A Schumpeter Model of Economic Growth and Innovation

Abstract

A Schumpeter Model of Economic Growth and Innovation

It is possible to formalize the Schumpeter model of innovation and economic growth. An adaptive, discontinuous maximization model, which allows for random technological change and increases in productivity, can be shown to generate optimal time paths for the introduction of innovations, the capital stock, labor inputs and excess profits as described in Schumpeter’s work. In order to demonstrate how the model works, we assumed in this paper rather short maximization periods and therefore frequent possibilities of readjustments. The maximization periods can however be of any lengths. With respect to innovations we assumed in this paper, for the sake of simplicity, that they occur in a random fashion and are thus exogenous. This is one way of introducing innovations. We are aware that there are also many other ones, e.g., innovations induced by one or several endogenous factors and (or) innovations occurring in a bunched fashion. As far as the difficult problem of the effect of innovation and technological change on production cost is concerned, we assumed that the former are labor-saving. Other assumptions can be made about these features of the model. The various parameters and coefficients entering the model can be changed freely, but each variation will generate optimal time paths of different shape, and possibly, different length. Repeated simulation runs indicate however that they all do have important Schumpetarian traits in common. They all belong to a discontinuous, innovationdriven process of capital accumulation and growth, in the presence of uncertainties with respect to the speed of technological progress, rising wage cost and rising cost to hold ones own against encroachments by competitors and imitators.