ABSTRACT
This chapter considers Schumpeter's more well-known and controversial work published in 1942, Capitalism, Socialism and Democracy, with its important reflections on the contemporary economic situation of the day. Schumpeter sets out to construct a model of the entire economic process as it functions over time and, just as with any other science, attempts to compare this with concrete reality to see whether the model is justified by the observable facts. Schumpeter notes at the outset that a fundamental issue for a theory of business cycles concerns causation. Economic fluctuations must be movements around something, and that something must be the equilibrium state. To explain economic change, Schumpeter turns his attention to innovative changes in the methods of production and supply of commodities. The banks thereby constitute a new type of firm whose economic function it is to produce means of payment.
