Schumpeter / Modern Growth Theory

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Economic Growth

“Once you start thinking about (growth), it’s hard to think about
anything else.”

Robert E. Lucas,
Lectures on Economic Growth

Solow framework: Growth through accumulation

Constant returns to scale + Decreasing returns to capital

s瑥a摹 s瑡瑥

Augmenting Solow:

Human capital

Geography/Resources/Terms of trade

Policies: Government consumption/Inflation/Openness/Aid

Institutions: Property rights/Legal origin/Extractive institutions/

Convergence and conditional convergence

Penn World Table (Heston and Summers): PPP measures of GDP

Technological advance

exogenous force driving growth

Solow residual

Joseph Schumpeter



Capitalist Dynamism

Creative destruction

A leap over marginalism and decreasing returns

Obstreperous student at U. of Vienna

Advisor to Egyptian princess

Austrian Finance Minister

President of failed bank

Itinerant professor

settled @ Harvard

Theory of Economic Development
, 1912

Stationary state

No profits

Enter the


the will to conquer, to create


disruption of steady state



Boom & Elimination of Profits

New Steady

Capitalism, Socialism and Democracy
, 1942

Marx’s influence: Capitalism’s endogenous dynamism

But for Schumpeter, conflict and disruption

Change and G

Capitalism’s paradox: Rationalism undermines private property

Capitalism self

Joseph Schumpeter: Creative destruction

Leading economist of the 21


Capitalism, then, is by nature a form or method of economic change
and not only never is but never can be stationary. And this
evolutionary character of the capitalist process is not … due to a
automatic increase in population and capital…The fundamental
impulse that sets and keeps the capitalist engine in motion comes
from new consumers, goods, the new methods of production and
transportation, the new markets, the new forms of industrial
organization that capitalist enterprise creates.

The opening of new markets, foreign and domestic, from the craft
shop and the factory to such concerns as US Steel illustrate the
process of industrial mutation that incessantly revolutionizes the
economic structure
from within
, incessantly destroying the old one,
incessantly creating a new one. This process of Creative Destruction
is the essential fact about capitalism.

Every piece of business strategy … must be seen in its role in the
perennial gale of creative destruction; it cannot be understood …on
the hypothesis that there is a perennial lull.

More Schumpeter:

Economists are at long last emerging from the stage in which price
competition was all they saw. As soon as quality competition and
sales effort are admitted into the sacred precincts of theory, the price
variable is ousted from its dominant position.

But in capitalist reality distinguished from its textbook picture, it is
…the competition from the new commodity, the new technology, the
new source of supply, the new type of organization

which commands a decisive cost or quality advantage and which
strikes not at the margins of the profits and the outputs of existing
firms but at their foundations and very lives [that counts].

…it becomes a matter of comparative indifference whether
competition in the ordinary sense functions more or less promptly; the
powerful lever that in the long run expands output and brings down
prices is in any case made of other stuff.

…competition of the kind we now have in mind acts not only when in
being but also when it is merely an ever
present threat. It disciplines
before it attacks.

Endogenous Growth

Adam Smith,1776 Pin factory

Increasing returns

Alfred Marshall, 1890,
increasing returns

Allyn Young, 1928, Cumulative Causation

Forward and backward linkages …knowledge spreads

Kenneth Arrow, 1962, Learning



Jane Jacobs, 1969,
The Economy of Cities

Agglomeration economies: ideas




Paul David, 1985,
: Network externalities

Paul Romer, 1986, Knowledge externalities

Ideas embedded in cumulative capital

endogenous growth

Robert Lucas, 1988, Mechanics of Economic Growth

Learning from others

CBD rents

On the mechanics of economic development

Robert E. Lucas, Jr.
University of Chicago, Chicago, IL 60637, USA


This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consisten
t w
ith some of the main features of
economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation

d technological
change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital a
mulation through


Arrow, 1962
. Kenneth J. Arrow , The economic implications of learning by doing.
Review of Economic Studies


(1962), pp. 155


Baumol, 1986
. William J. Baumol , Productivity growth, convergence, and welfare: What the long
run data show.
American Economic Review


(1986), pp.


Becker, 1964
. Gary S. Becker , Human capital. , Columbia University Press for the National Bureau of Economic Research, New York (1964).

