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Schumpeterian Growth
Theory
Introduction and Motivation
Elias Dinopoulos
Facts About Growth
Slide 1
Organization of the topic

Introduction and motivation

Data on growth and development

Stylized facts about growth
Facts About Growth
Slide 2
Why study economic growth?

Economic questions that are still debated:
Why are some countries rich and other
countries poor?
 Why growth rates differ across countries?
 Are long-run growth rates exogenous or
endogenous?


Two concepts of endogeneity:

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Do firms optimize when they decide to invest in
processes that generate growth?
Are long-run growth rates affected by policy
parameters?
Facts About Growth
Slide 3
The development of growth theory

Classical growth theory


Adam Smith; Malthus; Ricardo; Marx.
The neoclassical growth theory

The Solow model of economic growth.
Perfectly competitive markets
 Exogenous rate of population growth
 Exogenous rate of technological progress
 Endogenous long-run income per capita levels
 Endogenous transitional growth of per capita
output.

Facts About Growth
Slide 4
Preliminary definitions and concepts
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In a steady- state equilibrium each endogenous
variable grows at a constant rate (which can be zero).
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The growth rates of different variable can be different
but each growth rate must be independent of time.
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We can analyze a steady-state equilibrium easier than
an equilibrium that depends on time explicitly.
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We refer to a steady-state equilibrium as a long-run or
as a balanced growth equilibrium.
Facts About Growth
Slide 5
Schumpeterian growth
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Schumpeterian growth is a particular type of
growth that is based on the process of creative
destruction (Joseph Schumpeter, Capitalism,
Socialism and Democracy, 1942).
Creative destruction is a process that
characterizes the continual introduction of new
products or processes under conditions of
temporary monopoly power.

New and or better products (processes)
replace old ones; new firms replace old
ones; this process creates technological
progress that benefits society.
Facts About Growth
Slide 6
Schumpeterian growth theory
The process of creative destruction
generates technological progress and
economic growth.
 It is also based on temporary monopoly
power and dynamic imperfect competition.
 The presence of distortions and imperfect
competition allows a strong role for
government policy.

Facts About Growth
Slide 7
The development of new growth theory

In the mid 1980’s two broad classes of early
endogenous growth models were developed:
Paul Romer (1986, JPE) and Bob Lucas (1988)
introduced external economies to scale into the
theory of growth.
 Segerstrom, Anant and Dinopoulos (1990, AER),
Paul Romer (1990, JPE), Aghion and Howitt
(1992, Econometrica), and Grossman and
Helpman (1991, ReStud) developed the
Schumpeterian growth theory.

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Early Schumpeterian growth models carried the
scale effects property.
Facts About Growth
Slide 8
Schumpeterian growth theory
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Recent Schumpeterian growth models removed
the scale effects property.
These models introduced population growth in
earlier ones:
Schumpeterian growth models without scale
effects can be classified into:

Semi-Endogenous growth models


Jones (1995, JPE); Segerstom (AER, 1998),
Kortum (1997, Econometrica)
Fully-Endogenous growth models

Young (1998, JPE), Howitt (1999, JPE),
Dinopoulos and Thompson (JOEG, 1998)
Facts About Growth
Slide 9
Data on growth and development
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Fact #1: There is enormous variation in per
capita income across economies.

The poorest countries have per capita
incomes that are less than 5 percent of per
capita incomes in the richest countries.
See first section of table 1.1. (Jones, page 4),
which reports real per capita GDP in 1990 of rich
countries.
 There are measurement issues associated with
international comparisons.
 GDP is an imperfect measure of development
level but is correlated highly with other indicators
of prosperity.

Facts About Growth
Slide 10
Data on Growth and Development
Facts About Growth
Slide 11
Data on growth and developnment

Fact #2: Rates of economic growth vary
substantially across countries.

The last two columns of table 1.1 characterize
economic growth.
From 1960- 1990, growth in GDP per worker in the
U.S. averaged about 1.4 percent.
 Japan had a 5 percent average growth during the
same period, and China has experienced more than
10 per cent growth in the last decade.
 The last column of table 1.1 show how long it could
take for a country to double its per capita income,
using the formula time=(70/percentage of growth).

Facts About Growth
Slide 12