ABSTRACT
This chapter reviews the main features of Schumpeter's theory of economic development. Schumpeter starts from the proposition that there is a qualitative distinction between the process of economic development and the circular flow of a stationary economy that is characterised by equilibrium. The distinction is explained at length towards the start of each of his two main theoretical treatises, The Theory of Economic Development (TED) and Business Cycles (BC). In TED, the distinction is between 'The Circular Flow of Economic Life' and 'The Fundamental Phenomenon of Economic Development’. In BC, the distinction is between 'Equilibrium and the Theoretical Norm of Economic Quantities' and 'How the Economic System Generates Evolution'. The chapter discusses the institutions of development as they are deployed in Schumpeter's theory, namely, firms, markets, credit, banks and the state. Schumpeter associates the circular flow with the stationary state of an economy, while economic development is solely concerned with the introduction of innovations into the economy.