Becker, 1981
. Gary S. Becker , A treatise on the family. , Harvard University Press, Cambridge, MA (1981).

Becker and Barro
, 1985. Gary S. Becker and Robert J. Barro , A reformulation of the economic theory of fertility. , University of Chicago, Ch
go, IL (1985)
Unpublished working paper .

Boxall, 1986. Peter J. Boxall , Labor and population in a growth model. , University of Chicago, Chicago, IL (1986) Unpublish
doctoral dissertation .

Burmeister and Dobell, 1970. Edwin Burmeister and A. Rodney Dobell , Mathematical theories of economic growth. , Macmillan, N
York (1970).

, 1987. Bradford DeLong , Have productivity levels converged?. , MIT, Cambridge, MA (1987) Unpublished working paper .

, 1961. Edward P. Denison , The sources of economic growth in the United States. , Committee for Economic Development, New Yo

Gordon, 1971. Robert J. Gordon , Measurement bias in price indexes for capital goods.
Review of Income and Wealth, Income and wealth series 17


Griliches and Dale, 1967
. Zvi Griliches and Jorgenson Dale , The explanation of productivity change.
Review of Economic Studies


(1967), pp. 249


Harberger, 1984
. Arnold C. Harberger, Editor,
World economic growth
, ICS Press, San Francisco, CA (1984).

Jacobs, 1969
. Jane Jacobs , The economy of cities. , Random House, New York (1969).

Jacobs, 1984. Jane Jacobs , Cities and the wealth of nations. , Random House, New York (1984).

Krueger, 1983
. Anne O. Krueger , The developing countries' role in the world economy. , Lecture given at the University of Chicago, Chicag
IL (1983).

Krugman, 1985
. Paul Krugman , The narrow moving band, the Dutch disease and the competitive consequences of Mrs. Thatcher: Notes on trade
presence of dynamic scale economies. , MIT, Cambridge, MA (1985) Unpublished working paper .

Kuznets, 1959
. Simon Kuznets , Six lectures on economic growth. , The Free Press, Glencoe (1959).

Maddison, 1982
. Angus Maddison , Phases of capitalist development. , Oxford University Press, New York (1982).

Romer, 1986. Paul M. Romer , Increasing returns and long
run growth.
Journal of Political Economy

94 (1986), pp. 1002

Full Text

via CrossRef

Rosen, 1976. Sherwin Rosen , A theory of life earnings.
Journal of Political Economy


(1976), pp. 545


Schultz, 1963
. Theodore W. Schultz , The economic value of education. , Columbia University Press, New York (1963).

Stokey, 1987
. Nancy L. Stokey , Learning
doing and the introduction of new goods. , Northwestern University, Evanston, IL (1987) Unpublis
hed working
paper .

Summers and Heston, 1984
. Robert Summers and Alan Heston , Improved international comparisons of real product and its composition: 1950

of Income and Wealth, Income and wealth series 30


Tamura, 1986. Robert Tamura , On the existence of multiple steady states in one sector growth models with intergenerational a
uism. , University of Chicago,
Chicago, IL (1986) Unpublished working paper .

Uzawa, 1965. Hirofumi Uzawa , Optimum technical change in an aggregative model of economic growth.
International Economic Review


(1965), pp. 18


This paper was originally written for the Marshall Lectures, given at Cambridge University in 1985. I am very grateful to the

mbridge faculty for this honor, and
also for the invitation's long lead time, which gave me the opportunity to think through a new topic with the stimulus of so
tinguished an audience in prospect.
Since then, versions of this lecture have been given as the David Horowitz Lectures in Israel, the W.A. Mackintosh Lecture at

eens University, the Carl
Snyder Memorial Lecture at the University of California at Santa Barbara, the Chung
Hua Lecture in Taipei, the Nancy Schwartz Le
cture at Northwestern
University, and the Lionel McKenzie Lecture at the University of Rochester. I have also based several seminars on various par
of this material.

Journal of Monetary Economics

Volume 22, Issue 1
, July 1988, Pages 3

Paul Romer


Ph.D. U. of Chicago, 1983

Professor, Graduate School
of Business, Stanford Univ.

Robert Lucas

Nancy Stokey