In political economy, there are two directions: classical or as it is also called the English and German historical school. It so happened that in the vast majority of Russian universities they teach classical economic theory, and the German school is forgotten, although it is the application of its main provisions that brought the economies of developed countries to the modern level. One of the most famous works on the economics of the German school is Joseph Schumpeter's Theory of Economic Development.
short biography
Joseph Schumpeter was born on February 8, 1883 in the Czech (then Moravia) city of Třeš. At the age of 4, he lost his father and moved with his mother to Vienna (Austria). There, his mother married Field Marshal Major Sigmund von Köhler. Thanks to such a successful union, Joseph got the opportunity to study at the best educational institutions in Europe. At first he was educated at Theresianum (Vienna's best school). After her graduation, he entered the University of Vienna at the Faculty of Law. His teachers were famous Austrian scientists, philosophers, sociologists (E. Böhm-Bawerk, F. von Wieser and Gustav von Schmoller). During the years of study at the university, the foundation of the worldview of J. Schumpeter and the idea of ​​the foundations of the development of economic theory were laid.
In 1907-1908, Joseph worked in Cairo. After he released his first serious work, “The Essence and Basic Content of Theoretical National Economy,” which, however, was not successful.
Labor period
Upon returning from Cairo, he began working at the University of Vienna as a privat-docent, but was soon forced to move to Chernivtsi in 1909. Since 1911, Schumpeter has been working at the University of Graz. He received the post of professor in the department of political economy thanks to his friendship with E. Böhm-Bawerk, since the Council refused to appoint him to this post.
In 1913, he first came to the United States, where he taught at Columbia University for about a year. In 1932, he moved to America already for permanent residence, until his death on January 8, 1950.
Reading historical literature, as well as the works of other scholars, became the foundation for the emergence and development of the economic theory of Joseph Schumpeter. In addition to the mentioned concept, he is the creator of the History of Economic Analysis, in which he explores the development of economic thought from Aristotle to Adam Smith.
Theory Publishing
In the United States, The Theory of Economic Development was first published in 1939. Since then, the book has been reprinted several times, has been translated into other languages. For the first time in Russia, Schumpeter’s work, The Theory of Economic Development, was published in 1982 by Progress Publishing House. In Russia, the book was last reprinted in 2007 by Eksmo Publishing House.
The main provisions. The role of innovation in human development
Schumpeter’s main point in Theory of Economic Development is that the development and growth of the economy is impossible without the use of new materials, techniques and working methods. Only innovations and their implementation in industrial and economic life can lead to economic growth, increase the welfare and prosperity of the nation.
Schumpeter gives a comparison of a car and a horse cart as an example. The car is an innovation. This is not only an acceleration of movement, it is also an increase in carrying capacity. A car makes it possible to transport more and cheaper. At the same time, the production of cars contributes to the development of other areas: the oil refining industry, the production of more advanced glass, metal alloys, artificial rubber, etc. If you put ten pairs of horses and attach them to a harness, this will not give the same increase in traction or speed that a car has. However, new industries will also not arise. The emergence of new areas of production means an increase in the number of jobs, an increase in turnover, wages and an improvement in the quality of life of employees. Unlike Ricardo’s concept, Schumpeter, in Theory of Economic Development, considers population growth not as evil, but as good.
The role of the entrepreneur
In Schumpeter’s Theory of Economic Development, the entrepreneur plays a key role. But the concept itself has a slightly different meaning than that which the adherents of the classical school attach to it. In his theory, the "entrepreneur" is defined as "a person who, at his own risk and risk, decides to release and sell completely new products." He takes care of all the costs of promoting the new product, and as a reward he gets the opportunity to sell it exclusively. However, he does not have to be an inventor at the same time. Henry Ford is a prime example.
Ford was able to establish mass production of cars, reduce its cost and capture the market for several decades to come. It is the desire to become a monopolist that distinguishes the entrepreneur from the rest. Qualities inherent in all entrepreneurs: susceptibility to the new, energy, hard work, courage and perseverance.
An important role in the development of entrepreneurship is played by affordable loans. One of the features of the activity is that the entrepreneur does not have his own large savings or capital, and it is not so easy to find an investor, given that the latter always seeks to invest in already established production, that is, when the novelty is already accepted by the market. Therefore, the main task of the state is to achieve low interest rates on loans.
Business cycles
A special place in Schumpeter's theory is occupied by cycles. They are associated with the emergence of innovations, their implementation in production, mass production, obsolescence and retirement. The cycle itself lasts exactly as much time as is necessary to completely saturate the market or the emergence of new technology. Moreover, if demand is completely satisfied, but innovation does not appear, stagnation sets in, which can smoothly turn into a state of depression.
