From Smith to Schumpeter: A Theory of Take-off and Convergence to Sustained Growth

This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of …rm size and a set of equations that express the relevant endogenous variables — GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production — as functions of …rm size. It also obtains closed-form solutions for the dates of the events that drive the economy’s phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave pro…le replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of …rms and entrepreneurs to Smithian market expansion. Keywords: Endogenous Growth, Firm Size, Market Structure, Take-o¤. JEL Classi…cation Numbers: E10, L16, O31, O40 Address: Department of Economics, Duke University, Durham, NC 27708. Phone: (919) 6601807. Fax: (919) 6848974. E-mail: [email protected]. I thank for comments and suggestions: John Seater, Domenico Ferraro, David Weil, Oded Galor, Philippe Aghion, Ufuk Akcigit, Paul Romer, Michael Peters and, especially, Peter Howitt.