Peter Howitt on Schumpeterian Growth Theory

Over the past 15 years, much of my time has been spent developing a new generation of endogenous growth theory, together with Philippe Aghion. Our original contribution was Aghion and Howitt (1992). We have since generalized the simple model of that paper considerably and applied it to a variety of different questions. Most of what we have done is contained in our recent book (Aghion and Howitt, 1998a). Our theory is based on Schumpeter’s concept of “creative destruction.” It portrays a free enterprise economy that is constantly being disturbed by technological innovations from which some people gain and others lose, an economy in which competition is a Darwinian struggle whose survivors are those that succeed in creating, adopting and improving new technologies. Schumpeterian theory differs fundamentally from the earlier AK versions of endogenous growth theory, in which technological progress was portrayed as just another form of capital accumulation. In AK theory, the mainspring of growth was the private process of thrift, an essentially private process involving no interpersonal conflicts. Schumpeterian theory recognizes that, on the contrary, technological change is a social process, and that ever since the start of the Industrial Revolution, people’s skills, capital equipment and technological knowledge have been rendered obsolete and destroyed by the same inventions that have created fortunes for others. Our new theory treats innovation as a separate activity from saving, and it is explicit about who gains from it, who loses, how the gains and losses depend on social arrangements, and how such arrangements affect society’s willingness and ability to progress. The rest of this essay discusses some of the insights that the theory provides into four different issues: competition, patent policy, cross-country income differences and technological revolutions.