2. Introduction
Joseph Alois Schumpeter (German:8 February 1883 – 8 January
1950) was an Austrian-born American political economist. He was
as Finance Minister of Austria in 1919. In 1932, he became a professor
at Harvard University where he remained until the end of his career. One
of the most influential economists of the 20th century, Schumpeter
popularized the term "creative destruction" in economics.
3. Meaning of Trade Cycle
A trade cycle refers to fluctuations in
economic activities specially in
employment, output and income,
prices, profits etc.
4. Phases of a Trade Cycle
Generally, a trade cycle is composed of four phases – depression, recovery,
prosperity and recession.
Depression:
During depression, the level of economic activity is extremely low. Real
income production, employment, prices, profit etc. are falling. There are
idle resources. Price is low leading to a fall in profit, interest and wages. All
the sections of the people suffer. During this phase, there will be
pessimism leading to closing down of business firms.
Recovery:
Recovery denotes the turning point of business cycle form depression to
prosperity. In this phase, there is a slow rise in output, employment,
income and price. Demand for commodities go up. There is increase in
investment, bank loans and advances. Pessimism gives way to optimism.
The process of revival and recovery becomes cumulative and leads to
prosperity.
5. Prosperity:
It is a state of affairs in which real income and employment are high. There are no
idle resources. There is no wastage of materials. There is rise in wages, prices,
profits and interest. Demand for bank loans increases. There is optimism
everywhere. There is a general uptrend in business community.
However, these boom conditions cannot last long because the forces of expansion
are very weak. There are bottlenecks and shortages. There may be scarcity of
labour, raw material and other factors of production. Banks may stop their loans.
These conditions lead to recession
Recession:
When the entrepreneurs realize their mistakes, they reduce investment,
employment and production. Then fall in employment leads to fall in income,
expenditure, prices and profits. Optimism gives way to pessimism. Banks reduce
their loans and advances. Business expansion stops. This state of recession ends in
depression.
6. Schumpeter Theory
Discuss the roles of entrepreneurship in economic
development process. He explains the differences between
economic growth and development (Business Cycles 1939).
He argues development as consisting of a process
which involved reformation on various equipments of
productions, outputs, marketing and industrial
organizations.
7. Capitalist system is a rapid economic development system
process. This system may affect negatively on social life.
In the long-run, economy will face stagnation period and it is
not a process that always operate accordingly and smoothly.
In development process, economy may sometime run
prosperously (full employment condition) and sometime is in
crisis (unemployment) and this may take place happen
alternately.
8. A key factor of development is dependent on
entrepreneur group which are very innovative in
combining the factors of production which is targeted to
produce goods and services.
The reformation process included the following measures:
- introduce a new product
- using new method in producing goods
- to find new market
- to develop new raw material as alternative
sources
- to have rearrangement of industries
9. Analysis begun with the assumption that country’s economic
performance is in rigid condition, i.e., there are no population
growth and net investment, and high level of unemployment. Some
entrepreneurs committed to reformation and followed by other
entrepreneurs until there is an increase in investment.
The impacts are increasing in society’s income and consumption.
This phenomena will lead the entrepreneurs to increase the new
capital.
- induced investment – increasing of investment because of
increasing in income , production and profit.
- autonomous investment – investments which determined by
long term development, such as new resources found and
technology which can create reformation
10. The economic development (booming period) will be
followed by economic recession
- some entrepreneurs who cannot compete with those entrepreneurs
whose have done reformation will subsequently failed in their business
and lost their market and have to close their business.
- creation of new products will lead to uncertainty among the
entrepreneurs in terms investment and capital that are needed for
business development
- Those entrepreneur who are able to create the new products and
market will lead to economic booming However, the equilibrium point
is higher than the economic recession period.
- With the new equilibrium, the level of per capita income is higher
