Thursday, March 1, 2018

Combining Keynesian and Schumpeterian Models

The two models of Keynesian and Schumpeterian models have been at the forefront of modern economic debate often split along party lines. While each of these models have some advantages they are not the whole story in and of themselves. Research by Giovannie, et. al. (2017) helps us understand that these models can work together to encourage proper government policy and economic adaptation and integration. When discussing economic growth models that can help the U.S. it is more intuitive to see innovation as fostered not only by the ability of companies to create and adapt technology but also how government can better ensure that happens.

The K+S model combines Keynesian (demand-driven) mechanisms with Schumpeterian (innovation-driven mechanisms. Using this combined model we find a) search capabilities of firms, b) the pool of technological opportunities available for innovation, c) the degree and breadth of patent protection, d) the strength of market selection and competition.

The Schumpeterian growth model is used to understand innovation and growth within the economy. It rests on growth as a result of innovation and imitation and the diffusion and new products/ideas that lead to more efficient production processes. Innovation is motivated by financial returns and new technologies often replace older ones in a chaotic manner.

Keynesian economics is more based on demand economics which basically says that if people are working then the economy will be good. In this model, government has an important role in ensuring that jobs are growing and government influences the ability of the economy to grow. Sometimes, this is going to require significant investment.

What the researchers found was that an increase in technological opportunities and entrant-carried search have a positive effect on the long-run performance of the economy. Likewise, too much patent protection can damage sharing of information and thus deters growth. There is likely a happy medium of protection and adaptation by other firms but the study doesn't say where this was. There is some positive indication that stronger market competition impacts long-run economic growth. They also found that fiscal policies have an positive impact on unemployment, output stabilization and long run growth.

Neither of these models is true or not true but only useful based on gradation. Combining the models does mean that we can foster creative destruction and innovation by the proper use of government administration. The study helps us understand that government does have a role in encourage stronger policies that raise internal competition and foster greater economic growth. Patents and innovation are important but have their widest use when other firms within a cluster can eventually immitate those advantages raising the economy in the long run. Thus, by creating stronger government policies, pin pointing investment in key areas that improve the business environment, and helping companies to invent and imitate can raise the overall advantages of local economies.

Giovanni, D., et. al. (2017). Micro and macro policies in the Keynes+Schumpeter Evolutionary Models. Journal of Evolutionary Economics, 27 (1).

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