Does Schumpeter need Keynes?

Abstract

Schumpeter sketched a research program to explain the emergence of business cycles from perennial microeconomic flux. Economists however believe Schumpeterian micro processes are insufficient to generate macro dynamics, and therefore Schumpeterian themes must be appended with Keynesian features like wage-price rigidity and aggregate demand failures to generate business cycles. The view originated from Hyman Minsky and Richard Goodwin. This paper argues Schumpeterian micro processes can generate macro dynamics without Keynesian features. Two reasons are typically presented for why Schumpeterian micro processes are insufficient to generate macro dynamics. The first is micro innovations average out in a large economy and therefore cannot produce much macro movement. The second is Schumpeterian micro processes do not generate co-movement between employment and output. We argue that neither of the two reasons hold true within Schumpeter’s schema. Micro innovations do not cancel out when firms are related to each other in a production network. And the co-movement of employment and output can be explained by the suspension of economic actions in the midst of adaptation to innovation. Macroeconomists find it necessary to append Keynesian features to Schumpeterian micro processes because they omit the high dimension of coordination problems within Schumpeter’s business cycle theory. This paper motivates a new class of models in which micro flux generates macro dynamics due to problems inherent in the process of adaption to innovation within a high dimensional system.

Keywords: Schumpeter, Keynes, Business Cycles, Networks, Macroeconomics, Recessions, Price System, Coordination, Innovation

JEL Classification: E10, E30, B30