Economic Cycles and Business

Joseph Schumpeter lived in the early part of the 20th Century. He tried to integrate a sociological understanding into his economic theories but the power of his ideas on business cycles and economic development could not be captured in the mathematics of his day.

Business Cycles and Circular Flow:

Schumpeter's History of Economic Analysis argued that world economies operated according to Business Cycles and Circular Flows. This was one of his greatest contributions, but, another was to suggest that by excluding Innovations and Innovative Activities from the cycle the world economy would tend towards a stationary state of equilibrium. He noted that the point around which Innovation turns is the Entrepreneur.

The Entrepreneur is an Individual who disturbs this tendency towards stationary equilibrium and is the prime cause of Economic Development, which proceeds in a cyclic fashion along several time scales or phases.

The Demise of Capitalism:

Schumpeter agreed that Entrepreneurs need a well-developed financial system to purchase their resources but, whereas he predicted that Capitalism will collapse and be replaced by Socialism, he concluded that this will come about from within by a method known as ‘Creative Destruction’. He identified this with the process in which the old ways of doing things are destroyed and replaced by new ways.

Schumpeter's theory is that the success of capitalism will lead to a form of Corporatism and a set of values that are hostile to capitalism. This will occur among intellectuals because there will be insufficient work, of a sufficiently high calibre, to stimulate the scores of University educated students. He postulated that the intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form.

He did not predict a revolution but a trend to elect parliaments from, increasingly similar, social democratic parties of one stripe or another. Therefore, capitalism will collapse from within as democratic majorities vote for the creation of a welfare state and place restrictions on the entrepreneur that will burden and destroy the capitalist structure.