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Schumpeter

Theory

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Theory Schumpeter

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.

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Capitalist system is a rapid economic

development system process. This systemmay 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.

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A key factor of development is dependent onentrepreneur group which are very innovative in

combining the factors of production which istargeted to produce goods and services.

The reformation process included the followingmeasures:

- introduce a new product- using new method in producing goods

- to find new market

- to develop new raw material as alternativesources

- to have rearrangement of industries

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Analysis begun with the assumption that countryseconomic performance is in rigid condition, i.e.,

there are no population growth and net investment,and high level of unemployment. Someentrepreneurs committed to reformation andfollowed by other entrepreneurs until there is anincrease in investment.

The impacts are increasing in societys income andconsumption. This phenomena will lead theentrepreneurs to increase the new capital.

- induced investment increasing of investment

because of increasing in income , production andprofit.

- autonomous investment investments whichdetermined by long-term development, such asnew resources found and technology which can

create reformation

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The economic development (booming period) will befollowed by economic recession

- some entrepreneurs who cannot compete with thoseentrepreneurs whose have done reformation willsubsequently failed in their business and lost their marketand have to close their business.

- creation of new products will lead to uncertainty amongthe entrepreneurs in terms investment and capital that are

needed for business development- Those entrepreneur who are able to create the newproducts and market will lead to economic boomingHowever, the equilibrium point is higher than the economicrecession period.

- With the new equilibrium, the level of per capitaincome is higher

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Conclusion of Schumpeter Theory

Explanation of factors that cause uncertainty in capitalisteconomy.

Identification of factors that encourage economicdevelopment process.

For efficiency - optimal mobilization and combinationof factors of production with the new method ofproduction.

Enlargement of credit facilities to mobilize factors ofproduction

The significant role of entrepreneurs in economicdevelopment process

A significant characteristic in economic developmentprocess is mobilization of production factors and not toincrease new accumulated capital.