Explore Schumpeter’s theory of innovation and its implications for driving economic growth and transformation. Learn how entrepreneurs drive creative destruction and shape modern economies.
Critically Examine Schumpeter’s theory of innovation
According to Schumpeter, innovations in the structure of cycles are the outcome of economic development in a capitalist society.Schumpeter’s approach involves the development of his model into two stages. The first stage deals with initial impact of innovation and the second stage follows through reactions to the original impact of innovation.After ‘ a period of gestation, the new products start appearing in the market displacing the old products and enforcing a process of a liquidation, readjustment and absorption.
The demand for the old, products is decreased. Their price fall.The old firms contract output and some are even force to run into liquidation. As the innovators start repaying bank loans out of profits, the quantity of money is decreased and prices tend to fall. Profits decline. Uncertainty the risks increase. The impulse for innovation is reduced and eventually comes to an end.Depressions sets in, and the painful process or readjustment to the “point of previous neighbourhood of equilibrium” beings.Ultimately the natural forces of recovery bring about a revival. To Sahumpeter, cyclical swings are the cost of economic development under capitalism, a permanent feature of its dynamic time-path.
Schumpeter believes in the existence of kondratieff long-wave of upswings and downswings in economic activity. Each long—wave upswing is brought about by an innovation which leads to abundance of goods for the masses. Once the upswing ends, the long—wave down—swing begins.
Thus the second approximation of Schumpeter’s theory of trade cycle develops into a four—phase cycle with the recession which was the second phase in the first approximation continuing downward to give the depression phase and this extension of cycle is followed by a period of revival which continues till the equilibrium level is reached.
The interaction of the multiplier and the accelerator has the merit of raising national income at a much faster rate than by either the multiplier or the accelerator alone. It serves as a useful tool not only for explaining business cycles but also as a guide to stabilization policy. As pointed out by professor Kurihara, “It is in conjunction with the multiplier analysis based on the concept of the marginal propensity to consume (being less than once). That the acceleration principle serves as a useful tool of business cycle analysis and a helpful guide to business cycle policy.” The multiplier and the accelerator of the accelerator (B), the greater is the chance of an explosive cycle.
The greater the value of the multiplier, the greater the chance of a cycleless path. We may conclude with professor Estey, “Thus the combination of the multiplier and the accelerator seems capable of producing cyclical fluctuations. The multiplier alone produces no cycles from any given impulse but only a gradual increase to a constant level of income determined by the propensity to consume. But if the principle of acceleration is introduced, the result is a series of oscillation about what might be called the multiplier level. The accelerator first carries total income above its level.