The Economist’s View

The 18th-century economist Adam Smith is generally credited for shaping our views about how growth creates wealth, power, and stability. In The Wealth of Nations, published in 1776, Smith argued that ‘productive capacity’ was the engine of growth. Some 40 years later others such as David Ricardo with his theory of ‘comparative advantage’ saw that prowess in trade was the fundamental differentiator.
In the mid-20th century Robert Solow and Trevor Swan contributed alternative theories – the neoclassical growth model – where the role of technological change is seen as significant as accumulation of capital and all countries eventually reach a steady state of growth.

However, a decade earlier in 1942, Joseph Schumpeter made the connection between growth, innovation, and entrepreneurship upon which most companies and countries now base their respective economic policies. In his book, Capitalism, Socialism, and Democracy, Schumpeter saw an entrepreneur as someone who is able to convert a new idea into successful innovation. He popularized the idea of ‘creative destruction’ as creating new products, services, and business models across markets and so driving growth. It is this that is at the heart of successful long-term growth. The entrepreneur disturbs equilibrium and so causes economic development. Schumpeter argued that ‘innovation is the critical dimension of change’ and creates ‘temporary monopolies that allow abnormal profits,’ which are then competed away by rivals and imitators. These create new products and services that meet and drive demand and so improve profits and economic growth.

Schumpeter also proposed that finance can have a positive impact on growth as a result of its effects on productivity and technological change. In recent years, many Asian economies have cited government-led investments as being a core catalyst for sustained economic growth. Back in the West, many see that Schumpeter’s views stands firm and, for example, has had influence in such ambitions as the European Union’s core development plan – the Lisbon Strategy.

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