Showing posts with the label economic systems

Book Review: The Theory of Economic Development by Joseph Schumpeter

Joseph Schumpeter is known as the “Prophet of Innovation” and published his work The Theory of Economic Development at 28 years of age ( 1 ). As an economist he didn’t receive much attention because he wasn’t in alignment with the popular Keynesian Economics of the time ( 2 ).   His greatest achievement being the meshing of sociology with economics to make a system of development. The chapters of the book are: (I) The Circular Flow of Economic Life as Conditioned by Given Circumstances; (II) The Fundamental Phenomenon of Economic Development; (III) Credit and Capital; (IV) Entrepreneurial Profit; (V) Interest on Capital; (IV) The Business Cycle. Schumpeter believed in a perfect equilibrium where there are no profits, no savings, no new products, no voluntary unemployment, or need. It is a system of economic flow where there is no need to adapt, adjust, or change because everything is running smoothly. This perfect equilibrium either never existed or

Saving or Spending for Economic Growth?

Neoclassical growth theory states that higher saving rates can increase long-term wealth while Keynesian economics indicates that higher saving rates can lower consumption. Yun-Kwong Kwok in his paper creates a bridge between the two theories by studying the links of the Solow diagram (neoclassical) and IS-LM curves (Keynesian).   These two concepts are often covered separately in college because they do not easily mesh into a single framework.   People are left wondering if we should save or spend? The first concept to understand is that the neoclassical model is a long-term model while the Keynesian model is more short-term.   One focuses on a longer-term trend while another focuses more on immediate needs. This is one reason why decision-makers who are looking for immediate results often use the Keynesian model.  In the long-run Solow model, the total output Y of an economy is produced by capital K and labor L: Y=F(K,L).   Capital accumulates through net investment. Out

Economic Systems Grow Through Sustainable Reinvestment

Business and cities exist together and follow similar stages of growth and decline. Each invests back into itself to foster higher levels of economic interaction and revenue development. Governments seek to create a net return on tax investments while businesses seek revenue returns on new product/service lines.   Without constant reinvestment and growth, the system eventually declines.  Sustainability can be seen as a positive return on investment money that allows for reinvestment back into the system for future growth. Governments may reinvest resources in schools, roads, police, WI-FI, fiber optic cables, etc. to realize greater levels of income generating interactivity. The basic development mechanics between business and government are similar even though they take different forms. Economic hubs must draw in resources to fuel future growth. Resources may come in the form of new business start-ups or existing corporate reinvestment. Private investment increase local