The Curious Case of Missing Growth

"Creative destruction," also known as “Schumpeter's gale," is a concept in economics made famous by Joseph Schumpeter, who popularized it as a theory of economic innovation and believed it to be a key feature of economic growth.

It was Schumpeter who wrote "the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, creating a new one, will ultimately lead to growth.

While few economists doubt that "creative destruction" as a means to an end for economic growth, its impact on price, and as a result, economic growth, estimates based on price has gone rarely researched and little-noticed.

However, in a recently published paper entitled "Missing Growth from Creative Destruction" the authors, Philippe Aghion, Antonin Bergeaud, Timo Boppart Peter J. Klenow, and Huiyu Li, explore missing growth in US Census data on non-farm businesses from 1983 to 2013.

What they found was that goods or services that were destroyed to make room for new businesses and innovation lead to an increase in inflation; therefore, lower growth. Furthermore, they discovered that growth in the US was underestimated by one half of a percentage point per year, in some cases, surprisingly substantial, especially given the less-than-two percentage point average annual productivity growth during this period.

This research raises more questions. One such quandary is whether creative destruction may have played a similar role in China's economic slowdown as more traditional methods of production give way to innovative and technology-based solutions. One might infer, if innovation in the economy is skewed towards creative destruction rather than incremental change, then economic growth in China must be reexamined.

However, this paper also determined that the understatement of growth accelerated only modestly after 2005, and only about one-tenth of the US productivity slowdown can be attributed to this effect. Nevertheless, this effect might be more significant for economies like China, which are undergoing rapid digital transformation.

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