Keynes-Schumpeter

Task Force Chairs

  • Richard Nelson
    Professor Emeritus
    The Earth Institute
    Columbia University
  • José Antonio Ocampo
    Co-President
    Initiative for Policy Dialogue (IPD)

Both in countries at the economic frontiers and in countries striving to catch up with the economic leaders, the process of economic development involves continuing structural transformation. Empirical research leaves no doubt about that. A fundamental feature of the development process is the emergence and growth of new industries and the decline and often disappearance of old ones. Within industries, new firms replace older ones as the dominant players, and then later themselves may decline. The transformations generally involve both the private and the public sectors.

This view of the development process is Schumpeterian and evolutionary rather than neoclassical. It is also in line with the structuralist tradition in development economics. It involves continuing innovation in the broad sense of that term, the diversification of production structures in developing countries, and continuing creative destruction. (Continued in Description...)

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Empirical research within these traditions has looked in detail at economic development in a number of different countries. Research has studied the development dynamics of a number of particular industries, and the similarities and differences in the development processes going on in these industries in different countries. In relation to developing countries, research has looked at the links between growth and the trajectory of production structures, particularly in recent decades the diversification of export structures toward good and services with increasing technological contents or, in contrast, the persistence of commodity specialization. A number of these studies have gone down to the level of individual firms. Others have explored the nature and role of government programs and policies in stimulating and molding these processes.

The economists who have been doing microeconomic research along these lines generally have had their training in industrial economics, or firm management and strategy (often at Business Schools), or study of innovation and the processes and policies bearing on technological change more generally (often at programs dedicated to those topics). They tend to be uneasy about getting into topics generally understood to fall under various of the fields of macroeconomics. Yet many of them increasingly are coming to recognize the importance and influence on the processes involved of factors like the rate of unemployment, the extent and variability of inflation, exchange rate regimes, interest rates and the availability of credit more generally , topics usually studied by economists trained in macroeconomics. Some of these issues, and particularly the role of exchange rate, capital flow volatility and interest rates in determining economic growth and fluctuations, have been major concerns of structuralist thinkers. As a result, there is increasing interest in a more extended conversation with macroeconomists and some complementary or joint research.

At the same time, a number of macroeconomists have become increasingly interested in the real development process and increasingly recognize that it involves structural transformation in an essential way. However, few macroeconomists have much familiarity with the empirical research described above, or the theoretical orientation of those doing that research.

Yet to deal with the effects of macroeconomic conditions and policies on real long run economic development would appear to require some significant amendment and modification to prevailing macroeconomic theorizing. In particular, while the models developed by Harrod and Domar in the early post-war years did link Keynesian analysis, concerned with the determinants of aggregate unemployment and inflation, to factors associated with the growth of the capacity of the economy to produce goods and services, the emergence of neoclassical growth theory models in effect separated analysis of Keynesian concerns and variables from macroeconomic analysis of long run economic growth. Technical change does figure at the center of new growth theory, but its treatment is not connected to the micro and sectoral dynamics that the research of evolutionary and structural economists has highlighted as fundamental to the process and its economic effects. As a consequence, the studies by macroeconomists of how macroeconomic conditions and policies affect long run economic development tends to be blind to relationships between changes in economic structure and economic growth, as well as between short-term economic fluctuations and long-term growth –and, in that sense, they tend to be theoretically ad-hoc.

Recognition that economic development involves structural transformation and continuing disequilibrium clearly calls into question the relevance of the neoclassical theory of economic growth – in both its old and new versions –, which is the perspective that most macroeconomists grew up with. The tension here would seem to indicate that conversation with economists who have been studying the growth process from an evolutionary, Schumpeterian and structuralist perspective would be as valuable for macroeconomists as interaction with Keynesian macroeconomists would be for the former.

One of the arenas where such a conversation would seem particularly needed is about the mechanisms and institutions that provide the finance needed for economic transformation. This obviously is an extremely important topic in its own right, and neither group of economists have been studying it effectively. Long ago Schumpeter highlighted the central role of finance in allowing an economy to change what it was doing, but modern industrial economists who purport to be Schumpeterians have done little research on finance and industrial dynamics. Macroeconomists who increasingly are recognizing that economic development involves structural transformation none-the-less largely continue to work with a theory of finance that is tuned to macroeconomic variables, and not to an economy of many sectors and firms whose relative importance is changing over time.

There certainly is a broad “macro” financial environment that is operative in an economy at any time, and various policies will affect this environment in different ways. The central bank can tighten of loosen credit in a way that virtually all economic actors will feel. But different sectors will be affected in different ways, and even within a sector different kinds of firms (for example indigenous firms versus branches of multinationals) may feel the effect differently. But since hardly any of the analysis of the effects of monetary tightening or loosening has looked at the economy as an evolving system, we know very little about how these kinds of policies influence the pace and pattern of economic transformation.

Very similar things can be said about the effect of the exchange rate on economic development, an issue that figures out at the center of structuralist development thinking, with its recent obsession on how competitive exchange rate regimes promote new tradable sectors, and overvalued exchange rates generated by high commodity prices or excessive capital inflows block the structural transformation toward good and services with increasing technological contents.

Similar things can be said regarding the effects of tight or loose labor markets, and the effects of different labor market and social protection regimes.

There is, therefore, a lot for micro and macro economists to talk about. And a very exciting research agenda that might come out of those conversations.