Critically examine Schumpeter’s theory of capitalist development through innovations.

Joseph Alois Schumpeter (1888-1952) is an important economist in the history of economic thought. His methods of analysis and ideas about what causes development in a capitalist economy were different from classical economists. His theory emphasizes the evolutionary process of the capitalist economy. Capitalist economy is an economy in which the means of production are privately owned and there is free enterprise and voluntary exchange. The state plays a role but doesn’t largely participate in production. 

Some of the important features of Schumpeter’s theory of capitalist development are:-

1. Innovation:- According to the classical economists, capitalist economic development was led by capital accumulation, while Schumpeter believed it was due to innovation i.e. constantly finding newer and fresher methods of production that led to making profits. According to Schumpeter innovation meant an ongoing process of creative destruction. A good example would be the advances in home computers and software. They are constantly developing from their previous versions.

2. Competition:- Schumpeter believed fierce rivalry is an important characteristic trait of competition because that will always produce winners and losers. However, unless there are innovations, excess profits will not exist in any sector or market since there will be no quality difference after a point, or no novelty in methods and techniques of production.

3. Entrepreneurs:- Entrepreneurs or innovators are the key figure in Schumpeter analysis of the process of development. They occupy the central place in the development process because the initiate development in a society and carries it forward. Entrepreneurs often obtain funds for investment through credit. This credit is provided by large banks and financial institutions as economy grows through time. The invention in one field of the economic activity will induce inventions in the related fields. Thus the role of finance capital is also important in a capitalist system.

4. Decline in Entrepreneurial activities:- Schumpeter felt that as capitalism progressed, innovation that accompanies the progress would become a matter of technique and thus mechanical. These would be carried out by paid specialists and not by the entrepreneurs themselves. Things would become calculative and risk taking activities would disappear. The importance of entrepreneur would disappear. With the progress of capitalism, not only the functions of the entrepreneur and the institutional frame work of capitalism crumble but the group that protected early capitalism politically is also destroyed.

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