Lessons from Schumpeterian Growth Theory

Formal models allow us to make verbal notions operational and confront them with data. Schumpeterian growth theory has “operationalized” Schumpeter’s notion of creative destruction -the process by which new innovations replace older technologies-, in two ways. First, it has developed models based on creative destruction that shed new light on several microeconomic aspects of the growth process: in particular on the role of competition, on firm dynamics and on cross-firm and cross-sector reallocation. Second, it has used rich micro data, in particular on entry, exit and firm size distribution to confront predictions that distinguish it from other growth theories. In both respects, Schumpeterian growth theory has helped bridge the gap between micro and macroeconomics. In this paper, we consider three aspects on which Schumpeterian growth theory delivers distinctive predictions: first, the relationship between growth and market power; second, the relationship between growth and firm dynamics; third, the relationship between growth and development.