MPSC 2023 Prelims Paper-I · Question 57 of 100

Correct — option (3), 'a and b'. This question prints only two statements, a. and b., and both reproduce Joseph Schumpeter's distinction between development and growth as he drew it in his theory of economic development. Statement a. is correct. Schumpeter begins from what he calls the circular flow, a stationary state in which the economy repeats itself year after year: the same goods are produced by the same methods for the same customers, every participant merely following a routine learnt from experience, and the system is in equilibrium in the strong sense that nothing in it generates any impulse to change. Development, on his account, is not an intensification of that routine but a break in it — a spontaneous and discontinuous change that arises from within the economic system rather than being imposed from outside, and that displaces the equilibrium which existed before instead of returning to it. The agent of that break is the entrepreneur, who is defined not as a capitalist or a manager but as the person who carries out new combinations: a new good, a new method of production, a new market, a new source of supply of raw material, or a new organisation of an industry. Because such innovations destroy the value of the arrangements they replace, the process is the one Schumpeter later called creative destruction, and it is the source of both progress and the fluctuation of business cycles. Statement b. is correct as the other half of the same distinction. Growth in Schumpeter's usage is the slow, continuous change that comes from a gradual increase in savings and in population — more people and more capital doing more of the same thing. It enlarges the economy without altering its character, and precisely because it is gradual and continuous it does not disturb the circular flow. Both statements therefore stand and option (3) is the answer. Note that the closing line is printed 'Which of the statement above is/are correct ?' in the singular, and statement b. carries a stray comma after 'which'; both are as printed.

• (1)a only — This option accepts Schumpeter's account of development and rejects his account of growth, which leaves the distinction with only one side. The rejection is usually made for one of two reasons. The first is that a candidate treats growth and development as interchangeable words and so cannot accept a statement that assigns them different meanings, when the whole point of the passage being tested is that Schumpeter separated them. The second is that the candidate expects growth to be defined in terms of national income, as it is in most modern textbooks, and does not recognise a definition framed in terms of savings and population; but slow accumulation of capital and slow increase in numbers are exactly the continuous changes Schumpeter had in mind, and describing them is not a mistake in the statement.
• (2)b only — This option accepts the definition of growth and rejects the definition of development, which discards the more distinctive of Schumpeter's two ideas. Statement a. describes development as a discontinuous and spontaneous change in the stationary state, and every element of that description is Schumpeter's own: the stationary state is his circular flow, the change is spontaneous because it arises from within the economic system through the entrepreneur rather than being imposed from outside, and it is discontinuous because it displaces the previous equilibrium instead of adjusting it by small steps. A candidate may reject the statement because 'discontinuous' sounds like a criticism of an economy rather than a description of progress, but for Schumpeter discontinuity is precisely what development is, and an economy that only ever changes continuously is one that is growing without developing.
• (4)None of the above — An escape option can only be taken when every substantive statement has been positively ruled out, and here both statements reproduce a distinction that is among the best known in economic thought. Choosing it means either that the candidate has no view on Schumpeter at all and is treating the escape as a way of avoiding a guess, or that the awkward printing of statement b. — with its stray comma and its trailing construction — has been read as a sign that the statement must be defective. Poor typesetting is not evidence about the truth of a claim, and this paper carries a good deal of it. The safer procedure with an escape option is to require a positive reason for rejecting each of the printed statements, and to leave the option alone when no such reason can be produced.

Schumpeter's system starts with the circular flow, an economy in stationary equilibrium where production is repeated unchanged from period to period, and asks what could make such a system change from within. His answer is innovation, carried out by the entrepreneur and financed by credit created by banks — a point often missed, since it makes the banker a necessary partner in development rather than a passive intermediary. Innovation takes five forms in his account: the introduction of a new good, a new method of production, the opening of a new market, the conquest of a new source of supply of raw materials or intermediate goods, and the carrying out of a new organisation of an industry, such as the creation or breaking up of a monopoly position. Because the innovator earns a temporary profit, imitators follow in a cluster, and the wave of imitation and the subsequent adjustment are what generate business cycles in his theory. The wider consequence, developed in his later work, is creative destruction: the same process that creates new products and methods destroys the firms, skills and arrangements built around the old ones, so that progress in a capitalist economy is inseparable from the disruption of what already exists. Development in this sense is qualitative and structural; growth is quantitative and continuous.

