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.
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.

 

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