Why Schumpeter Theory is Not Applicable to UDCs? (11 Reasons)

The following points highlight the eleven reasons why Schumpeter’s theory is not applicable to Under- Developed Countries (UDCs).

Reason # 1. Not applicable to Socialist Countries:

This theory is not applicable to majority of UDCs which have socialist system.

For example, the introduction of social security measures and highly progressive income taxes are harmful to the development of an entrepreneurial class because they tend to reduce the profits.

Reason # 2. Lack of Entrepreneurship:

The Schumpeterian analysis rests on the existence of entrepreneurial class but UDCs lack adequate entrepreneurship. In such economies, profits are low and low state of technology does not enhance innovational investments in new plant. Moreover, the lack of adequate power, transport, skilled personnel acts as disincentives to entrepreneurial activity.

Reason # 3. Different Socio-Economic Order:

UDCs have got a socio economic structure which is entirely different from the socio economic order that prevailed in Western Europe and America in 18th and 19th centuries and which has been the basis of Schumpeterian analysis of problem of development.

In these countries, certain essentials of growth like economic and social overheads, suitable attitudes and values for economic development were already existing but in UDCs such essentials do not exist.

Reason # 4. Neglect Savings:

Schumpeter’s exclusive emphasis on bank credit obscures the rate of savings in investment. It also considers the importance of deficit financing, budgetary savings, public credit and other fiscal measures in the economic development.

Reason # 5. Neglects Consumption:

The Schumpeterian analysis is production oriented and the development process is consumption oriented. This is applied in the current trend towards the welfare state in which demand and consumption play a leading role.

Reason # 6. Neglects Population Growth:

Schumpeter’s theory is also inapplicable to UDCs because it neglects the effect of growth of population on wealth. In these countries, population is the main hurdle in the process of development and any theory that neglects population problem cannot be very useful to them.

Reason # 7. Unsatisfactory Explanation of Inflationary Forces:

In this theory, inflationary impulses form an integral part of the process of development but it involves no secular inflation. The long term price is stable. In an UDC inflationary forces are very powerful.

Reason # 8. Assimilation of Innovations:

According to Prof. Henry Wallich, the development process in UDCs is based not on innovations but on existing innovations. For example, entrepreneurs in UDCs are not in a position to innovate; rather they adapt innovations taking place in advanced countries.

Reason # 9. Not Applicable to Mixed Economies:

Schumpeter’s innovator is a private entrepreneur who does not fit in the present day mixed economies. In an underdeveloped country, state is the biggest entrepreneur. The main encouragement for development comes from the state and semi-state bodies. Thus, Schumpeter’s innovation has a limited role to play in underdeveloped countries based on mixed economy.

Reason # 10. Neglects External Effects:

According to Schumpeter, “Development is the result of changes that arise from within the economy”. But, in underdeveloped countries changes do not take place from within the economy, rather they are the outcome of foreign ideas, technology, capital etc.

Reason # 11. Institutional Changes Needed:

In underdeveloped countries the so-called sociocultural environment, plagued by caste system, hereditary principles, obscurantism etc., obstruct many people for new and higher status.

Therefore, institutional changes like organisational structures, skilled labour, spread of trade union activities among labourers, appropriate values, attitudes and motivations etc., are needed in underdeveloped countries about whom Schumpeter had not spoken a single word.