Schumpeter Model Of Economic Growth

The neo-classical model is based upon the concept of marginal productivity. But in case of UDC4 it is difficult to assess marginal productivity. Here the rains as well as droughts may change the marginal productivity. Accordingly, how wages will be determined on the basis of marginal productivity.


The Schumpeter model of economic growth moves round the inventions and innovations. This model is explained with the followings:

(1) Process of production, (2) The dynamic analysis of the economy, (3) The demise of capitalism.


The process of production shows the combination of productive forces which result in the production of goods. These productive forces are composed of material and immaterial factors. The physical or material factors consist of land, labor and capital, while non­physical or immaterial factors are composed of technical facts and social organization.

Thus Schumpeter production function is as:

Y = f(L, K, N, S, U)

Where Y = output of the economy, K = produced means of production, L = labor, N = natural resources, S = technology and U = social set-up or social organization.

Taking total differential of production function and then dividing it by dt.

dy =af/ak . dk + af/an . dN + af/aL . dL + af/aS . dS + af/aU . dU

dY/dt = af/aK . dK/dt + af/aN . dN/dt + af/aL . dL/dt + af/aS . dS/dt + af/aU . dU/dt

According to this equation the production of the economy depends upon the rate of change of productive forces(dK/dt , dN/dt , dS/dt),the rate of change of technology(dS/dt)and the rate of change of social set-up(dU/dt).

  1. 1. DYNAMIC EVALUATION OF ECONOMY IN SCHUMPETER MODEL In respect of dynamic analysis of economy we present two types of effects.
  2. The effects of change in factors of production like K, L and N, which he calls “Growth

    1. The effects of change in technological and social changes —as the effects of changes
      in S and U, which he calls “Evolution Components”.
    2. In respect of growth components he keeps the land as fixed. As dN/dt = 0
    3. Then we have the remaining two variables like change in population(dL/dt) and change in means of production (dK/dt)
    4. dL

      Regarding population he says that it is an exogenous variable. In other words, the

      dt ‘

      exogenous factors determine population in the economy. He further says that the population growth is a slow process, and it is not furnished with heavy fluctuations.

      Thus the population function will be as: L = f(t)


      dt : Regarding capital goods or produced means of production Schumpeter says that their

      change depends upon savings. Whereas savings depend upon rate of profit. But it is not possible to get profits without development and without profits the development is not possible. He says that according to circular flow of NI, the value of a product will be equal to its costs. In this

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      way, no profits will be accrued. But Schumpeter says that when new techniques are introduced they will generate profits. It means that in capitalistic system the profits depend upon technology. In other words, the stock of capital changes due to change in applied technical knowledge. It is as:

      dK rds) dt = dt,)

      This shows that in Schumpeter model the capital accumulation is attached with technical changes. The increase in technical changes lead to increase in capital accumulation.


      dt : Regarding institutional and social changes Schumpeter says that it is a complicated

      situation and it is attached with social, psychological, technical and political atmosphere of a country. Thus, it is as:


      dt = f(K, L, N, S, U)

      Thus we find that in Schumpeter model the change in production of the economy depends upon technological change and socio—cultural set—up of the economy.


      Now we discuss the effect of technology on economic development. Schumpeter says that economic development is the result of discontinuous technical changes. He says that the process of economic development can be initiated with five different events, like: (1) Introduction of some new good, (2) Introduction of some new technique of production, (3) Discovery of some new market, (4) Discovery of some new source of supply, (5) The change in the structure and organization of some industry.

      Because of such all changes the absorption of factors of production changes. ROLE OF ENTREPRENEURS IN DEVELOPMENT

      Schempeter says that ‘Enterpreneure’ is such a factor of production who introduces new combinations of factors of production. He is neither a technician, nor he is a finance manager. He just makes inventions and innovations. He makes inventions just for the

      of inventions. However, he is also influenced by the desire of profit and socio—cultural set­up of the society. In order to perform his economic functions the entrepreneur is need of two things:

      (1) He must be having technical knowledge so that he could produce new goods.

    5. (2) He could easily get the funds. In this respect, credit plays an important role. Because of credit, an entrepreneurogets a command over factors of production. Not doubt, in short run the credit leads to create inflation in the economy, but still it encourages the inventions and innovations.The above discussion reveals that in Schumpeter model, economic growth depends upon technical and technological conditions of the economy. Whereas the technological changes depend upon the activities of entrepreneurs; and the activities of entrepreneurs depend upon entry of new entrepreneurs and creation of credit.

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