Development and Underdevelopment in the History of Economic Thought

Growth and Inequality in a Unified Schumpeter Mark 1 + 2 model

Mellacher Patrick, University of Graz, Graz Schumpeter Centre

I study the interrelation between technological change, economic growth and inequality in a novel Schumpeterian agent-based model are born and evolve endogenously. Joseph Schumpeter developed in “Theorie der wirtschaftlichen Entwicklung” (1911) and “Capitalism, Socialism and Democracy” (2003[1942]) what was later called the Schumpeter Mark 1 and Mark 2 models. His Mark 1 model centers around the entrepreneur, who disrupts the circular flow of the economy by using “new combinations”, i.e. by introducing new products, improving the production processes etc. In his Mark 2 model, Schumpeter emphasizes the role of big corporations for technological progress. Pressured by competition, they must invest in Research & Development to continuously improve their products and cut their costs of production. I formalize Schumpeter’s theories with an agent-based model that combines the features of Schumpeter Mark 1 and Mark 2. In my model, entrepreneurs play the leading role in the birth of new industries, as they can either try to found industries or to imitate existing firms (i.e. Mark 1). Firms invest in R&D to continuously increase their profit and to push out their competitors (i.e. Mark 2). Despite its simplicity, the model is able to reproduce a large number of stylized facts. Among others, output, price and number of firms behave according to the industry life cycle literature. Furthermore, depending on the parameters, the model can produce either a relationship between growth and inequality that is akin to the Kuznets-curve or to the relationship uncovered by Piketty (2014), where inequality starts to grow again in mature economies. In the latter case, the model is also able to capture all of the 10 stylized facts on “declining business dynamism” by Akcigit and Ates (2021) published in AEJ:Macroeconomics.


Keywords: Schumpeter, innovation, growth, inequality, agent-based model

Paper file