John Schumpeter and Washing Machines Plan

John Schumpeter’s theory of economic development
  * Schumpeter was the first to propose the link between entrepreneurship and economic development

  1. The circular flow
According to Him economic development “is spontaneous and discontinuous change in the channels of the circular flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing.” (pg 64)

Development consists in the carrying out of new combinations for which possibilities exist in the stationary state. New combinations come about in the form of INNOVATIONS.
Innovation scan include, the introduction of a new product, new method of production, the opening of a new market, the conquest of a new source of raw material, the carrying out of a new organization of any industry like the creation of monopoly. (pg 66)

According to Schumpeter, it is the introduction of a new product and the continual improvements in the existing ones that lead to development.

  2. Role of the Innovator
The entrepreneur is motivated by the desire to find a private commercial kingdom, the will to conquer and prove his superiority, the joy of creating of getting things done or simply of exercising one’s energy and ingenuity. (pg93)   The entrepreneur requires the technical knowledge in order to produce something new and the power of disposal over the factors of production in the form of credit.

  3. Role of profits
An entrepreneur innovates to earn profits
According to Schumpeter under competitive equilibrium the price of each product just equals its cost of production and there is no profit. Profits arise due to dynamic changes resulting from an innovation. They continue to exist till the innovation becomes general.
  4. Breaking the circular flow
Schumpeter’s model starts with the breaking up of the circular flow with an innovation in the form of a new product by an entrepreneur for the process of earning profit.
In order to break the circular flow, the...