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Working Paper No. 66. Firm Tunrover and the Rate of Macroeconomic Growth – Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction

PublicationWorking paper
Dan Johansson, Endogen tillväxt, EOE, Erol Taymaz, Experimentell ekonomi, Företagandets villkor, Gunnar Eliasson, Kreativ förstörelse
Working paper No. 66
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Abstract

The positive effects of new innovative entry and fast and efficient allocation of resources are balanced against the efficiency of price signaling in markets in a non-linear micro based simulation model of an Experimentally Organized Economy (EOE). In this model increasingly rapid reallocation of resources over markets, moved by innovative new entry and competitive exit (the rate of firm turnover) generates faster growth in output, but eventually, if too fast, is shown to affect the reliability of price signaling in markets and to raise the frequency of investment mistakes. Beyond a certain level of the rate of firm turnover the aggregate effects at the macro level, therefore, turn negative. This optimal growth trajectory depends on the balance between the rates of entry and exit and on the performance of new firms compared to incumbents, their size compared to incumbents and the variation in the same characteristics.

Eliasson, G., Johansson, D. & Taymaz, E. (2005). Firm Tunrover and the Rate of Macroeconomic Growth – Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction. Ratio Working Paper No. 66.

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Working Paper No. 66. Firm Tunrover and the Rate of Macroeconomic Growth – Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction
Working paperPublication
Eliasson, G., Johansson, D. & Taymaz, E.
Publication year

2005

Published in

Ratio Working Paper

Abstract

The positive effects of new innovative entry and fast and efficient allocation of resources are balanced against the efficiency of price signaling in markets in a non-linear micro based simulation model of an Experimentally Organized Economy (EOE). In this model increasingly rapid reallocation of resources over markets, moved by innovative new entry and competitive exit (the rate of firm turnover) generates faster growth in output, but eventually, if too fast, is shown to affect the reliability of price signaling in markets and to raise the frequency of investment mistakes. Beyond a certain level of the rate of firm turnover the aggregate effects at the macro level, therefore, turn negative. This optimal growth trajectory depends on the balance between the rates of entry and exit and on the performance of new firms compared to incumbents, their size compared to incumbents and the variation in the same characteristics.

Working Paper No. 52. Simulating the New Economy
Working paperPublication
Eliasson, G., Johansson, D. & Taymaz, E.
Publication year

2004

Abstract

The IT, the Internet, or the Computing & Communications (C&C) technology revolution has been central to the economic discussion for several decades. Before the mid-1990s the catchword was the “productivity paradox” coined by Robert Solow, who stated in 1987 that “computers are everywhere visible, except in the productivity statistics”. Then the New Economy and fast productivity growth fueled by C&C technology suddenly became the catchword of the very late 1990s. Its luster however, faded almost as fast as it arrived with the dot.com deaths of the first years of the new millennium. With this paper we demonstrate that the two paradoxes above are perfectly compatible within a consistent micro (firm) based macro theoretical framework of endogenous growth. Within the same model framework also a third paradox can be resolved, namely the fact that the previous major New Industry creation, the Industrial Revolution, only involved a handful of Western nations that had got their institutions in order. If the New Economy is a potential reality, one cannot take for granted that all industrial economies will participate successfully in its introduction. It all depends on the local receiver competence to build industry on the new technology. We, hence, also demonstrate within the same model the existence of the risk of failing altogether to capture the opportunities of a New Economy.

Related content: Simulating the New Economy

Working Paper No. 52. Simulating the New Economy
Working paperPublication
Eliasson, G., Johansson, D. & Taymaz, E.
Publication year

2004

Abstract

The IT, the Internet, or the Computing & Communications (C&C) technology revolution has been central to the economic discussion for several decades. Before the mid-1990s the catchword was the “productivity paradox” coined by Robert Solow, who stated in 1987 that “computers are everywhere visible, except in the productivity statistics”. Then the New Economy and fast productivity growth fueled by C&C technology suddenly became the catchword of the very late 1990s. Its luster however, faded almost as fast as it arrived with the dot.com deaths of the first years of the new millennium. With this paper we demonstrate that the two paradoxes above are perfectly compatible within a consistent micro (firm) based macro theoretical framework of endogenous growth. Within the same model framework also a third paradox can be resolved, namely the fact that the previous major New Industry creation, the Industrial Revolution, only involved a handful of Western nations that had got their institutions in order. If the New Economy is a potential reality, one cannot take for granted that all industrial economies will participate successfully in its introduction. It all depends on the local receiver competence to build industry on the new technology. We, hence, also demonstrate within the same model the existence of the risk of failing altogether to capture the opportunities of a New Economy.

Related content: Simulating the New Economy

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