The distinction between growth and development is one of the most reliably examined ideas in MPSC's economy section, partly because it can be asked as a definition, as an attribution, or as a comparison, and partly because it is the hinge on which the whole development chapter turns. Modern usage puts the distinction slightly differently from Schumpeter — growth as a rise in real national or per capita income, development as growth accompanied by structural change and improvement in welfare, education, health and distribution — and both usages are examinable, so a candidate should be able to state each and attribute the second to Schumpeter when his name appears in the stem. The procedural point this question makes is about statement lists of unusual length. Only two statements are printed here, which is uncommon in a paper whose lists usually run to four, and a candidate who is expecting four may waste time looking for the missing pair or, worse, may reason about a statement that was never printed. Reading how many items a list actually contains before judging any of them is a small discipline that costs nothing and prevents a whole class of error.

• Schumpeter defines development as a spontaneous and discontinuous change arising from within the economic system, which displaces the stationary equilibrium of the circular flow rather than adjusting it gradually.
• He defines growth as the slow and continuous change produced by a gradual increase in savings and in population, which enlarges the economy without altering its character.
• The agent of development in his theory is the entrepreneur, defined as the person who carries out new combinations rather than as the owner of capital, and the innovation is financed by credit created by banks.
• Schumpeter identifies five forms of innovation: a new good, a new method of production, a new market, a new source of supply of raw materials, and a new organisation of an industry.
• Creative destruction is his term for the process by which innovation destroys the value of the firms, skills and arrangements that the old order rested on, making disruption inseparable from progress in a capitalist economy.

• Treating growth and development as interchangeable, which makes it impossible to accept a statement that assigns them different meanings
• Expecting growth to be defined in terms of national income and rejecting Schumpeter's definition in terms of savings and population
• Reasoning about statements that were never printed; this question has only two, where most lists in this paper have four
• Taking an escape option such as 'none of the above' because the printing of a statement is awkward, when typesetting says nothing about truth

Schumpeter reaches MPSC papers as a definition question on the growth-development distinction, as an attribution question on innovation, the entrepreneur or creative destruction, and occasionally as a business cycle question. The Commission also uses his distinction as raw material for two-statement items of the kind seen here, where one statement defines each term and the candidate must accept or reject each separately — a format in which the commonest failure is to accept the more famous half and reject the other. The block to prepare alongside him is the wider development economics chapter, since Nurkse, Rosenstein-Rodan, Hirschman and Myrdal all supply questions from the same few pages of a standard textbook, and this very paper draws on several of them.

No directly related past PYQ was found.

• practice — not a real PYQ

  In Schumpeter's theory, the entrepreneur is best described by which of the following ?

  • (a)The owner of the capital invested in a firm
  • (b)The person who carries out new combinations in production
  • (c)The manager who supervises the day-to-day running of a business
  • (d)The banker who supplies credit to industry

  Answer(b) The person who carries out new combinations in production — Schumpeter deliberately separates the entrepreneurial function from the ownership of capital and from routine management, since a man who merely runs an existing business according to established practice is part of the circular flow rather than an agent of development. The banker is necessary as the supplier of the credit that finances the innovation, but the innovating function itself belongs to the entrepreneur.

• practice — not a real PYQ

  The term 'creative destruction', describing the process by which innovation destroys the value of existing firms and arrangements even as it creates new ones, is associated with which economist ?

  • (a)J. M. Keynes
  • (b)Joseph Schumpeter
  • (c)Ragnar Nurkse
  • (d)Gunnar Myrdal

  Answer(b) Joseph Schumpeter — the phrase belongs to his later account of capitalism, and it follows directly from his earlier theory of development, in which progress comes from discontinuous innovation that displaces the existing equilibrium rather than from the gradual accumulation of savings and population. It is that displacement of what already exists which makes the process destructive as well as creative.