The Theory of Economic Development

by Joseph A. Schumpeter, John E. Elliott (Introduction), Redvers Opie (Translator)

Schumpeter proclaims in this classical analysis of capitalist society first published in 1911 that economics is a natural self-regulating mechanism when undisturbed by "social and other meddlers." In his preface he argues that despite weaknesses, theories are based on logic and provide structure for understanding fact.

Of those who argue against him, Schumpeter asks a fundamental question: "Is it really artificial to keep separate the phenomena incidental to running a firm and the phenomena incidental to creating a new one?" In his answers, Schumpeter offers guidance to Third World politicians no less than First World businesspeople.

In his substantial new introduction, John E. Elliott discusses the salient ideas of The Theory of Economic Development against the historical background of three great periods of economic thought in the last two decades.

Genres: Economics, Politics, Nonfiction, Business, Philosophy, Society, History

320 pages, Paperback

First published December 12, 1934

About the author

People know Moravian-born Joseph Alois Schumpeter, an American, for his theories of socioeconomic evolution and the development of capitalism.

This political scientist briefly served as finance minister of Austria in 1919. Of the 20th century, the most influential Schumpeter popularized the term "creative destruction."

https://en.wikipedia.org/wiki/Joseph_...

Reviews

[Barack Liu · Rating 5 out of 5]

095-The theory of economic development-Joseph Schumpeter-1911
Barack

"The function of entrepreneurs is to combine factors of production and bring them together. Because this is a special action only when the elements are first combined - and if it is done in the process of running an enterprise, it is a routine task. ."

Joseph Schumpeter, born in 1883 in Moravia (present-day Czech Republic) in the Austro-Hungarian Empire, died in 1950. He received his Juris Doctor degree from the University of Vienna. In 1932, he moved to the United States as a professor of economics at Harvard University. Representative works: Capitalism, Socialism and Democracy, Economic Development Theory, History of Economic Analysis, Marx to Keynes Top Ten Economists, etc.

The Theory of Economic Development was first published in Austria in the autumn of 1911. Economic books. It summarizes the main economic phenomena of the generation and development of capitalism and makes a pioneering and profound discussion while describing the historical development process. The first innovative theory put forward in this book was that it caused a sensation in western economics.

Part of the directory.
1. The circulation of economic life is restricted by a certain environment.
2. The fundamental phenomenon of economic development.
3. Credit and capital.
4. Entrepreneur's profit.
5. Interest on capital.
6. Economic cycle.

Schumpeter pioneered the "Innovation Theory". According to Schumpeter, innovation, or a new combination, essentially means creating a new production function. It may be to create a new product, or it may be to increase the productivity of existing products.

An economic activity without a "new combination" is essentially a circular flow and has no "development". In such production, the residual value beyond the value of the goods produced is generally not obtained. Production can only realize the value that is seen in advance in the production plan, it is pre-hidden in the value of the means of production.

Economic growth, such as population growth and wealth accumulation, cannot in essence be called a development process. Because it does not produce qualitative changes, and there is only one adaptation process, is a change in quantity.

In the process of development, there are three important factors, "land" "labor" and "new combination of means of production and credit". We call people who implement new combinations "entrepreneurs". In other words, people with such tasks cannot be called "entrepreneurs" or "professional managers" if they simply maintain the day-to-day operations of existing portfolios and management enterprises.

Despite the new mix of entrepreneurs' "leaders", the image of capitalist entrepreneurs is not relevant to the image of the political leaders we know well. The latter convinces people of the desirableness of carrying out his plan, and the only person the former has to convince or impress is the banker or investor who will fund him.

In principle, only entrepreneurs need credit. Credit is essentially a creation of purchasing power that empowers entrepreneurs, but it is not simply a transfer of existing purchasing power. The purchasing power here is not generated out of space but draws the original purchasing power out of its original position and into a new portfolio led by entrepreneurs. What bankers have to do is entrust factors of production to such a group of people. By sacrificing the purchasing power that existed before, this newly created purchasing power allows the new portfolio to move.

