Innovation Economics :-A new belief / theory which revolves round innovation being the main cause for the trade cycle.

Propounded by Mr J.A. Schumpeter - around 15 years back.

Knowledge , technology , entrepreneurship and innovation are positioned at the centre of the model

JOSEPH ALOIS SCHUMPETERJoseph Alois Schumpeter(8 February 1883 8 January 1950)was anAustrian Americaneconomistandpolitical scientist. He briefly served asFinance Minister of Austriain 1919

SCHUMPETERS MODEL OF ECONOMIC GROWTH

ROLE OF INNOVATION An innovations may consist of: 1.The introduction of a new product 2.The introduction of new method of production3.The opening up of a new market 4.The conquest of a new source of raw material According to Schumpeter ,it is the introduction of new product / process and the continual improvements in the existing ones that lead to growth and development.

ROLE OF ENTREPRENEURSchumpeter identifies entrepreneurial profit as the prime motivatorthe premium put upon successful innovation. Schumpeter says that 'Entrepreneur' is such a factor of production who introduces new combinations of factors of productionIn order to perform his economic functions the entrepreneur is need of two things: (i) He must be having technical knowledge so that he could produce new goods. (ii) He could easily get the funds. In this respect, credit plays an important role. Because of credit, an entrepreneur gets a command over factors of production.

BREAKING THE CIRCULAR FLOWSchumpeters 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 purpose of earning profit.

In order to break the circular flow ,the innovating entrepreneurs are financed by bank-credit expansion.

Investment in innovation is risky, they must pay interest on it. Once the new innovation becomes successful and profitable, other entrepreneurs follow it.

Innovations in one field may induce other innovations in related fields. The emergence of motor car industry may in, in turn ,stimulate a wave of new investments in the construction of highways ,rubber tyre etc.

CYCLIC PROCESSInvestment is assumed to be financed by creation of bank credit.It increases money incomes and prices and helps to create a cumulative expansion throughout the economy.With the increase in purchasing power of the customers, the demand for the products of the old industries increases to the supply.Price rise ,profit increase and old industries expand by borrowing from the banks. It induces a secondary wave of credit ,inflation which is superimposed or the primary wave of innovationAfter a period the new products start appearing in the market displacing the old products and enforcing process of liquidation and readjustment.The demand for old product is decreased. Their price fall. some are even forced to run into liquidation.As though innovators start repaying bank loans out of profits, the quantity of money is decreased and prices tends to fall. profit decline. Uncertainty &the impulse for innovation is reduced.Depression entered.

Analysis begun with the assumption that countrys 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 societys income and consumption. This phenomena will lead the entrepreneurs to increase the new capital.

(a)induced investment increasing of investment because of increasing in income , production and profit.

(b)autonomous investment investments which determined by long-term development, such as new resources found and technology which can create reformation

TRENDS OF GROWTH IN THE SCHUMPETERS MODEL

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.

PREDICTION OF THE DEMISE OF CAPITALISM

Like Karl Marx Schumpeter also thinks that eventually the capitalism will come to an end and it will be replaced by Socialism.In this respect, he gives following arguments:

(i) Along with the evolution of capitalism the entrepreneurs and their techniques of production will get obsolete. The salaried managers will take-over the charge of industrial units in place of entrepreneurs.(ii) Along with the growth of capitalism the 'Liberalism' will increase. This will weaken the institution of 'Monarchy'. The capitalistic class will get weaker, and it will depend upon civil and military bureaucracy. In this way, an unrest will develop in the society.(iii) The capitalism provides the right to speak and write. The people will express their dissatisfaction against capitalism in tea-houses, parks, hotels and in journals and newspapers.In this way, the capitalism will finally convert into socialism. Thus according to Schumpeter the capitalism will have a 'Self-Demise".

CRITICISM OF THE THEORYIn Schumpeter Model 'the inventor and innovator has been accorded as an 'Ideal Man'. But now a days the inventions and innovations are the routine activities of industrial concerns. Schumpeter regards innovation as the main cause of economic developmentToo much importance to bank -creditIt is wrong to say that society, will eventually move towards socialism. As if we analyse Europe and America like capitalist countries they have a higher degree of industrial development. They have a right to speak and write. But till now no possibility has emerged whereby the rich capitalist country could turn towards socialism. While the reverse has occurred and the socialists countries are converting themselves into 'Market Economies', after the disintegration of Soviet Union.

DIAGRAMATIC REPRESENTATION OF THE SCHUMPETERIAN MODEL

BIBLIOGRAPHYOFFLINE SOURCES OF INFORMATION-INTERNATIONAL ECONOMICS-J.E.CURRYTHE THEORY OF ECONOMIC DEVELOPMENT:AN ENQUIRY INTO PROFITS,CAPITAL,CREDIT,INTEREST & BUSSINESS CYCLE-J.A.SCHUMPETERFUNDAMENTALS OF FINANCIAL MANAGEMENT-EUGENE BRINGHAM & JOEL F. HOUSTON

ONLINE SOURCES OF INFORMATION- WIKIPEDIA THE ECONOMIST ECONOMICSCONCEPT.COM