Criticisms of Schumpeter’s Theory of Economic Development

The following points highlight the nine major criticisms of Schumpeter’s theory of economic development.

Criticism # 1. Role of innovator emphasized:

Schumpeter theory highlights the role of innovator as the prime mover of economic development.

The analysis of the entrepreneurial innovation is highly useful in the development of capitalism.

Innovations are only one of many factors causing cyclical fluctuations in a capitalistic economy.

But it is difficult to differentiate their innovating activity from their ordinary business activity. The innovational activities have become a matter of routine these days and there is no need of special agent like innovator for carrying on such activities. Thus Schumpeter has over glorified the place of innovator in his model.

Criticism # 2. Role of savings ignored:

Schumpeter assumed that innovations are financed by the bank credit and this assumption is not much convincing. Banks usually grant short term loans. He assumes that innovations are financed by the borrowings from credit creating banks.

This actually happened in Germany, but in many other countries, this sort of financing does not occur.

In this way this theory ignores the important sources of real savings such as deficit financing, budgetary savings, public borrowings and other fiscal measured.

Criticism # 3. Analysis of capitalist process not convincing:

According to Schumpeter broad socio-economic analysis of capitalist process is generally admired. Yet few seem prepared to accept its conclusions. His arguments are stimulating but not completely convincing. This theory explains that rational behaviour of innovators and intellectual class is responsible for the success of capitalism.

The Schumpeter’s Hero i.e. innovator or entrepreneur is a forward looking man in the economic matters and he is an adaptable individual who can overcome all sorts of difficulties and obstacles. But in social and political field, he may be quite weak.

The entrepreneur may not be capable of adjusting to political changes. The success of capitalism does not depend only on the personality and behaviour of the innovator but on the non economic factors too. It is therefore, not convincing that capitalist process always works on the basis of rationality and dispassionate ideas.

Criticism # 4. Emergence of socialism not based on sound reasoning:

Schumpeter’s analysis about the emergence of socialism is provocative yet it seems to be one sided and over emphasized. He himself is not quite sure about the way in which socialism will take place of capitalism.

His unawareness about this factor is clear from these words, “We know nothing as yet about the precise way by which socialism may be expected to come, except that there must be a great many possibilities ranging from gradual bureaucratization to the most picturesque revolution.” So it is very difficult to conclude that the decomposition of capitalism will eventually lead to composition of socialism.

Criticism # 5. Circular flow based on Say’s law of markets:

Circular flow is the first component of the Schumpeterian analysis of economic growth and its features reveal that this concept is very much similar to Say’s- Law of Markets. The circular flow or Say’s law is valid in a stationary society which is not in tune with development process which is dynamic one.

It is the dynamic setting which is more conducive to economic development. Hence the assumptions of circular flow are incompatible with the development process.

Criticism # 6. Analysis of cyclical process is wrong:

Schumpeter’s view that the economic development is the result of the cyclical process is wrong. According to Nurkse, “Economic development is related to continuous changes”.

Criticism # 7. Undue importance to bank credit:

Schumpeter has given undue important to bank credit. Bank credit may be important in the short run when industrial concerns get credit facilities from the banks. However, in the long run when the need of capital funds is greater but bank credit is insufficient. For this, business houses have to float new shares, debentures etc. in the market.

Criticism # 8. Innovations is not the main cause of economic development:

Schumpeter regards innovations as the main cause of economic development. However, this view is far from reality because economic development of a country does not depend on innovations only but also on many economic and social factors.

Criticism # 9. Little relevance for underdeveloped countries:

In the context of underdevelopment, the Schumpeter theory is found to be inadequate. In underdeveloped counties, the class of innovators is very small because of the small extent of the market, and the low expectation of profits. Schumpeter has talked of a private innovators as the prime mover of economic growth, but in most of the poor countries, the government is the biggest innovator.

Again Schumpeter believes that development is the result of domestic forces. But underdeveloped economies depends on imported technology, foreign capital joint collaboration etc. Thus the development process in the backward countries is very much influenced by the exogenous forces in the initial stages of development.

Again the underdeveloped countries are under a constant strain of population growth. This factor has not been considered by Schumpeter in his analysis. Population growth creates so many economic, social and political problems, and retards the pace of development process.