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Schumpeterian growth theory, Schumpeter, and growth policy design

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Abstract

The purpose of this paper is to show that both Schumpeterian growth theory and Schumpeter’s own thinking can be helpful in order to think about growth policy design and the role of the state. This reflection offers an economic policy roadmap and gives rise to concrete proposals in terms of an adequate mix of demand and supply-side options depending on the country’s distance to the world technology frontier.

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Notes

  1. For example, they use Mincerian equations to evaluate the returns from education, and whenever these returns appear to be small, they conclude that education is not a binding constraint on growth. Or if interest rates turn out to be low, they conclude that credit is not a binding constraint on growth.

  2. The theory was initiated in the fall of 1987 at MIT. During that year Aghion and Howitt wrote their ‘model of growth through creative destruction’ which came out in print as Aghion and Howitt (1992).

  3. There is no occurrence of the term creative destruction in The Theory of Economic Development (TED; Schumpeter 1934) nor in Business Cycles (BC; Schumpeter 1939). In the TED, Schumpeter rather refers to a ‘process of liquidation’ or ‘of absorption’ between two booms (Schumpeter 1934: 244). In BC, Schumpeter refers to the notion of ‘creative response’, a notion he dedicated a paper to in 1947. This notion is very similar to the one of creative destruction. In particular, Schumpeter emphasized 3 main characteristics of a creative response: 1. It can only be understood ex post; 2. It shapes the whole course of subsequent events and their ‘long run’ outcome so that it cannot be conceived as a mere ‘transition’; 3. Its frequency and its intensity have something to do with entrepreneurial activity captured from a multidimensional perspective: quantitative, qualitative, institutional and behavioural (Schumpeter 1947: 150).

  4. See Aghion et al. (2013).

  5. This idea is not at odds with Schumpeter’s original stance at economic policy matters. Although he was in principle reluctant to derive policy implications from models far too simple to reflect important features of the real economy, there are textual evidences in favour of a judicious regulatory policy (Ordnungspolitik as opposed to Prozesspolitik) that would provide the general (and somewhat abstract) rules of the game, a policy framework that displays common features with Hurwicz’s concept of mechanism design (see Kurz in this volume).

  6. Which of these effects dominates will depend in particular upon the size of innovations: the larger the size of innovation, the smaller the productivity adjusted-wage rate, and therefore the smaller the business-stealing effect Assessing the relative importance of these two effects in practice, requires estimating the structural parameters of the growth model using micro data. Note that excessive growth is also compatible with growth models a-la-Romer (1990). See Benassy (1998).

  7. By ‘extractive economic institutions’, Acemoglu and Robinson (2002) mean practices and policies designed to extract incomes and wealth from one subset of society (the masses) to benefit a different subset (the governing elite). They are opposed to ‘inclusive economic institutions’, which must feature secure private property, an unbiased system of law, and a provision of public services that provides an environment in which people can exchange and contract; they also must permit the entry of new businesses and allow people to choose their careers.

  8. Note that, in this lecture, Schumpeter defines institutions as ‘all the patterns of behavior into which individuals must fit under penalty of encountering organized resistance, and not only legal institutions (such as property or the contract) and the agencies for their production or enforcement’(Schumpeter 1983 in Swedberg 1991: 438).

  9. This text constitutes the basis of a series of lectures that Schumpeter was scheduled to give during January 9–20, 1950, at the Charles R. Walgreen Foundation in Chicago. The day before the first lecture, however, Schumpeter died.

  10. For more details, see Festré (2002).

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Authors and Affiliations

  1. Harvard University, Cambridge, MA, USA

    Philippe Aghion

  2. University Nice Sophia Antipolis and GREDEG, Nice, France

    Agnès Festré

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  1. Philippe Aghion
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  2. Agnès Festré
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Correspondence to Agnès Festré.

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Aghion, P., Festré, A. Schumpeterian growth theory, Schumpeter, and growth policy design. J Evol Econ 27, 25–42 (2017). https://doi.org/10.1007/s00191-016-0465-5

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