Schumpeter's paradox reconsidered: The need for a theory of circular flow

Seo, Takashi (2021): Schumpeter's paradox reconsidered: The need for a theory of circular flow.

Abstract

This study focuses on the well-known theme of Schumpeter’s system of economic theory. Specifically, the study discusses Schumpeter’s paradoxical stance on Walras’ general equilibrium theory, which Louçã (1997) called Schumpeter’s paradox. We reconsider the significance of the notion of circular flow in business cycle theory, after recognising the continuity from static to dynamic theory, and then to business cycle theory that integrates these theories. In doing so, we focus on the fact that Schumpeter called the equilibrium in the cyclical process a circular flow or a stationary process and proposed his own concept of neighbourhoods of equilibrium, which was not found in Walras’ general equilibrium theory. Through such an analysis, we propose that Schumpeter’s paradox is eased to some degree and that the theory of circular flow should be explored further.

• Item Type: MPRA Paper
• Language: English
• Keywords: Schumpeter, Walras, Kuznets, Business cycles, Circular flow, General equilibrium, Neighbourhood of equilibrium
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B25 - Historical ; Institutional ; Evolutionary ; Austrian; B - History of Economic Thought, Methodology, and Heterodox Approaches > B3 - History of Economic Thought: Individuals > B31 - Individuals; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Allen R (1991) Opening doors: the life and work of Joseph Schumpeter, 2vols. Translation Publishers, New Brunswick and London

Andersen ES (2006) The limits of Schumpeter’s business cycles. Ind Innov 13(1):107-16 Andersen ES (2009) Schumpeter’s evolutionary economics. Anthem Press, London

Clemence RV (ed) (1989) Essays: on entrepreneurs, innovations, business cycles, and the evolution of capitalism, Routledge, New York

Clemence RV, Doody FS (1950) The Schumpeterian system, Addison-Wesley Press, Cambridge Foster J (2015) Joseph Schumpeter and Simon Kuznets: comparing their evolutionary economicapproaches to business cycles and economic growth. J Evol Econ 25:163-72

Freeman C (2015) Schumpeter’s ‘business cycles’ revisited. Eur J Econ Soc Syst 1-2:47-67 Hansen AH (1951) Schumpeter’s contribution to business cycle theory. Rev Econ Stat 33(2):129-32

Harris SE (ed) (1951) Schumpeter: social scientist. Harvard University Press, Cambridge

Kanazashi M (1979) Economics of J.A. Schumpeter (in Japanese). Shinhyoron, Tokyo

Kingston W (2006) Schumpeter, business cycles and co-evolution. Ind Innov 13(1):97-106

Kuznets S (1930a) Equilibrium economics and business-cycle theory. Q J Econ 44(3):381-415

Kuznets S (1930b) Static and dynamic economics. Am Econ Rev 20(3):426-41

Kuznets S (1940) Schumpeter’s business cycles. Am Econ Rev 30(2-1):257-71

Lange O (1941) Business cycles: a theoretical, historical and statistical analysis of the capitalist process by Joseph A. Schumpeter. Rev Econ Stat 23(4):190-93

Louçã F (1997) Turbulence in economics. Edward Elgar, Cheltenham and Lyme

McCraw TK (2007) Prophet of innovation: Joseph Schumpeter and creative destruction. Belknap Press of Harvard University Press, Cambridge and London

Morioka M (2000) Stationarity in Evolution. In: JAFEE, Shiozawa Y (eds) Evolution as a Method (in Japanese). Springer Verlag Tokyo, Tokyo, chap.5

Nakayama I (1972) The collected works of Ichiro Nakayama vol.1: the expansion of pure economics (in Japanese). Kodansha, Tokyo

Nelson RR, Dosi G, Helfat CE, Pyka A, Winter SG, Saviotti PP, Lee K, Malerba F, Dopfer K (2018) Modern evolutionary economics: an overview. Cambridge University Press, Cambridge

Rosenberg H (1940) Book review: business cycles: a theoretical, historical, and statistical analysis of the capitalist process by Joseph Schumpeter. Am Hist Rev 46(1):96-99

Rosenberg N (1994) Joseph Schumpeter: radical economist. In: Shionoya Y, Perlman M (eds) Schumpeter in the history of ideas. University of Michigan Press, Ann Arbor, pp 41-57

Schumpeter JA (1908) Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie. Duncker & Humblot, Leipzig

Schumpeter JA (1912) Theorie der wirtschaftlichen Entwicklung. Duncker & Humblot, Leipzig, available on internet. (https://schumpeter.info/index.html)

Schumpeter JA (1926) Theorie der wirtschaftlichen Entwicklung: Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus, Duncker & Humblot, Munich and Leipzig

Schumpeter JA (1934) The theory of economic development: an inquiry into profits, capital, credit, interest and the business cycle. Harvard University Press, Cambridge

Schumpeter JA (1937) Preface to Japanese edition of “Theorie der wirtschaftlichen Entwicklung.” In: Clemence RV (ed) (1989), pp 165-68

Schumpeter JA (1939) Business cycles: a theoretical, historical, and statistical analysis of the capitalist process. McGraw-Hill, New York

Schumpeter JA (1950) Capitalism, socialism, and democracy, 3rd edn. Harper, New York Schumpeter JA (1951) Ten great economists. Oxford University Press, Oxford

Schumpeter JA (1954) History of economic analysis. Allen and Unwin, London

Schumpeter JA (1982) The ‘crisis’ in economics: fifty years ago. J Econ Lit 20(3):1049-59

Schumpeter JA (1989) Business cycles: a theoretical, historical, and statistical analysis of the capitalist process, abridged with an introduction by Fels R. Porcupine Press, Philadelphia

Shionoya Y (1997) Schumpeter and the idea of social science. Cambridge University Press, Cambridge

Shionoya Y (1998) Schumpeter’s vision of economy (in Japanese). Iwanami shoten, Tokyo

Shiozawa Y, Morioka M, Taniguchi K (2019) Microfoundations of Evolutionary Economics. Springer, Tokyo

Stolper WF (1994) Joseph Alois Schumpeter: the public life of a private man. Princeton University Press, Princeton

Walras L (1954) Elements of pure economics or the theory of social wealth, translated by Jaffé W. Allen & Unwin, London

Yagi K (1988) A study of the history of Austrian economic thought (in Japanese). Nagoya University Press, Nagoya

Yagi K (2004) Economic Thought in Vienna (in Japanese). Minerva shobo, Kyoto