In a circular flow, the same products are produced in the same way year after year; "In a circular flow, an enterprise's total income (income without monopoly factors) is sufficient to offset expenditure." The characteristics of their income can be expressed in full terms of "operating wages". In other words, in such enterprises, there are only producers who make no profit and do not suffer losses. Profits are generated only in new combinations created by "entrepreneurs". This is what we call entrepreneurial profits.

Therefore, the entrepreneur must be an innovator. Innovation is bound to be destructive and profitable, And the group that made the profits was the one who first introduced the new portfolio into the market.

Because books, like children, become independent people once they leave their parents' homes. They live their own lives, and authors have their own. It would be inappropriate to intervene with outsiders who have left home. The book has broken its path, rightly or wrongly, and it has earned its place in German literature in its time and field. For me, it seems best not to let it get in the way as much as possible. ."

"When we look at the general forms of economic phenomena, about their consistency, or about how to understand their keys, we are showing that at this moment we want to see them as something that needs to be studied as something "unknown" and something that needs to be explored;

When we succeed in finding a clear causal relationship between the two phenomena, if the phenomenon of "cause" is non-economic, then our problem is solved. That's what we can do as economists in this situation, and we have to give way to other disciplines in the future. On the other hand, if the factor as a cause is economic, we must continue our efforts in interpretation until we reach the base of non-economic.

This is true for both general theories and specific cases. If I can say, for example, that the phenomenon of land rent is due to differences in the quality of land, then the economic explanation is already complete. ."

"The same is true of other items in the farmer's calculations, not to ask him whether he is fully accounted for like a big industrialist, or semi-consciously and through the power of habit to make his decisions. Within certain limits he usually knew the price of what he had to buy; he knew how much he had to spend on his work (whether he was calculating the value of his labor on purely economic principles, or he viewed it in a completely different light than anyone else); he knew how to farm it, all based on long-term experience.

It is also from experience that all the people he buys from him know the size and intensity of his needs. Since the "circular flow" of economic periods, which is most striking of all economic rhythms, is relatively rapid, and because what happens in each economic period is essentially the same, the mechanism of exchange economy operates with great precision. Past economic periods dominated the activities of individuals. ."

One of the reasons for connecting human society to its great power is that, in addition to the political system, there is our economic system. It is conceivable that if modern society does not have a strong economic system, almost everyone in society will be connected to this network. How the overall strength of human society will be greatly weakened. And this system, which connects the vast majority of individual humans into this network, is one of the sources of strength that gives us a significant advantage over other animals.

How much meat the butcher sells is determined by how much meat his customers, such as tailors, will buy and at what price. But this depends on the latter's operating income, which in turn depends on the needs and purchasing power of the latter's customers, such as shoemakers, and the purchasing power of shoemakers depends on the needs and purchasing power of the people he produces for them;

This economic world is made up of quantitative interlocking and interdependent relationships that can be seen everywhere, no matter which direction people choose to move around. No matter where you enter this, no matter where you leave it, you may have taken many, but not a certain number of steps, and you must return to this starting point in the end. ."

It is precise because economic activity is so interconnected. This allows changes in one of these links to spread to the entire economic system like ripples on the surface of the water. Especially in today's highly globalized economy, this effect may be even more pronounced. Our economic system is like an ecosystem. Consisting of a large number of parts, they interact with each other in one form or another.

Social products themselves do not exist as social products. It is not the result of the conscious yearning of systematic activities, just as the economic system itself is not an "economy" operating under a unified plan. "If we think we have enough intelligence, we can accurately plan the output, sales, and sales of every commodity in our economic activities." Then we will certainly pay the price.

Economic activity may have any motive, even a spiritual one, but its significance is always to meet needs. "Philosophers encourage us to reduce our desires, and thus our troubles. Economists encourage us to pursue our desires because it encourages us to spend more and produce more.

