The Schumpeterian Growth Paradigm
GAICIL Insights
Most growth theories treat firms as interchangeable.1 This one puts them in a permanent fight. In a review, Philippe Aghion, Ufuk Akcigit and Peter Howitt argue that a paradigm modeling growth as the result of innovations involving creative destruction sheds light on aspects of growth that alternative theories cannot properly address. They focus on three areas with distinctive predictions: competition and market structure, firm dynamics, and the relationship between growth and development.
The paradigm's core is that innovations involve creative destruction, with current innovators driving out previous technologies. That lets industrial organization be integrated into growth theory, enabling analysis of how growth relates to product market competition. It links growth with firm dynamics, generating predictions about entry, exit and reallocation and how these shape overall growth. Growth becomes something firms do to each other.
Development gets reconciled with growth. The paradigm shows how institutional development shapes the relationship among firm size distribution, reallocation and growth. It brings out appropriate growth institutions and policies: what drives growth in a sector or country far below the world technology frontier is not necessarily what drives growth at the frontier, where creative destruction matters more. A recipe that works for catching up can fail at the cutting edge.
Further avenues include the relationship among innovation-led growth, top income shares and social mobility. The paradigm predicts more innovation should raise both top income shares, including rewards to successful innovators, and social mobility, because creative destruction means new innovators displace incumbents. Fortunes rise, and their owners keep changing.
Bring the result forward to the present. Artificial intelligence is creative destruction at large scale, with new technologies, products and firms displacing old ones. Integrating competition, firm dynamics and growth gives tools for analyzing how AI will affect market structure, reallocation and aggregate growth. Without such a framework, AI debates swing between utopia and doom with nothing in between.
Competition and market structure come first. The competition-innovation relationship shapes how AI develops. Markets letting new innovators challenge incumbents sustain creative destruction; markets where incumbents block entry may slow progress. The paradigm grounds the design of competition policy for AI markets.
Firm dynamics come second. AI will reshape entry, exit and reallocation across the economy. Firms adopting AI effectively may grow while others decline. Understanding these dynamics, and the institutions facilitating or impeding them, is crucial for maximizing AI's growth benefits. Rules that make it hard for failing firms to exit also make it hard for AI adopters to grow.
Appropriate institutions shape global diffusion. Countries far from the frontier may benefit from policies facilitating adoption and imitation, while frontier countries need policies fostering creative destruction and frontier innovation. AI policy should be tailored to each economy's distance from the frontier. Copying the frontier's AI policy may be a mistake for a country still catching up, and the reverse holds too.
The top-income and mobility prediction speaks to AI inequality debates. Innovation may raise top income shares while promoting mobility, as new innovators displace incumbents. Ensuring AI-driven innovation opens opportunities for newcomers helps make its distributional effects include greater mobility.
Translated into policy, the paradigm offers a coherent framework for growth policy in the AI era. Supporting innovation, preserving competition, facilitating reallocation and adapting to distance from the frontier can foster growth. Institutions enabling creative destruction while helping the displaced adjust can make growth rapid and inclusive.
Pulled together, growth driven by creative destruction depends on competition, firm dynamics and institutions suited to each economy's position. This review offers a rigorous, unified framework for these relationships, and as AI drives a new era of creative destruction, guidance for harnessing innovation for growth and opportunity.
Here is the uncomfortable test for AI policy: ask of every AI rule whether it makes displacement of today's leaders easier or harder. In this paradigm, an economy where incumbents are hard to dislodge will see AI's growth dividend shrink, however brilliant the technology.
Introduction
In this review, we argue that the Schumpeterian growth paradigm, which models growth as resulting from innovations involving creative destruction, sheds light on several aspects of the growth process that cannot be properly addressed by alternative theories. We focus on three important aspects for which Schumpeterian growth theory delivers predictions that distinguish it from other growth models, namely, (a) the role of competition and market structure, (b) firm dynamics, and (c) the relationship between growth and development.
Takeaway
“Above we demonstrate how Schumpeterian growth theory generates predictions that make use of the fact that innovations involve creative destruction (i.e., with current innovators driving out previous technologies). Thus, Schumpeterian growth theory manages to put IO into growth, allowing us to discuss the relationship between growth and product market competition. The framework can be used to link growth with firm dynamics, thereby generating predictions on the dynamic patterns of markets and firms (e.g., entry, exit, reallocation) and on the ways in which these patterns shape the overall growth process. We argue that Schumpeterian growth theory helps us reconcile growth with development. First, it helps us look at how institutional development shapes the relationship among firm size distribution, reallocation, and growth. Second, it brings out the notion of appropriate growth institutions and policies, that is, the idea that what drives growth in a sector (or country) far below the world technology frontier is not necessarily what drives growth in a sector or country at the technological frontier, at which creative destruction plays a more important role. [Figure 9: caption in PDF — see PDF] The Schumpeterian growth framework can be further developed in several interesting directions. We are currently exploring three new avenues. One is the relationship among innovation-led growth, top income shares, and social mobility. The Schumpeterian paradigm predicts that more innovation should increase both top income shares (these include the rewards to successful innovators) and social mobility (by virtue of creative destruction, which implies that new innovators should continuously challenge the vested interests of previous innovators).1
A second avenue is the analysis of the relationship between innovation-led growth and well-being. On the one hand, more creative destruction implies more job destruction, which should reduce the well-being of currently employed workers.”
Notes
- Philippe Aghion, Ufuk Akcigit & Peter Howitt, The Schumpeterian Growth Paradigm, 7 Ann. Rev. Econ. 557 (2015), https://doi.org/10.1146/annurev-economics-080614-115412. Takeaway source: Philippe Aghion, Ufuk Akcigit, Peter Howitt, The Schumpeterian Growth Paradigm, Conclusion. ↩
Cite as: Philippe Aghion, Ufuk Akcigit & Peter Howitt, The Schumpeterian Growth Paradigm, 7 Ann. Rev. Econ. 557 (2015), https://doi.org/10.1146/annurev-economics-080614-115412
Header image: 3D Printer - PolyPrinter (23901017377).jpg by Texas State Library and Archives Commission from Austin, TX, United States, CC BY 2.0, via Wikimedia Commons.
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