The Differences between Schumpeter and Keynes Economic Theorems - Essay Example

due The Differences between Schumpeter and Keynes Economic Theorems Introduction The invent of economic thought has hadseveral 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. All these theories and thought are seen to be adversely affected by their timing. As a matter of fact an economic theory is stimulated to solve a certain economic problem, which is real either at the theories invent period or a preceding theory. Therefore theories that are developed at the same time show similarities but may differ due to different views of the problem as stipulated by the theory developer. 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 goods controlled the economy with the argument that economic activities were determined by monetary factors such as interest rates, money supply, credit and taxes. This argument worked right due to the increased complexity in the lives of people, both socially politically and economically. In analyzing and prospecting the repercussions of these changed economy each held a different conclusion. Keynes saw a future where the economist would dominate by manipulating the monetary keys, such as government expenditure interest rates, credit control or con troll of money supply. Through this the economist would achieve full employment and permanent equilibrium that will enable stability and economic progress (Heilbroner 273). Schumpeter on the other hand viewed in the angle that the economist acts under a government that is headed politicians. With the power to control economic progress, the economist would be over-confidence with his actions. The economist would therefore possess excess pride, but would be influenced by a politician. The impact would be that the economist ability to influence economic stability would be misused by the politician to acquire dictatorship power (Heilbroner 201). Apart from the mercantilist, all other predecessors of the Keynesian economist advocated for free markets. The classical economists argued that the government was only necessary for security purposes and not to influence business operation. Schumpeter partly agreed to this, while Keynes held a completely different view on free trade. While Schumpeter tried to improve on the classical models, that is using them to explain his models; Keynes on the other built an opposite stand. Schumpeter believed that the economy is always at full employment as supply creates its own demand enabling the market to clear. Although Schumpeter ignored the fact that production are influenced by consumer preferences, by arguing that the consumer and producer behaviors do not change, he referred to any behavioral changes as too small to alter the structure of the economy (Flaschel 216). To Keynes, a free market can never attain a stable equilibrium. To clarify the role of interventions in attaining equilibrium, Keynes criticized the unexplained assumptions of the classical economists. Unlike the classical economics that savings and investments were only determined by interest rates Keynes marginal propensity to consume marginal efficiency of capital as other determinants respectively. Given that full employment could be attained even if these two factors were unequal, in addition to inflexibility in interest rates, then the classical model of savings and investment was irrelevant (Heilbroner 264). Moreover to Keynes, the statement that the problem of unemployment would be solved by asking the workers to accept a lower wage rate as stipulated in the wage theory deemed unpractical. In a nutshell, both Keynes and Schumpeter criticized the classical economics Keynes emphasized on government intervention to bring about equilibrium conditions. Schumpeter on the other hand criticized Keynes intervention, holding to the fact that intervention was only effective in the short run, but capitalism succeeds in the long run. Both views are very important in today’s world where majority of the nations operate in a mixed economy. Work cited Drucker , Peter F. "Schumpeter And Keynes." Forbes. N.p., 23 May 1983. Web. 4 Dec. 2013. Flaschel, Peter. The Macrodynamics of Capitalism: Elements for a Synthesis of Marx, Keynes and Schumpeter. Berlin: Springer, 2009. Print French, Doug. "Schumpeter vs. Keynes - Doug French - Mises Daily." Ludwig von Mises Institute : The Austrian School Is Advancing Liberty. N.p., 9 Mar. 2009. Web. 4 Dec. 2013. Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. New York: Simon and Schuster, 1967. Print Read More