"These two "aspects" of production make it an economic problem from the start. It must be distinguished from the purely technical problems of production. There is an antagonism between them that we often see in economic life in the personal confrontation between a technical manager and a business manager in a business. We often see changes in the production process proposed by one party rejected by the other.

For example, an engineer might suggest a new process that business leaders reject because they would not benefit. Engineers and businessmen may express their views that they aim to manage the business properly and that their judgment comes from knowledge of this appropriateness. "To this day, there is still such a contradiction between those responsible for production in an enterprise and those ， responsible for business practices. The purpose of the two sides is different, thus creating a difference in conclusions.

It is also useful to often compare ideals with reality so that the abandonment of possibilities is not due to ignorance, but to considering mature economic reasons. In short, every method of production used at certain times is subject to economic appropriateness. ."

Technically and economically, production means combining things and power within our means. Each production method means a particular combination. Different production methods can only be distinguished by combination, that is, either according to the object of the combination or according to the relationship between their quantities. Each specific production behavior, for us to reflect such a combination, for us is such a combination. ."

So technology refers to a production method or combination of products. Like giving children the same building blocks, different ways of the building will get different results, either castles, or airplanes, or robots. Even if you give the same people, material resources, and money as a business, different methods of using these resources will produce different results. The most important thing for business owners is how to continuously optimize the combination of all the resources at hand.

But we immediately saw that the need to make a decision would arise in any work. The apprentice of a shoemaker cannot repair his shoes without making a decision and deciding on some issues independently, no matter how small. "What to do" and "how to do" taught him; When a power company worker goes to a home to repair a lighting system, he even has to make some decisions about what to do and how to do it.

An agent even has to be involved in price decision-making, and within a certain range may entrust him with the right to set the price of his goods - yet he is neither a "leader" nor necessarily an "independent". As for business leaders or independent owners, they must make decisions and make decisions on most things. But what and why he did it was also taught to him. ."

If we divide the form of labor into the labor of the leader and the labor of the enforcer. Each of us plays both roles but in different proportions and degrees. Even as a business leader, his job is not entirely to assign others what to do. It also contains something that requires his direct execution. And even as small as a front-line worker. His work is not entirely to follow the instructions of his superiors to do things. On a smaller level, he also needs to make his judgments and have absolute autonomy.

There are all kinds of economics in this world that say that we can't read them through in our limited leisure time. Therefore, we must carefully choose, carefully allocate their time resources to those relatively cost-effective theories and theories. It's as if a person can eat a limited amount of food a day. Then he must carefully select the type and quality of food ingested. After eating too much junk food, the appetite for healthy food is bound to be small.

Since all production involves choosing between the possibilities of competition and always means negating the production of other goods, the total value of the product is by no means a net gain, but merely its surplus after subtracting the value of other products that could otherwise have been produced. The value of the latter represents an argument against the selected product, while at the same time measuring its strength. Here we encounter the cost element. Cost is a phenomenon of value.

At the end of the analysis, the cost to producers of the production of a good is such that the consumer goods are: they could have been obtained with the same means of production, but they cannot now be produced because of the results of the production choices. Thus, the use of means of production involves a sacrifice, as does the use of labor in terms of other means of production.

There is indeed another condition that must be met about labor, namely that every expenditure on labor must create a utility that at least compensates for the counter-effects associated with labor expenditure. This, however, will in no way change the fact that, within the scope of this condition, an individual engages in labor expenditure in the same way as he engages in expenditure on other productive resources. ."

2016/11/13
2020/04/18

[Otto Lehto · Rating 4 out of 5]

Schumpeter's comprehensive theory of economic development as entrepreneurial innovation was first laid down in this 1911 book. It prefigures his theory of "creative destruction" in Capitalism, Socialism and Democracy. Compared to the scanty attention paid to the subject in that later and arguably more famous book, The Theory of Economic Development explains the matter in detail. The book is all about the impact of innovation on the shape and trajectory of the evolving economy. This process explains the creative destruction of business fortunes, technological innovations, and the oscillating nature of capitalism's triumph.

