Institution Date due The Differences between Schumpeter and Keynes Economic Theorems Introduction The invent of economic thought has had several growth and with views of economic problems, issues and solutions changing as time goes by, that is from the mercantilist view, physiocrats’ view, just to mention a few to the modern economics…
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Both Joseph Schumpeter and John Maynard Keynes were subjected to the same economic period, suffering from economic recession and aimed at developing theories aimed at economic development. However both analyzed the situation differently and thus observed different economic problems which made them to come with different definitions of the economics, which are very important in understanding the modern economic trends and situations. In an effort to solve the economic crisis, Keynes called for government intervention. Holding to the fact that money was not an just a means of exchange as was stipulated by the likes of Adam Smith and David Ricardo, but the supply of money, and to be specific money velocity had an adverse effect on the demand of goods, Keynes put it across that regulation of money supply would improve economic conditions during recession (Heilbroner 267). To come up to this conclusion, Keynes held lack of control of money supply in the capitalist system had caused the recession. Schumpeter agreed to Keynes idea that the failure of capitalist system resulted to the economic recession but attributed the failure to poor relation between capitalist investors and the actual managers of the investment projects who happened to be employees. According to Schumpeter, the managers salaries are not correlated to the company’s profit and thus don’t strive to maintain or improve future returns. Although Schumpeter did not reject interventions, he held that capitalism could be maintained and its success accelerated ‘creative destruction’ that is replacement of old worn-out business models by new entrepreneurs’ innovations. What determines real price of commodities is a question that most economics have had in their minds. Keynes was not an exception, although his answers portrayed a view completely different from his predecessors. To develop his theories, Keynes held that money and credit were real, and greatly influenced commodity prices (Heilbroner 270). Disregarding that firms and individuals had any impact the economy as demand which was only affected by money velocity influenced capital formation, productivity and employment. However Keynes held the assumption that his theory was only effective if the velocity of money was held constant. Schumpeter embedded on this assumption and criticized the whole theory on the fact that velocity of money can only be constant in primitive societies and not in the modern complex economic conditions. It was Keynes ideas, of fiscal and monetary policies that were used to solve the recession problem. However, equilibrium conditions were only obtained in the short run just as they were proposed by Keynes. Schumpeter criticized Keynes short run solutions as not caring about the future. Schumpeter identifies that the central economic problem was not equilibrium as stipulated by Keynes, and suggested that structural change was more realistic. In attempt to solve the problem, he maintained that capitalist, not discarding intervention can still thrive given his theorem of the innovator. Schumpeter emphasized that equilibrium solutions were only short run that could not prevail in the long run due to structural changes. Contrary to their predecessors, Keynes and Schumpeter replaced the argument demand or supply of
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