Transfers Between Industrial Branches in the Course of Schumpeter-Mensch Long Swings

Abstract

Schumpeter’s transformation theory (1912, 1954) is an analysis of industrial development: economic innovations come in fits and spurts, which generate long waves and short-term business cycles. The first phase of a long wave is expansive: industrial production, employment, and capital investment increase under “competitive destruction”. But as the pattern of demand stabilizes, production is more and more rationalized by increased capital investment; the price per unit product falls; demand increases; output rises. Later the increasing level of employment is first retarded, and then diminishes as rationalization proceeds. In the course of the change from increasing to decreasing employment per unit of output, there are shifts in the relative levels of activity in different industrial branches. The supply side undergoes transformation. Schumpeter’s vision of development was greatly admired by many economists, but a common feeling was that it was a tragedy that he was unable to formalize it as a general theory.