The book has six chapters. It is possible to get the heart of his theory, as Schumpeter readily admits, by simply reading Chapter 2 if you are already familiar with the essence of the neoclassical equilibrium theory, i.e. what Schumpeter calls the theory of "circular flow". If you need refreshment, this theory is summarized, with idiosyncratic flourishes, in Chapter 1. The second chapter, however, marks a departure from this "circular flow" theory by providing an endogenous theory of development focused on the entrepreneurial act of innovation, defined as the creative recombination of existing resources and goods, that upsets the commercial equilibrium. This theory explains how capitalism is essentially an evolutionary process that proceeds through "jerky motion" and does not "grow like a tree" (both metaphors used by Schumpeter himself). In this process, old industries, techniques, and values are destroyed, and new ones are born/birthed which again gives rise to various new profit opportunities that can be seized by alert innovators.

The last four chapters explicate this theory, with dogged persistence, into the realm of banking, credit, entrepreneurial profit, wage levels, prices, rising prosperity, and business cycles. The value of this chapters lies in their brilliant exposition of the link between entrepreneurial innovation and the functioning of the rest of the economy. He convincingly shows how the continual disturbance of equilibrium conditions through entrepreneurship has massive ramifications for the various classes of the "evenly rotating economy". However, in the final analysis, re-evaluating Schumpeter's theory in light of numerous advances in business cycle theory, credit theory, monetarism, casts some doubt as to the universal validity of some of his suggestions which remain sketchy. Schumpeter himself later on became rather dissatisfied with some of the exposition in these later chapters, as explained in the author's preface to the second edition of the book.

At any rate, the brilliance of the central theory cannot be doubted. The equilibrium theory of neoclassical economics can explain important parts of the economic process, but it also leaves several important parts unexplained. These can better be explained by seeing innovation and creativity as propelling the economy into a disequilibrium, evolutionary process. The field of contemporary evolutionary economics owes its origin to Schumpeter's marvelous insights. They remain as fresh and exciting today as they must have been when originally presented.

[Jeff Greason · Rating 4 out of 5]

A classic and foundational work of economics. I have long wished to read it and finally did. I understand now why Schumpeter is more often quoted than read. The material was written more to persuade economists than to introduce the subject matter. Long sections answer objections mostly lost to history. The translation from the German adds to the dense prose, and the terms of economic art have shifted over the last century.

Still, the effort was worthwhile. The link between entrepreneurial activity and the existence of economic growth was and remains persuasive. In his discussion of interest, I think his argument goes perhaps a but too far but his essential point -- that the time value of investment derives from economic growth and new businesses -- is still sound. However, I think it is better understood that interest would exist even without that, merely at a lower rate. The one element where I really differed is in his argument regarding interest as a money phenomenon -- surely, the market for buying power is enormously more productive with money, but one could easily show that even seeds lent to a farmer would not be lent unless repaid with interest.

on balance, a difficult but worthwhile book

[Matthias · Rating 5 out of 5]

The first 3-4 chapters are absolutely brilliant. Schumpeter's observations were way ahead of their time, he was a true genius in his field.
The last 2 chapters are quite "Austrian", though, and have not aged as well as the first ones.
But, all in all, this book remains a milestone in the history of Economics.

[Non Liu · Rating 5 out of 5]

The basic requirement for Schumpeterian Theory of Innovation

[Marco Sán Sán]

Es brillante la capacidad de plantear un juego, crear el tablero y decirnos cómo jugarlo. A diferencia de Keynes que toma prestado el tablero o de Marshall que sólo pone las reglas.

Al igual que Menger, Schumpeter ve dinamismo en el desarrollo de la economía, para estos pensadores no hay sujetos sometidos a una estructura que fluye indiferente a ellos, hay individuos que producen valores de cambio conforme a su capacidad en determinado momento de la historia.

