The Schumpeter model of economic growth moves round the inventions and
innovations. This model is explained with the followings:
(1) Process of Production, (2) Dynamic
Analysis of the Economy, (3) Trends of Growth, (4) The Demise of Capitalism.
(1) Process of
Production in Schumpeter Model:
The process of production shows the combination of productive forces which
result in the production of goods. These productive forces are composed of
material and immaterial factors. The physical or material factors consist of
land, labor and capital, while non-physical or immaterial factors are composed
of technical facts and social organization.
Thus Schumpeter production function is as:
Y = f (L, K, N, S, U)
Where; Y = output of the economy, K = produced means of production, L = labor,
N = natural resources, S = technology and U = social set-up or social
Taking total differential of production function and then dividing it by dt.
According to this equation the production of the economy
depends upon the rate of change of productive forces (dK/dt, dN/dt, dL/dt), the rate of change of technology
(dS/dt) and the rate of change of social set-up (dU/dt).
Evaluation of Economy in Schumpeter Model:
respect of dynamic analysis of economy we present two types of effects.
(i) The effects of change in factors of production like K, L and N, which he
calls "Growth Components".
(ii) The effects of change in technological and social changes, as the
effects of changes in S and U, which he calls "Evolution Components".
In respect of growth components he keeps the land as fixed. As
Then we have the remaining two variables like change in population
(dL/dt) and change in means of production (dK/dt).
dL/dt: Regarding population he says that it is an exogenous variable. In
other words, the exogenous factors determine population in the economy. He further says that
the population growth is a slow process, and it is not furnished with heavy
fluctuations. Thus the population function will be as: L = f (t).
dK/dt: Regarding capital goods or produced means of production Schumpeter says
that their change depends upon savings. Whereas savings depend upon rate of profit. But
it is not possible to get profits without development and without profits the
development is not possible. He says that according to circular flow of NI, the
value of a product will be equal to its costs. In this way, no profits will be
accrued. But Schumpeter says that when new technique? are introduced they will
generate profits. It means that in capitalistic system the profits depend upon
technology. In other words, the stock of capital changes due to change in
applied technical knowledge. It is as:
dK/dt = k (dS/dt)
This shows that in Schumpeter model the capital accumulation is attached with
technical changes. The increase in technical changes lead to increase in capital
dU/dt: Regarding institutional
and social changes Schumpeter says that it is a complicated situation and it is
attached with social, psychological, technical and political atmosphere of a
country. Thus, it is as:
dU/dt = u (K, L, N, S, U)
Thus we find that in Schumpeter model the change in production of the economy
depends upon technological change and socio-cultural set-up of the economy.
Role of Technology in
Now we discuss the effect of technology on economic development. Schumpeter
says that economic development is the result of discontinuous technical changes.
He says that the process of economic development can be initiated with five
different events, like:
(i) Introduction of some new good,
(ii) Introduction of some new technique of production, (iii) Discovery of some
new market, (iv) Discovery of some new source of supply, (v) The change in the
structure and organization of some industry.
Because of such all changes the
absorption of factors of production changes.
Role of Entrepreneurs
Schumpeter says that 'Entrepreneur' is such a factor of production who
introduces new combinations of factors of production. He is neither a
technician, nor he is a finance manager. He just makes inventions and
innovations. He makes inventions just for the sake of inventions. However, he is
also influenced by the desire of profit and socio-cultural set-up of the
society. In order to perform his economic functions the entrepreneur is need of
(i) He must be having technical knowledge so that he could produce new goods.
(ii) He could easily get the funds. In this respect, credit plays an important
role. Because of credit, an entrepreneur gets a command over factors of
production. Not doubt, in short run the credit leads to create inflation in the
economy, but still it encourages the inventions and innovations.
