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SchumpeterTheoryofBusinessCycle

Preparedby:

ManishDash

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The business cycle represents wavelike

fluctuations in the level of businessactivity from the equilibrium or trend

line.

Schumpeter

Business Cycle

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Innovation theory

Joseph Schumpeter has explained the expansion

and contraction in business cycle through

industrial innovation. Whenever innovation takes place, it causes

disequilibrium in the economy

Continues till re-adjustment at some newequilibrium level.

The innovation is the introduction of a new

product in a full employment economy

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What is innovation?

Schumpeter argued that innovation comes

about through new combinations made by anentrepreneur, resulting in

The introduction of new goods, that is the one with

which consumers are not familiar, of a new quality.

The introduction of new method of production The opening of new market

The conquest of new source of supply of raw

material

The carrying out of new organization

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Features

Distinction between invention and innovation

Schumpeter makes a distinction between innovation &invention. Invention means creation of new things and

innovation means application of new things on to practical use

Emphasis on entrepreneurial function

Schumpeter has given emphasis on the role of entrepreneurialfunctions in economic development. In his views, development

means basic transformation of the economy that is brought

about by entrepreneurial functions

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Contd Presentation of disequilibrium situation

through entrepreneurial activity

The entrepreneurial activity represents adisequilibrium situation, a dynamic phenomenon

and a break from the routine or circular flow or

tendency towards equilibrium

Entrepreneurialism dream and the will tofound a private kingdom

The motives of creating things and applying these

things into practice inspire the entrepreneur to

undertake innovation.

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Schumpeter not only foresaw the importance of the individual and of technologicalinnovation in advancing an economy, he also recognized that in advanced capitalist

economies, once a wave is over, entrepreneurship will cease to exist and will come to

be replaced by socialism.

AccordingtoSchumpeter'smodel,wecanexpectdepression,moresocialism,

andaflatteningofsocietytocontinueforatleastanother10years,intothe

beginningofaSixthSchumpeterWavearound2020.

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Critical Evaluation

Schumpeters Theory of Innovation is criticized

on the following grounds :

The theory has the scope of entrepreneurism in the

sense that it has included the individual

businessman along the directors and manager of the

company

Schumpeter innovating entrepreneurs represents the

enterprise with the R & D and innovative character.

But developing countries lack these character.

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Contd.

The theory emphasizes on innovation and excludes the risk

taking and organizing aspects

Schumpeters entrepreneurs are large scale businessman whointroduce new technology, method of production.

Schumpeter remained silent about as to why some economics

had more entrepreneurial talent than others.

However, despite the above criticisms,

Schumpeters theory of innovation is

regarded as one of the best business cycle

theories.

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