Schumpeter logra con una elegancia sobrada y coherencia sublime plantear como único motor de la economía al individuo, algo que a Keynes con sus políticas estadistas ni por la mente le pasaría o punto que Hayek nunca logro entrever partiendo de las mimas bases austriacas.

Su gran erudición logra equilibrar las dos corrientes de su tiempo, la escuela austriaca y la neoclásica.
Algo así como un campo de juego para el empresario, figura fundamental en todo su planteamiento, aquel que logra combinar utilidades para crear innovaciones que creen una constante para el desarrollo del mercado, una vez afianzadas tales innovaciones en el mercado, el empresario desaparece para volverse un capitalista y así comenzar el ciclo de la llamada “destrucción creativa” bajo la competencia del mercado. Osea otro empresario que juegue el juego para crear “nuevas” necesidades.

Es increíble cómo logro ver todo este desarrollo casi 100 años antes del florecimiento de internet donde las distancia desaparecen y el coste de producción baja a mínimos nunca antes vistos. Me recuerda a Kojève diciendo con gusto en plena primera guerra mundial “no se preocupen, vamos a confortable zoológico. No les quepa duda” y avecinándose la segunda guerra mundial que seria mucho peor repitiéndolo “no se preocupen, vamos a confortable zoológico. No les quepa duda”.

Hombres que simplemente entendieron lo que Hegel planteo “la liberta es conciencia de la necesidad”. Brillantes.

[Odysseas Spyroglou · Rating 4 out of 5]

This is a cumbersome book to read however it is considered one of the classics. It is one of the early (modern) descriptions of the evolution of economic cycles and development. Schumpeter key concepts are:

- Entrepreneurship and Innovation: entrepreneurs are catalysts for economic development, introducing "new combinations" such as novel products, production methods, markets, or organisational forms. These innovations disrupt the static economic cycle, leading to progress. "The entrepreneurial function need not be embodied in a physical person and in particular in a single physical person."

- Creative Destruction: Innovations sparks a "creative destruction," where new technologies and ideas make existing ones obsolete, continuously transforming the economic landscape. "The boom gives way to slump or recession. Completion of innovations brings in a large supply of goods which cannot be marketed at profitable price. There are forced bankruptcies since the banks call back loans.
The repayment of bank loans accentuates deflationary forces. Business risks scare away the prospective entrepreneurs. In this unfavourable climate, the innovational activity comes to a halt. After this painful process of adjustment in which weak enterprises are liquidated, the businessmen find conditions again ripe for a further spurt of entrepreneurial activity. The economic activity is resumed at a higher equilibrium. This is how the circle of development process is completed.

- Role of Credit and Capital: credit is enabling entrepreneurs to implement innovations. Banks and financial institutions provide the necessary capital, facilitating the reallocation of resources toward new ventures.

- Economic Cycles: economic development is inherently cyclical, driven by clusters of innovations that lead to periods of rapid growth followed by consolidation phases.

[Liquidlasagna · Rating 5 out of 5]

[found in the following list]

Books with the best decision theoretic and philosophical foundation
by Michael Emmett Brady

The following books will provide an optimal understanding of how one should study and organize the data and observations that comprise the social sciences. These books provide a broad foundation in logical, epistemological, and philosophical techniques that are sound and valid. A reader who masters these books will quickly grasp the complex, dynamic, nonlinear aspects of social science systems as they evolve through time.

