Schumpeter theory of trade cycle

Business Economic topic

1. Schumpeter Theory trade cycle BBA- ll - Girish Puranik

2. Introduction Joseph Alois Schumpeter  ( German:8 February 1883 – 8 January 1950)  was an Austrian-born American political economist. He was as Finance Minister of Austria in 1919. In 1932, he became a professor at Harvard University where he remained until the end of his career. One of the most influential economists of the 20th century, Schumpeter popularized the term "creative destruction" in economics .

3. Meaning of Trade Cycle A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc.

4. Phases of a Trade Cycle Generally, a trade cycle is composed of four phases – depression, recovery, prosperity and recession.   Depression: During depression, the level of economic activity is extremely low. Real income production, employment, prices, profit etc. are falling. There are idle resources. Price is low leading to a fall in profit, interest and wages. All the sections of the people suffer. During this phase, there will be pessimism leading to closing down of business firms.   Recovery: Recovery denotes the turning point of business cycle form depression to prosperity. In this phase, there is a slow rise in output, employment, income and price. Demand for commodities go up. There is increase in investment, bank loans and advances. Pessimism gives way to optimism. The process of revival and recovery becomes cumulative and leads to prosperity.  

5. Prosperity : It is a state of affairs in which real income and employment are high. There are no idle resources. There is no wastage of materials. There is rise in wages, prices, profits and interest. Demand for bank loans increases. There is optimism everywhere. There is a general uptrend in business community. However, these boom conditions cannot last long because the forces of expansion are very weak. There are bottlenecks and shortages. There may be scarcity of labour , raw material and other factors of production. Banks may stop their loans. These conditions lead to recession   Recession : When the entrepreneurs realize their mistakes, they reduce investment, employment and production. Then fall in employment leads to fall in income, expenditure, prices and profits. Optimism gives way to pessimism. Banks reduce their loans and advances. Business expansion stops. This state of recession ends in depression.

6. Schumpeter Theory Discuss the roles of entrepreneurship in economic development process. He explains the differences between economic growth and development (Business Cycles 1939). He argues development as consisting of a process which involved reformation on various equipments of productions, outputs, marketing and industrial organizations .

7. Capitalist system is a rapid economic development system process. This system may affect negatively on social life . In the long-run, economy will face stagnation period and it is not a process that always operate accordingly and smoothly . In development process, economy may sometime run prosperously (full employment condition ) and sometime is in crisis (unemployment ) and this may take place happen alternately.

8. A key factor of development is dependent on entrepreneur group which are very innovative in combining the factors of production which is targeted to produce goods and services. The reformation process included the following measures : - introduce a new product - using new method in producing goods - to find new market - to develop new raw material as alternative sources - to have rearrangement of industries

9. 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. induced investment – increasing of investment because of increasing in income , production and profit. - autonomous investment – investments which determined by long term development, such as new resources found and technology which can create reformation

10. 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

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