Schumpeterian Competition and Economic Growth

23 January 2007 at 2:37 pm Peter G. Klein 2 comments

| Peter Klein |

Nobel Laureate Michael Spence writes about sustained high growth in today’s (gated) WSJ. Focusing on Botswana, China, Hong Kong, Indonesia, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand, Spence notes:

While each instance of sustained high growth is to some extent idiosyncratic, they share certain features. In all cases, there is a functioning market economy with its price signals, incentives, decentralization and enough definition of private property ownership to enable investment. All attempts to circumvent this necessary condition through central planning have met with major misallocations of resources and failure.

Isn’t it wonderful that the Austrian and public-choice critiques of central planning are so well-known that invoking them seems almost, well, trite?

A key feature of sustained high growth, Spence adds, is resource mobility:

Contrary to the image that sometimes comes from a macroeconomic overview, productivity growth at these rates is not achieved by having everyone do what they were doing before, but a little bit more efficiently. The portfolio mix of economic activity changes very rapidly. This is what Schumpeter called “creative destruction” and Paul Romer calls “churn.” . . . This movement of people geographically and across sectors is not an ancillary side effect of the growth process, but rather the essence of it.

Incidentally, Schumpeterian competition is not always easily discernible at a microeconomic level. Paul Vaaler and Gerry McNamara find mixed evidence for increasingly “dynamic competition” in the US technology sector. (See also the essays in Paul’s book with Lee W. McKnight and Raul L. Katz.)

Entry filed under: - Klein -, Classical Liberalism, Evolutionary Economics, Institutions.

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2 Comments Add your own

1. spostrel | 23 January 2007 at 4:52 pm

“No growth without change” should be emblazoned on the doorways of every economics ministry and legislature. Growth without change is the fantasy of most of those opposing international trade, Wal-Mart, growth in service employment, etc. The reality is that if the job structure of an economy is static over the decades, so will be its standard of living. Changes in the division of labor and the set of tasks performed are the mechanism by which growth occurs.

I’m pretty skeptical of many empirical attempts to catch a lot of this, because widely available data sources have very coarse partitioning of products and processes. Nor does the Bureau of Labor Statistics do a great job of keeping up with occupational shifts. My wife once documented that the number of manicurists (nail technicians, to be precise) estimated by the BLS was lower than the number of subscriptions to just one of the two leading trade magazines for nail professionals. And those folks are state licensed. Even when job categories are formally unchanged, the tasks performed by employees in those categories may change completely–think about computer programmers before and after the advent of high-level languages, for example–without this showing up in the statistics.
2. Donald A. Coffin | 24 January 2007 at 11:59 am

It;s unclear, though (even, as I recall, in Romer’s work) whether churn is a cause or an effect of growth.