Abstract

A Neo-Classical Macro-Economic Model: Entrepreneurs, Bankers, Innovations and Excess Profits

In this paper an attempt is made to formulize a dynamic neo-classical model. Its underlying ideas go back to Wicksell’s cumulative process and Schumpeter’ process of innovation and economic growth. Entrepreneurs are the driving force in a market economy. They propel an economy forward in their continuous search for excess profits, no outside impulses are necessary. Innovations, the incentives to introduce them by investing in new capital goods, and the financing of the latter in a credit economy form the core of neo-classical economic growth process. At its center is the behavior of entrepreneurs and bankers with respect to expected earnings, risk taking and liquidity. The model has 18 equations and 18 variables. It contains as special cases the conventional seven equation neo-classical model, Keynes model, possibly Friedman’s Simple Common Model and Solow’s model of economic growth.