Growth and the cycle: Creative destruction versus entrenchment

A model of endogenous growth is developed in which vertical innovations, generated by a competitive research sector, constitute the underlying source of growth. Equilibrium is determined by a forward-looking difference equation, according to which the amount of research in any period depends upon the expected amount of research next period. One source of this intertemporal relationship is creative destruction. That is, the prospect of more future research discourages current research by threatening to destroy the rents created by current research. The paper analyzes the positive and normative properties of stationary equilibria, in which research employment is constant and GNP follows a random walk with drift, although under some circumstances cyclical equilibria also exist. Both the average growth rate and the variance of the growth rate are increasing functions of the size of innovations, the size of the skilled labor force, and the productivity of research as measured by a parameter indicating the effect of research on the Poisson arrival rate of innovations; and decreasing functions of the rate of time preference of the representative individual. Under laissez faire the economy's growth rate may be more or less than optimal because, in addition to the appropriability and intertemporal spillover effects of other endogenous growth models, which tend to make growth slower than optimal, the model also has effects that work in the opposite direction. In particular, the fact that private research firms do not internalize the destruction of rents generated by their innovations introduces a business-stealing effect similar to that found in the partial-equilibrium patent race literature. When we endogenize the size of innovations we find that business stealing also makes innovations too small. the Co-Editor and referees of this journal. 323 324 PHILIPPE AGHION AND PETER HOWITT destruction (1942, p. 83, his emphasis): The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets,.... [This process] 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. The present paper constructs a simple model of growth through creative destruction, by modelling the innovation process as in the patent-race literature surveyed by Tirole (1988, Ch. 10) and Reinganum (1989). The expected growth rate of the economy depends upon the economy-wide amount of research. The paper shows that equilibrium in such an economy is determined by a forwardlooking difference equation, according to which the amount of research in any period depends upon the expected amount of research next period, similar to the difference equation that defines equilibrium in the two-period overlappinggenerations model of money (Azariadis (1981), Grandmont (1985)).

NBER Macroeconomics Annual 1993, Volume 8, 1993

Journal of Evolutionary Economics, 2012

The purpose of this paper is to present a model of growth with endogenous fluctuations. The main feature of our model is that it throws light on the relationships between long waves and business cycles in the economy. The driving forces in the model work in this way: endogenous R&D investment creates new cumulative knowledge. When this knowledge reaches a threshold H*, radical innovations occur which generate productivity growth via the substitution of old capital with new capital. These disruptive events appear recurrently, generating long waves and revitalizing the growth process. Short-term cycles in the model come from the interactions between these innovation-driven transformations and certain prey-predator mechanisms that involve the labor market. We find that our model presents excellent properties: the model generates endogenous cyclical growth as a disequilibrium process; persistent and irregular short cycles appear interwoven with the long waves; and there is a strong significant interaction between both kinds of fluctuations.

1995

In a dynamic general equilibrium setup, this paper aims at providing a general framework for the analysis of the role of vintages and creative destruetion on business fiuctuations. By stressing the forward-Iooking behavior of the optimal scrapping rule, we use a standard rational expectations argument to show) in the linear utility case, the time independence of the scrapping function. Secondly, we prove that equilibrium output shows a purely periodic behavior around an exponential growth trend, the pattern of the cycle being deterrnined by the pattern of initial conditions. The vintage capital model presented in this paper provides a new view on business fiuctuations: historical conditions are at the basis of business fiuctuations, in the sense that historically volatile or stable econornies will reproduce their own historical pattern in the future.

Economic Modelling, 2010

In this paper we build a basic macroeconomic model aimed to grasp some aspects of the inner functioning of macroeconomic fluctuations. We highlight a mechanism through which the appearance of a product innovation results in an eventual reduction of the aggregate economic activity. When a new product appears, demand moves towards this more attractive product. The ‘creative destruction’ effect in this context is represented by the resources lost when firms producing old varieties exit the market due to the shortage of demand. Because firms producing a given product receive on average the same amount of demand, exits happen to be highly synchronized. We use this fact to explain the fluctuation asymmetries observed in real data. We test the ability of the model to meet features of real data against the United States' GDP in the 1950–1992 period.

