Schumpeter and Democracy

Schumpeter and Democracy - 10/21/2010 Schumpeter and...

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10/21/2010 1 Schumpeter and Democracy Paradox Schumpeter argues that individual pursuit of self-interest that created capitalism will also destroy it Self-interest undermines the social foundations of capitalism Schumpeter investigates why capitalism is unstable in his book Capitalism, Socialism, and Democracy Four Assumptions First, everyone wants to increase his material consumption as much as possible Second, individuals vary in their ability to secure increases in their consumption One component of ability is skill Another component of ability is effort Third, success depends not only on ability but also on luck Fourth, luck enables skill and effort to produce rewards disproportionate to the individual's ability In other words, luck intensifies the returns to skill and effort Those who are lucky get more than their effort and skill earn
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10/21/2010 2 Implications The four assumptions motivate a dynamic that transforms three areas of human life Economy Society Politics This dynamic is called “Creative Destruction” “Creative Destruction” Ablest people on average will become successful entrepreneurs Over time a few large firms will dominate the production of every kind of good To maintain their dominance of production, these few large firms will invest heavily in research and development of improved products If they do not, new entrepreneurs develop improved products that capture the market “Creative Destruction” Because improved products are more valuable, over the long term concentrated production results in steady enrichment of capitalist economies Creation of improved products steadily destroys the market for existing products Computers replace typewriters Smaller computers replace bigger ones Ipods replace cd players which replaced walkmans which replaced transistor radios which replaced humming
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10/21/2010 3 Implications for Society Creative destruction in the economic sense changes society Before capitalism, society is composed of “the
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This note was uploaded on 01/13/2011 for the course PS ps 240 taught by Professor Ralphschoellhammer during the Spring '10 term at Kentucky.

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Schumpeter and Democracy - 10/21/2010 Schumpeter and...

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