The Theory of Economic Development

Dr. Joseph Schumpeter

Ursula Backhaus, Diplom-Volkswirt, MSc. (Translator)

Magdeburger Allee 55, 99086 Erfurt, Germany

[463] Seventh Chapter. The Economy as a

Whole.1 Leipzig, Verlag von Duncker &
Humblot. 1912.
Hypotheses non fingo.

The underlying idea presented so far forms a unity of method as well as one
of substance. It is its purpose to lay out a complete conception of a series of
closely related economic phenomena. To us this means that there is just one
basic line of reasoning, just one way of looking at things, just one and the same
group of facts. But it is in the very nature of the problem that with every
step on our explanatory journey it is just one particular concrete problem
that has figured prominently. Our interest was directed in each case towards
the concrete result to be obtained, to gain access to an understanding of the
concrete phenomena. The character of the capitalistic economy, of entrepre-
neurial profit, of interest, and of crises – these have been the major individual
problems dealt with and the motivation for the development of the concept
presented. The concept proves itself in application to these problems and the
principles of explanation formulated in the second chapter are primarily
directed towards this solution. It is the solution of these problems that has been
our primary concern. But there is another side to the matter – just as there
is another side to the static conception. This is that the underlying idea can
also take another form when oriented towards the problem of economic
development per se. We now want to change our course slightly, and if only
briefly and with some reservations, take a step [464] in that direction. In
order to achieve this goal, the following explanations should first, in a summary
way, clarify some of the points made in the earlier treatment and then add
further, essential elaboration. But all these aspects should be contained within
the same framework and be restricted to their essential elements. What follows
rests and depends on what has been said earlier; it is closely related to it
and does not go beyond what is required by the purpose at hand.
The first step towards an analysis of the whole process of the course of
economic life is taken by static theory. It can explain to us a part of the

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J. Backhaus (ed.), Joseph Alois Schumpeter, 61–116.

© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
62 Joseph Schumpeter

economic mechanism by describing it as the momentum towards that state,

in which every economic agent realizes an overall satisfaction of needs,
which cannot be increased by further acts of exchange – provided that this
term is interpreted in a wide sense as to include production – without a
change in the conditions given. The problem of statics is one that can always
be described by the following scheme: Given a particular population in a certain
geographic environment, with a particular endowment and needs, that is
socially and economically organized in a particular way with given methods
of production and stocks of goods, then, we can ask; what are the quantities
and prices of all goods that will be produced and exchanged under these
provisions? This problem can easily be solved and it can be shown exactly that
there is only one single result. Changes in the equilibrium state of the economy
can only be caused by the data and can only be due to “intervening factors”
coming from the outside. The effects of a change in equilibrium will again
be analyzed by observing how a new state of equilibrium will be achieved
and how it differs from the earlier one. A theory to explain the changes of
the data themselves is, however, not being provided. 1 The question posed is
always the following: If, and only if, [465] one or the other disturbance occurs,
what are the consequences of the economic response due to these intervening
factors?2 The entire scheme of the static system revolves upon those issues.
Therefore, the motto of the static system is that individuals accept the current
conditions and try to perform as well as possible under the given circumstances.
The content of the static system consists in the basic understanding as to
how individuals deal in the best way possible with the manifold data presented
to them. Finally, the essence of the static system does not primarily consist
in the constant nature of the data, but of the kind of [adaptive] economic
process it describes.
We take the second step in drawing a picture of the economy as a whole
by investigating the phenomenon of development. According to our concep-
tion, economic development poses the second most important problem faced
by economics. Development becomes a special problem because of the insight
that the basic facts of the circular flow are of a static character. Over time,
the picture of the economy is changing. If we look at an economy at any
particular point in time, we will observe lively business and buzzing activity.
Static theory offers as an explanation the drive to regularly achieve or
re-establish a state of equilibrium. This is by no means wrong. If we look at
the same economy at another point in time, then we find a similar state of
affairs. Again, static theory offers its familiar explanation. But the state of
equilibrium, towards which the economy gravitates at the new point in time,
is different from the one achieved earlier. Unlike the waves of the ocean,
the waves of the economy do not return to the same level. They always tend
to swing like a pendulum around a certain level, but the level itself is not
always the same. It is not just the observable facts that change. The explana-
tory pattern, i.e. the ideal type, changes as well. Let us grant that the first
problem of economics was: how, based on its entire circumstances of life, does