The price level and the price system

This chapter examines Schumpeter&s;s treatment of the price level and price system. A major objective is to disentangle Schumpeter&s;s theory of the price level from the analysis of the process of creative destruction applied to the prices of individual commodities. It identifies three elements of the overall theory that have particular importance in explaining price dynamics and then develops a simplified formalisation to explain how each of the elements impacts on price dynamics. The three elements of Schumpeter&s;s theory of economic development are: innovation, credit creation and competition. According to Schumpeter, the price level rises during the prosperity phase of the business cycle and falls during the recession phase. Schumpeter explains movements in the price level primarily by the ups and downs in the amount of credit outstanding with entrepreneurs, which affects purchasing power in the economy.