Q.Explain Schumpeter's Innovation theory of profit. Why do innovation profits tend to be temporary rather than permanent?

Schumpeter tied profit to a specific ACT — successful innovation — and, just as importantly, explained why the reward from that act does not last forever.

Joseph Schumpeter approached profit from a different angle than Knight: rather than asking what KIND of danger the entrepreneur bears, he asked what specific ACT earns the entrepreneur a profit in the first place. His answer was INNOVATION — not simply running an existing business efficiently, but introducing something genuinely NEW: a new product that consumers had not seen before, a new and cheaper method of production, access to a new market, or a new and better source of raw materials or supply.

An entrepreneur who successfully innovates in one of these ways can, for a time, sell at a price well above cost, or produce at a cost well below rivals, earning a substantial profit that has nothing to do with luck or with bearing an insurable risk — it is a direct reward for being FIRST. Crucially, Schumpeter held that this profit could not last indefinitely. Once rival firms observe the innovation's success, they copy it (a cheaper process gets adopted industry-wide, a new product gets imitated by competitors), and ordinary competitive pressure gradually competes away the innovator's special advantage, pushing profit back down towards a normal level. The economy, in Schumpeter's view, therefore moves in bursts: a wave of profit follows each fresh innovation, only to …