Joseph Schumpeter's Economic Theory

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Economic Theory

Introduction

This theory section will include Joseph Schumpeter’s explanation of the business cycle and his innovation theory. This is an important theory in this project because it will help analyze the pharmaceutical industry and the production of medication. This section sets out to discuss where the theory came from and thoroughly explain the theory.

Joseph Schumpeter

Joseph Schumpeter had always wanted to be an economist. He is well known in the fields of economics, as well as political science and sociology. Two of the things he is most known for are how he introduced entrepreneurs into economics and for producing a history of economic thought. He produced three major works in less than 10 years that are
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100). Schumpeter believed that to explain the economy, you have to use a dynamic approach. The circular flow, which is an economic description that many economists have developed, was developed using a static approach. A static approach is one that would keep flowing the same way. Circular flow explains how the economy would function normally, even when there are small outside disturbances and based on a limited amount of economic forces (Sweezy, 1943). Some economists believe that this static economy would be the end of capitalism. Schumpeter on the other hand argues that this was simply the beginning of the capitalistic economy (Heilbroner, 1999). It would become a routine that would be repeated and that would result in it becoming a habit (source on sociology). But he also believed that there could be disturbances from the inside of the economy which could have an effect on the economy. This is where the innovation theory came from and it it is also a dynamic approach. Schumpeter knew that the economy does not follow the circular flow at all times, so he wanted to be able to explain the cases/instances that fell outside of the circular flow. The answer was “new combinations” or innovations made by entrepreneurs. Schumpeter argued his theory of innovation based on the idea that in a society it is easier to follow than to become a leader. In…show more content…
93). Entrepreneurs have certain characteristics or qualities that set them apart from a regular individual. One quality is that they are able to see the potential or the possibilities within an innovation. The entrepreneur must also display leadership qualities to be able to actually push the product or innovation out into the world. Schumpeter discovered these personality traits of certain groups of people when he discovered the source of economic change. Schumpeter’s theory of innovation was based on the notion that if a certain group of people with certain personality traits (entrepreneurs) were eliminated from society, then the forces driving change would cease to exist (Sweezy,
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