Economic Modelling, 2008

Following Jones and Williams (2000), we assume that R&D is simultaneously subject to positive and to negative external effects (e.g., the non rival nature of technology conflicts with congestion externalities). This observation allows to conceive an economy where two R&D sectors evolve without departing significantly from each other in terms of their productive results (society tends to penalize imbalances in technical progress, making negative external effects to appear associated to a sector when this outstands relatively to the other sector; the second sector, in turn, will be subject to positive externalities that reflect a catching up effect). The proposed framework, when associated to a growth setup, is able to replicate the existence of endogenous fluctuations and, therefore, it intends to be a contribution to the literature on endogenous business cycles.

Eastern European Economics, 2014

The opportunity-cost approach, suggesting a countervailing cyclical effect between research and development (R&D) and short-term investments, is the subject of theoretical and empirical debate. Our contribution provides comparative firm-level evidence for the effect of demand fluctuations and credit constraints on firms' R&D. We use microdata from ten new EU member states drawn from the Business Environment and Enterprise Performance Survey conducted by the European Bank for Research and Development and the World Bank. The results indicate that, first, R&D is countercyclical, with more R&D gained in recession than is lost in booms and, second, countries with higher income levels have less countercyclical R&D. The expected-return effect gains importance over the opportunity-cost effect in countries with higher income levels. Research investigating the impact of volatility on growth has moved to the forefront in the research agenda. Theories on endogenous growth stress the importance of research and development (R&D) and knowledge creation for innovation and longterm sustainable growth. 1 The Schumpeterian cleansing mechanism, or the "virtue of bad times," suggests that recessions reduce inefficiencies and force firms to focus

2004

Economists have recently revived the notion that recessions play a useful role in fostering innovation and growth. But in practice, a major source of innovation, R&D, is procyclical. In fact, R&D is procyclical even for firms that do not appear to be financially constrained. This paper argues the reason R&D is procyclical is because of a dynamic externality inherent to R&D that makes entrepreneurs shortsighted and concentrate their innovation in booms even though it is optimal to concentrate it in recessions. Thus, what previous authors have argued is a desirable feature of fluctuations in the previous literature-creating opportunities for intertemporal substitution-turns out to be a social liability in equilibrium.

The Economic Journal, 2003

This is an important book that will influence future research on R&D and innovation. It brings together a number of pioneering papers by Adam Jaffe and Manuel Trajtenberg (and various co-authors) on the use of patent citations to study the innovation process, plus several new pieces of work. The book is organised in four parts. The papers in Part 1 lay the 'conceptual' groundwork for research on patent citations. The first is the classic paper by Trajtenberg demonstrating that citations are linked to demand-based measures of social surplus for one important medical innovation, CT scanners. Making this link between patent citations and social (and private) value provides powerful justification for using citations in economic studies. It is surprising and unfortunate that there have not been similar studies on other innovations, despite the huge growth of empirical work on vertically differentiated product markets.

2014

This article tries to give evidences the Schumpeterian innovation theory of business cycles gives us the most satisfactory understanding interrelations between business cycles and economic growth. It is shown that roots of this conceptual approach were created in 1894 by monograph of M.I.Tugan-Baranovsky, who can be recognized as precursor of the Schumpeter’s Theory of Economic Development. The article presents historical analysis of the genesis and genetic line of the innovation theory of economic development till the modern Neo-Schumpeterian conceptions of technological paradigms. It lays methodological basis for the conclusion the innovation technological change and the corresponding restructuring of national economy must be recognized as the main measures to overpower the recession and to ensure the economic growth in long-run perspective.