The above discussion reveals that in Schumpeter model, economic growth
depends upon technical and technological conditions of the economy. Whereas the
technological changes depend upon the activities of entrepreneurs; and the
activities of entrepreneurs depend upon entry of new. entrepreneurs and creation
(3) Trends of Growth
in Schumpeter Model:
According to Schumpeter the capitalistic economies possess the properties of
cyclical fluctuations, i.e., they are furnished with booms and depressions. The
entrepreneur or entrepreneurs who invent some new technique of production or
some new product when it is introduced in the market the producers earn heavy
profits. After some interval the other firms also produce that very product. In
this way, the supply of that product increases in the market. As a result, the
economy will experience increased level of income and employment. But, because
of abundance of goods in the market the prices of goods fall leading to create
depression in the economy. In such situation some new entrepreneurs will come
forward who will invent new techniques of production or some new product. This
will create revival and then boom in the economy and finally the economy will
enter into the phase of boom. All such means that according to Schumpeter the
inventions and innovations are responsible for trade cycles in the capitalistic
(4) Prediction on
Decline of Capitalism:
Like Karl Marx Schumpeter also thinks that eventually the capitalism will
come to an end and it will be replaced by Socialism.
In this respect, he gives following arguments:
(i) Along with the evolution of capitalism the entrepreneurs and their
techniques of production will get obsolete. The salaried managers will take-over
the charge of industrial units in place of entrepreneurs.
(ii) Technical changes on the one side, create economies. But, on the other
hand, the expansion in the industrial net-work along with the growth of
capitalism, the trade unions and other bargaining activities will flourish.
(iii) Along with the growth of capitalism the 'Liberalism' will increase. This
will weaken the institution of 'Monarchy'. The capitalistic class will get
weaker, and it will depend upon civil and military bureaucracy. In this way, an
unrest will develop in the society.
(iv) The capitalism will promote emaciation and women rights. It will disrupt
the family life.
(v) The capitalism provides the right to speak and write. The people will
express their dissatisfaction against capitalism in tea-houses, parks, hotels
and in journals and newspapers.
In this way, the capitalism will finally convert into socialism. Thus
according to Schumpeter the capitalism will have a 'Self-Demise".
(i) In Schumpeter Model 'the inventor and innovator' has been accorded as an
'Ideal Man'. But now a days the inventions and innovations are the routine
activities of industrial concerns. Schumpeter further says that economic fluctuations occur because of
inventions and innovations. But it is not true. They come into being because of
business expectations, psychological behavior and monetary and fiscal measures.
Again, Schumpeter assigns top importance to inventions and innovations in
respect of economic development. But in Pakistan like countries where there is
shortage of funds and resources the inventions cannot be made.
(ii) Schumpeter depends upon credit creation for the sake of inventions. But
it is objected by saying that in short run the Bank Credit may be helpful for
industrial development. But in case of long run the bank loans will be
inadequate for such development. In such situation, the industrial
development will be depending upon sale of shares etc.
(iii) According to Meir and Baldwin it is wrong to say that society, will
eventually move towards socialism. As if we analyze Europe and America like
capitalist countries they have a higher degree of industrial development. They
have a right to speak and write. But till now no possibility has emerged whereby
the rich capitalist country could turn towards socialism. While the reverse has
occurred and the socialists countries are converting themselves into 'Market
Economies', after the disintegration of Soviet Union.
(i) Schumpeter's model is concerned with that particular social and economic
structure which prevailed in Europe and US in 18th and 19th century. But such
model is least applicable in case of Pakistan like developing countries. Our
socio-economic structure is different from them. We do not have the necessary
requirements of growth.
(ii) The Schumpeterian model is based upon 'Entrepreneurs'. But in UDCs, there
is a shortage of these people. Here the rate of profit is low. The technological
level is poor. Consequently, the spirit to invent and innovate remains lacking.
Moreover, lack of funds, poor means of transportation and research facilities
discourage the potential entrepreneurs.
(iii) In UDCs so many projects are controlled by govts. because they have low
profits, the risks are more; and they are run by bureaucrats and managers which
hardly engage themselves in inventions and innovations.
(iv) Economic development is associated with so many economic and non-economic
factors. Whereas Schumpeter attaches economic development with just inventions
(v) In case of UDCs the entrepreneurs follow and copy those techniques and
products which have gone obsolete in DCs, rather making inventions.
(vi) According to Schumpeter the internal circumstances of an economy will
generate economic development. But UDCs are surrounded by centuries old
sufferings, problems, agonies, traditions, customs and techniques of production
etc. In such like situation, the Schumpeter's model will lose its efficacy
(vii) In UDCs the population growth is a big issue. The rising population often
distorts the growth efforts. In such state of affairs what the Schumpeter's
inventions will do?
(viii) Schumpeter depends upon 'Credit' for economic development. But in case of UDCs where production can not be enhanced the inflation will rise which will
thwart the process of growth.