There are two directions in political economy: the classical or, as it is also called, the English and German historical schools. It so happened that in the vast majority of Russian universities they teach classical economic theory, and the German school is forgotten, although it was the application of its main provisions that brought the economy 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
Josef Schumpeter was born on February 8, 1883 in the Czech (then Moravia) city of Trshesht. 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 Koehler. Thanks to such a successful union, Josef got the opportunity to study at the best educational institutions in Europe. First he receivededucation at Theresianum (the best school in Vienna). After graduation, he entered the University of Vienna at the Faculty of Law. His teachers were well-known Austrian scientists, philosophers, sociologists (E. Böhm-Bawerk, F. von Wieser and Gustav von Schmoller). During the years of study at the university, the foundation was laid for the worldview of J. Schumpeter and the idea of the foundations for the development of economic theory.
In 1907-1908 Josef worked in Cairo. After that, he released his first serious work, The Essence and Main Content of Theoretical National Economy, which, however, was not successful.
Labour Period
On his return from Cairo, he began working at the University of Vienna as a Privatdozent, 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 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 for permanent residence, until his death on January 8, 1950.
Reading historical literature, as well as the works of other scientists, 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.
Publication of the theory
In the US, "Theory of Economic Development" wasfirst published in 1939. Since then, the book has been repeatedly reprinted and translated into other languages. For the first time in Russia, Schumpeter's work "The Theory of Economic Development" was published in 1982 by the Progress publishing house. In Russia, the book was last reprinted in 2007 by the Eksmo publishing house.
Basic provisions. The role of innovation in human development
The main position given by Schumpeter in the "Theory of Economic Development" is that the development and growth of the economy is impossible without the use of new materials, techniques and methods of work. Only innovations and their introduction into industrial and economic life can lead to economic growth, welfare and prosperity of the nation.
As an example, Schumpeter compares a car and a horse carriage. The car is an innovation. This is not only an acceleration of movement, it is also an increase in carrying capacity. The car makes it possible to transport more and cheaper. At the same time, the production of machines contributes to the development of other areas: the oil refining industry, the production of more perfect glass, metal alloys, artificial rubber, etc. Putting ten pairs of horses and attaching them to a team will not give the same increase in traction or speed that an automobile has. At the same time, new industries will also not arise. The emergence of new areas of production means an increase in the number of jobs, an increase in trade, wages and an improvement in the quality of life of employees. In contrastfrom the concept of Ricardo, Schumpeter in "The Theory of Economic Development" considers population growth not as an evil, but as a blessing.
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 is attached to it by the adherents of the classical school. In his theory, "entrepreneur" is defined as "a person who, at his own peril and risk, decides to produce and sell completely new goods." He assumes all the costs of promoting the new product, and as a reward he gets the opportunity to sell it exclusively. At the same time, he does not have to be an inventor at the same time. Henry Ford is a prime example.
Ford was able to mass-produce 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 new things, energy, diligence, courage and perseverance.
Affordable loans play an important role in the development of entrepreneurship. 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 has already been accepted by the market. Therefore, the main task of the state is to achieve low interest rates on loans.
Business cycles
Cycles occupy a special place in Schumpeter's theory. They are associated with the emergence of innovations, their introduction into production, mass production, obsolescence and disposal. The cycle itself lasts exactly as long as it takes to completely saturate the market or the emergence of a new technology. At the same time, if demand is completely satisfied, and 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 single out the successive stages of the life of a 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 high capital investment and zero return.
- First entry to 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, first competitors.
- Mass production, market saturation. The technology has been worked out, the goods are sold slightly above cost, high competition.
- Recession, retirement. The market is saturated, no one wants to buy goods, warehouses are full. Prices at cost and below.
If after the fifth phase no new technology has appeared or an entrepreneur has not been found and the cycle has not "restarted", then temporary stagnation sets in, followed by depression. At the same time, in order toto build a new technological order, it is necessary to destroy the old one. This is the so-called "creative destruction" concept.
According to Schumpeter, the greatest danger is not a depression, but an economic crisis, when new technologies are available, but, despite the need for them, they are not in demand, since buyers do not have money to buy them.
According to Schumpeter's "Theory of Economic Development", crises are not a cyclical phenomenon, but occur when economic life is in an unnatural state. This happens either under the influence of external sources (for example, war or colonization), or because of the wrong policy of the state, which puts obstacles to technological progress.
Consequences of abandoning economic development
It sounds strange, but some countries refuse economic development. Failure means deindustrialization. It can take place under various pretexts at the suggestion of local authorities or occur under the influence of external forces. In any case, this means a departure from the direction of economic development proposed by Schumpeter, which, in the face of fierce competition between countries, leads to disaster.
In our time, the consequences of the rejection of economic development can be seen in the countries of Eastern Europe and Latin America: mass impoverishment of the population, high unemployment and crime, degradation of agriculture, industry, if any, thenmainly represented by labour-intensive areas of production. High-tech industries are the first to "die" in the country. The population is either dying out or leaving for more prosperous countries.
The fate of capitalism according to Schumpeter's theory
In accordance with the picture that Joseph Schumpeter paints in The Theory of Economic Development, capitalism will eventually evolve into socialism as a result. 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, will find themselves without work, without income, but with great ambitions. Entrepreneurs and politicians will have to reckon with this. In order to ensure stability in society, they will have to transfer part of their income to support infrastructure and social security. Thus, capitalism evolves into socialism.
Schumpeter on communism
Josef Schumpeter was skeptical about communism and the revolutionary development of society. Only progressive movements of progress could, in his opinion, lead to stable economic development. Although he supported the revolution in the Russian Empire and the innovations introduced by the Bolsheviks, but only as a scientist who monitors the progress of the experiment.
According to Schumpeter, the communism described in the work of Karl Marx is the "new gospel", with the only difference being thatcommunism is the promise of heaven on Earth here and now, not in the next world. Naturally, Schumpeter, like any normal scientist, was skeptical about such promises. But he supported the very system of strict labor discipline that existed in the USSR. Joseph Schumpeter has a quote in The Theory of Economic Development: “The Russian state, unlike the capitalist state, has the ability to strictly direct the upbringing and education of young people in accordance with its goals and constructive ideas.”
Flaws of the concept
The problem with 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 regression (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 some people's actions, but proceeds from the fact that people always act logically.
Creative destruction doesn't always lead to progress. There was a period in the history of mankind when it led to a regression, and many vital technologies were lost. Europe plunged into the darkness of the Middle Ages.
Schumpeter's 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 focused on the development of high technologies, scientific research and cheap loans forentrepreneurs. As a result, they were able to carry out accelerated industrialization and become leaders in the market of high-tech science-intensive products.
Impact of the concept on political economy
The value of the contribution to the development of economic theory of the work of Joseph Schumpeter is really high. It explains how and by what factors the economy develops. The theory is based on rich historical material. At the same time, Schumpeter's concept does not conflict with classical economic theory, but harmoniously complements it.
