GE ELECT 112 -THE THEORY OF ECONOMIC DEVELOPMENT.pptx

GE ELECT 112 -ENTREPRENEURIAL MIND

1. THE THEORY OF ECONOMIC DEVELOPMENT AN INQUIRY INTO PROFITS, CAPITAL, CREDIT, INTEREST, AND THE BUSINESS CYCLE PREPARED BY: SANDRA A. BONIFACIO

2. JOSEPH ALOIS SCHUMPETER an AUSTRIAN POLITICAL ECONOMIST. He write the book “ MAGNUS OPUS” , which was published in 1911 in GERMANY and main parts of it was written on the Ukrainian ground , when he was a professor at the Chernivtsi University . in the year 1934 , the english edition appeared. the book is A CLASSICAL ANALYSIS OF CAPITALIST SOCIETY .

3. THE THEORY OF ECONOMIC DEVELOPMENT schumpeter proclaims that ECONOMICS IS A NATURAL SELF - REGULATING MECHANISM WHEN UNDISTURBED BY “ SOCIAL AND OTHER MEDDLERS” . he argues that despite weaknesses, theories are based on logic and provide structure for understanding fact.

4. THE THEORY OF ECONOMIC DEVELOPMENT schumpeter assumes a perfectly competitive economy which is in stationary equilibrium. in such a stationary state, there is perfect competitive equilibrium. no profits, no interest rates, no savings, no investments and no involuntary unemployment. this equilibrium is characterized by the term “ circular flow ” , continues to repeat itself every year. the same products are produced every year in the same manner.

5. THE THEORY OF ECONOMIC DEVELOPMENT economic development is “spontaneous and discontinuous change in the channels of the circular flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing”. development is possible in carrying out of new combinations. new combinations come about in the forms of INNOVATIONS .

6. innovations an innovations may consists of: the introduction of the new products the introduction of the new method of production the opening up of a new market the conquests of a new sources of raw materials. the carrying out of a new organization of any industry like the creation of monopoly.

7. innovations according to schumpeter, it is the introduction of new product and the continual improvements in the existing one’s that lead to development.

8. the schumpeterian theory of economic development

9. role of entrepreneur in the schumpeterian analysis of development, entrepreneurs have to play the central role in the business cycles . they initiate the economic development in the spontaneous and discontinous manner. the cycling swings are the cost of economic development under capitalism.

10. role of entrepreneur entrepreneurship is different from managerial activities. a manager simply directs production under existing techniques but entrepreneurship , requires the introduction of something new. an entrepreneur is also different from a capitalist. the capitalist simply furnishes the funds while entrepreneur directs the use of the funds.

11. role of entrepreneur in economic system, there is a high degree of risk, thus entrepreneur is motivated : the desire to find a private commercial kingdom. the will to conquer and prove his superiority. the joy of creating, getting things done or simply of exercising one’s energy and ingenuity.

12. role of profits, credits and interest the role of profits: - an entrepreneur innovates to earn profits. - profits are conceived “as a surplus over costs: a difference between the total receipts and out lay, as a function of innovation” . - profit arises due to dynamic changes resulting from an innovation, they continue to exists till the innovation becomes general.

13. role of profits, credits and interest schumpeter regards economic development as a dynamic and discontinuous process. the society progresses through trade cycles. in order to break the circular flow, innovating entrepreneurs are financed by bank credit expansion . investment in innovation is risky, they must be paid bank interest on it .

14. role of profits, credits and interest bank credit is an essential element of schumpeter’s model. according to schumpeter, the creation of bank credit is assumed to accelerate money incomes and prices in the economy . it creates a cumulative expansion throughout the economy. the demands and purchase increases, the higher rates of profits stimulate producers to raise investments by borrowing from the banks .

15. role of profits, credits and interest the credit inflation starts with the entrance of new entrepreneurs in the field of production, which superimposes on the primary wave of innovations. it may be called boom or prosperity period .

16. the business cycle or cyclical process schumpeter’s approach to business cycle or crisis is historical, statistical and analytical. he believes that business cycle or crisis is not merely the result of economic factors. he concludes that crisis is the “process by which economic life adapts itself to the new economic conditions” .

17. the decay of capitalism the continuous technical progress results in an unbounded increases in total and per capita output. the economic success of capitalism will eventually lead to its decay. capitalism can maintain itself only so long as entrepreneurs behave like knights and pioneers. schumpeter holds a very pessimistic view about the survival of capitalism.

18. the decay of capitalism schumpeter’s reasons for the disintegration of capitalism: a. the obsolescence of entrepreneurial function -he observes that the success of early captains of industry have made innovation a routine activity. the new lords of business are managers, depersonalised owners and private bureaucrats.

19. the decay of capitalism schumpeter’s reasons for the disintegration of capitalism: b. destruction of institutional framework - the tendency towards concentration increases in the size of production units destroy capitalisti institutions like private property and freedom of contract.

20. the decay of capitalism schumpeter’s reasons for the disintegration of capitalism: c. destruction of protecting political strata - it will administer the last blow to captalist system. the goup that protected early capitalism politically is also destroyed. it is destroyed by the royal power. merchants and industrialists became economically powerful and they begin to dominate in political field due to the progress of capitalism.

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