1. SCHUMPETERIAN MODEL OF
ECONOMIC GROWTH
PRESENTED BY,
ARNAB PAL,
CSE-1,ROLL-73,
WBUT ROLL NO.-14800111024

2. TABLE OF CONTENTS
 ECONOMIC GROWTH IN GENERAL
 JOSEPH ALOIS SCHUMPETER
 SCHUMPETER’S MODEL OF ECONOMIC GROWTH
 ROLE OF INNOVATION
 ROLE OF ENTREPRENEUR
 ROLE OF PROFIT
 BREAKING THE CYCLIC FLOW
 CYCLIC PROCESS
 TRENDS OF GROWTH IN SCHUMPETER’S MODEL
 PREDICTION OF DECLINE OF CAPITALISM
 CRITICISM OF THE THEORY
 DIAGRAMATIC REPRESENTATION OF SCHUMPETER’S
MODEL

3. ECONOMIC GROWTH
 Economic development is the development of economic wealth of
countries or regions for the well-being of their inhabitants.
 Economic Growth & development are two different terms used in
economics. Generally speaking economic development refers to
the problems of underdeveloped countries and economic growth
to those of developed countries.

4. JOSEPH ALOIS SCHUMPETER
Joseph Alois Schumpeter (8 February 1883 – 8 January 1950) was
an Austrian American economist and political scientist. He briefly served
as Finance Minister of Austria in 1919. One of the most influential
economists of the 20th century, Schumpeter popularized the term
"creative destruction" in economics.

5. SCHUMPETER’S MODEL OF ECONOMIC
GROWTH
 Schumpeter Model of Economic Growth:
 The Schumpeterian model of economic growth moves round the inventions and
innovations. This model is explained with the following:
(1) Process of Production,
(2) Dynamic Analysis of the Economy,
(3) Trends of Growth,
(4) The Demise of Capitalism.

6. ROLE OF INNOVATION
An innovations may consist of:
1.The introduction of a new product
2.The introduction of new method of production
3.The opening up of a new market
4.The conquest of a new source of raw materials
According to Schumpeter ,it is the introduction of new
product and the continual improvements in the
existing ones that lead to growth and development.

7. ROLE OF ENTREPRENEUR
 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 two things:
(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 of credit.

8. ROLE OF PROFITS
 An entrepreneur innovates to earn profits.
 Profits are conceived “as a surplus over costs :a difference
between the total receipts and outlay –as a function of innovation
 According to Schumpeter ,under competitive equilibrium the price
of each product just equals its cost of production and there no
profits. Profits arise due to dynamic changes resulting from an
innovation. They continue to exist till the innovation becomes
general.

9. BREAKING THE CIRCULAR FLOW
 Schumpeter’s model starts with the breaking up of the circular flow with
an innovation in the form of a new product by an entrepreneur for the
purpose of earning profit.
 In order to break the circular flow ,the innovating entrepreneurs are
financed by bank-credit expansion.
 Investment in innovation is risky, they must pay interest on it. Once the
new innovation becomes successful and profitable, other entrepreneurs
follow it.
 Innovations in one field may induce other innovations in related fields.
The emergence of motor car industry may in, in turn ,stimulate a wave of
new investments in the construction of highways ,rubber tyre etc.

10. CYCLIC PROCESS
 Investment is assumed to be financed by creation of bank credit.
 It increases money incomes and prices and helps to create a cumulative
expansion throughout the economy.
 With the increase in purchasing power of the customers, the demand for
the products of the old industries increases to the supply.
 Price rise ,profit increase and old industries expand by borrowing from
the banks. It induces a secondary wave of credit ,inflation which is
superimposed or the primary wave of innovation
 After a period the new products start appearing in the market displacing
the old products and enforcing process of liquidation and readjustment.
 The demand for old product is decreased. Their price fall. some are even
forced to run into liquidation.
 As though innovators start repaying bank loans out of profits, the quantity
of money is decreased and prices tends to fall. profit decline. Uncertainty
&the impulse for innovation is reduced.
 Depression entered.

11.  Analysis begun with the assumption that country’s economic performance is in
rigid condition, i.e., there are no population growth and net investment, and high
level of unemployment. Some entrepreneurs committed to reformation and
followed by other entrepreneurs until there is an increase in investment
 The impacts are increasing in society’s income and consumption. This
phenomena will lead the entrepreneurs to increase the new capital.
(a)induced investment – increasing of investment because of increasing in
income , production and profit.
(b)autonomous investment – investments which determined by long-term
development, such as new resources found and technology which can create
reformation

12. TRENDS OF GROWTH IN THE
SCHUMPETER’S MODEL
 The economic development (booming period) will be followed by
economic recession
• Some entrepreneurs who cannot compete with those entrepreneurs
whose have done reformation will subsequently failed in their
business and lost their market and have to close their business.
• Creation of new products will lead to uncertainty among the
entrepreneurs in terms investment and capital that are needed for
business development
• Those entrepreneur who are able to create the new products and
market will lead to economic booming However, the equilibrium
point is higher than the economic recession period.
With the new equilibrium, the level of per capita income is higher.

13. PREDICTION OF THE DEMISE 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) 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.
 (iii) 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".

14. CRITICISM OF THE THEORY
 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 behaviour and monetary and fiscal
measures.
 Again, Schumpeter assigns top importance to inventions and innovations in respect
of economic development. But in countries like India where there is shortage of
funds and resources, inventions might not always be feasible.
 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.
 According to Meir and Baldwin it is wrong to say that society, will eventually move
towards socialism. As if we analyse 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.

15. DIAGRAMATIC REPRESENTATION OF THE
SCHUMPETERIAN MODEL

16. BIBLIOGRAPHY
OFFLINE SOURCES OF INFORMATION-
 INTERNATIONAL ECONOMICS-J.E.CURRY
 THE THEORY OF ECONOMIC DEVELOPMENT:AN ENQUIRY INTO
PROFITS,CAPITAL,CREDIT,INTEREST & BUSSINESS CYCLE-
J.A.SCHUMPETER
 FUNDAMENTALS OF FINANCIAL MANAGEMENT-EUGENE BRINGHAM &
JOEL F. HOUSTON
ONLINE SOURCES OF INFORMATION-
 WIKIPEDIA
 THE ECONOMIST
 ECONOMICSCONCEPT.COM