Cycle phases
The direction of development of economic theory, proposed by Schumepeter, made it possible to distinguish the successive stages of the life of technology on the market. Regardless of the type of product, the timing of its turnover, the entire cycle consists of five phases.
- Technology development. This phase is characterized by large investments and zero returns.
- The first entry into the market. New items are expensive, you have to spend a lot of money on advertising and promotion. The product is positioned as a luxury item.
- Production improvement, cost reduction. Cheaper production, the first competitors.
- Mass production, market saturation. The technology has been worked out, the product is sold slightly above cost, high competition.
- Recession, retirement. The market is saturated, nobody wants to buy goods, warehouses are full. Prices are at cost level and lower.
If after the fifth phase a new technology has not appeared or an entrepreneur has not been found and the cycle has not “restarted”, then temporary stagnation sets in, followed by depression. Moreover, in order to build a new technological structure, it is necessary to destroy the old one. This is the so-called concept of "creative destruction."
According to Schumpeter, the greatest danger is not depression, but the economic crisis, when there are new technologies, but despite the need for them, they are not in demand, as buyers do not have money to buy them.
According to Schumpeter’s Theory of Economic Development, crises are not a cyclical phenomenon, but arise when economic life is in an unnatural state. This happens either under the influence of external sources (for example, war or colonization), or due to the wrong policy of the state, which obstructs technical progress.
The consequences of abandoning economic development
It sounds strange, but some countries are abandoning economic development. Failure means de-industrialization. It can take place under various pretexts with the submission of local authorities or occur under the influence of external forces. In any case, this means moving away from the direction of economic development proposed by Schumpeter, which in conditions of fierce competition between countries leads to disaster.
Nowadays, the consequences of the rejection of economic development can be seen in countries of Eastern Europe and Latin America: mass impoverishment of the population, high unemployment and crime, agricultural degradation, industry, if any, is mainly represented by labor-intensive areas of production. The first in the country to die are high-tech industries. The population is either dying out or moving to more prosperous countries.
The fate of capitalism according to Schumpeter theory
In accordance with the picture that Joseph Schumpeter paints in Theory of Economic Development, capitalism as a result will evolve into socialism in the future. This is inherent in the very essence of the capitalist system. With the complexity of production, there is a need for more educated and highly qualified specialists. At the same time, production is being automated and jobs are being cut. As a result, many highly educated citizens, radical intellectuals, find themselves unemployed, without income, but with great ambitions. Entrepreneurs and politicians will have to reckon with this. In order to ensure stability in society, they will be forced to transfer part of the proceeds to support infrastructure and social security. Thus, capitalism evolves into socialism.
Schumpeter on Communism
Joseph Schumpeter was skeptical of communism and the revolutionary development of society. Only progressive progress could, in his opinion, lead to stable economic development. Although the revolution in the Russian Empire and the innovations introduced by the Bolsheviks, he supported, but only as a scientist who monitors how the experiment goes.
According to Schumpeter, the communism described in the work of Karl Marx is the “new gospel,” with the only difference being that communism is the promise of paradise on Earth here and now, and not in the next world. Naturally, Schumpeter, like any normal scientist, was skeptical of such promises. But the very system of hard labor discipline that existed in the USSR, he supported. Joseph Schumpeter has in his “Theory of Economic Development” a quote: “The Russian state, unlike the capitalist state, has the ability to strictly direct the upbringing and education of young people in accordance with their goals and constructive ideas.”
Flaws concept
The problem of the development of Schumpeter's economic theory is that it considers only a progressive society. In his opinion, there is only progress, and the very possibility of recourse (reverse movement) is denied. It is no less abstract than the theories of Ricardo or Karl Marx, since it does not provide for fierce competition between different countries and peoples. The concept does not take into account the irrationality of certain actions of people, but proceeds from the fact that people always act logically.
"Creative destruction" does not always lead to progress. There was a period in the history of mankind when it led to regression, and many vital technologies were lost. Europe plunged into the darkness of the Middle Ages.
Schumpeter theories in action
An example of the successful application of the concept of economic development are the countries of the East: China, Japan, South Korea. They emphasized the development of high technology, research and cheap loans for entrepreneurs. As a result, they were able to conduct accelerated industrialization and become leaders in the market of high-tech science-intensive products.
The influence of the concept on political economy
The value of the contribution to the development of the economic theory of the work of Joseph Schumpeter is really high. She explains how and due to what factors the economy is developing. The theory is based on rich historical material. At the same time, the Schumpeterian concept does not conflict with the classical economic theory, but harmoniously supplements it.