1. The General Theory of Employment, Interest, and Money - John Maynard Keynes
2. A Treatise on Probability - John Maynard Keynes
3. Risk, Uncertainty and Profit - Frank H. Knight
4. The Theory of Economic Development - Joseph A. Schumpter
5. The Wealth of Nations - Adam Smith
6. Risk, Ambiguity and Decision - Daniel Ellsberg
7. The (Mis)behavior of Markets - Beniot Mandelbrot and Richard L. Hudson
8. Probability, Econometrics and Truth - Hugo A. Keuzenkamp
9. The Unbround Prometheus: Technological Change and the Industrial Development in Western Europe from 1750 to the Present - Second Edition - David S. Landes
10. The Laws of Thought - George Boole
11. The Black Swan - Nassim Nicholas Taleb
12. Fooled by Randomness - Nassim Nicholas Taleb
13. J.M. Keynes Theory of Decision Making, Induction and Analogy - Michael Emmett Brady

[Gizem Kendik Önduygu · Rating 3 out of 5]

Bu defa güncel sosyal inovasyon literatürüne bakayım dedim. Tahmin ettiğim kadar geniş bir dünya değilmiş. Sosyal girişimcilik literatürü tersine burada dahi-kahraman bireyler yerine kolektif eylem ve organizasyonlara olan vurgu gün geçtikçe artıyor. Belki indigenous social innovation yeni bir açı olabilir. O da belki. (Sırf dekolonizasyon tartışması diye romantize edecek değilim. Ben bir köylüyüm.)

Bu alana girince karşımıza ilk çıkan isimlerden biri Schumpeter. Girişimcileri ekonomik kalkınma ve inovasyonun merkezine oturtan kişi. Bunlara şöyle bir baktım çıktım.

[Miauricio Alva · Rating 4 out of 5]

Me sirvió para mi tesis 👍

[Jiro · Rating 5 out of 5]

静态循环-企业家创新-资本承担风险-企业家利润与利息-经济周期

[Constantinos · Rating 3 out of 5]

Truth be told the message is timeless but I find the writing dull and hard to follow.

[Ken Davidian · Rating 3 out of 5]

I really liked this book! The introduction was a good overview of academic economic history and gave good background for the original text. Having read the other two books of the "trilogy" first (I read the third book, "Capitalism, Socialism and Democracy" first, "Business Cycles" second, and *then* this book) I could see where Schumpeter was heading when he started referring to business cycles. I feel bad only giving this book three stars at first, but I'll review my notes and revise the rating if there was something else of value that I'm forgetting about...

[Marks54 · Rating 3 out of 5]

This is an edition of Schumpeter's first book and a good articulation of his theory of innovation and entrepreneurship and how they fit into the capitalist order. It is especially valuable in showing how creative destruction and entrepreneurial finance fit into an economic system that is already at high employment. It is not for the faint of heart and their are better presentation of these ideas by Schumpeter later down the road, such as in Capitalism, Socialism, and Democracy.

[Phillip Bryant · Rating 3 out of 5]

"The 2nd chapter is the best. The first chapter sets up the logic and arguments supporting the second chapter. The rest of the book is dry and difficult reading. Also, Schumpeter wrote with an egotistical tone. As an example, "But I shall not add another word of explanation because the matter must be clear to the reader who gives it the appropriate attention."

Recommended only for those with a keen academic interest in the role that entrepreneurship plays in economic development."

[Richard Marney · Rating 5 out of 5]

A re-read (actually number 6 or 7).

Even as a dye-in-the-wool Keynesian in my formative years as an economist, I hold a begrudging respect for this stalwart of the Austrian School. I return to this (I believe) his most valuable contribution to economics from time to time, inspired by new questions or doubts. This occasion was prompted by a debate with a colleague on business cycles.

[Paul Tennant · Rating 5 out of 5]

i love how he uses the circular flow of capital. what happens to capital once all domestic sources of investment are exhausted. great book on understanding the bottom up approach. That said it is not the easiest of reads, but his mind will amaze you.

[Ferhat Culfaz · Rating 2 out of 5]

Seminal work, but very technical and theoretical. Not suitable for laymen. Good for reference.

[Kristina Vukovic · Rating 5 out of 5]

Mislim da mi je omiljeni deo knjige rasprava o kreditima.