These days, a growing school of economists are asking what propels growth and drawing inspiration from the ideas of Joseph A. Schumpeter (1883-1950), the Austrian economist and Harvard University professor. Like Schumpeter, these economists are focusing on technology, innovation, and knowledge. And the underlying message of the Schumpeterians is fundamentally optimistic. "The one fact that comes from economic history is the ability of the human mind to break through barriers that weren't imaginable 50 years ago." says Joel Mokyr, economic historian at Northwestern University.
Traditionally, mainstream economics has been unable to explain what determines long-term growth. In the late 1950s, Nobel laureate Robert M. Solow of Massachusetts Institute of Technology showed that increases in the economy's labor supply and capital stock explained only part of growth. The rest was attributed to technological change, but it was largely unexplainable.
The Schumpeterians go beyond traditional economics to look at what really drives technological change. They are analyzing how growth is affected by the support for technical innovation, educational institutions, and rewards to entrepreneurs for coming up with new products. A leading Schumpeterian is Paul Romer of the University of California at Berkeley, perhaps one of the country's most influential young economist. Romer's theoretical work breaks new ground by showing how technological progress can supercharge growth, just as a new jet turbine or a new biotechnology drug spells the difference between a plodding economy and a dynamic one. Romer and other new growth theorists are finding support from such economic historians as Paul David of Stanford University. His empirical studies show the historic interplay between technological change and economic growth.
The most recent wave of research from the Schumpeterians focuses on the links between international trade and growth. In traditional economic theory, the benefits from free trade to a large economy such as the U.S. come mainly because consumers and businesses can pay lower prices for imports. While this is no small potatoes, it doesn't do much to increase growth in the long run.
Yet free trade may have a much bigger payoff than conventional economics allows. Free trade encourages the rapid spread of technology and industrial ideas, according to such trade theorists as Gene M. Grossman of Princeton, and Elhanen Helpman of Tel-Aviv University, who have been influenced by the pioneering work of Paul R. Krugman of MIT. Trade can also invigorate growth by providing access to bigger markets. Conversely, in many cases, barriers to trade slow the rate of technological transmission, leaving a protectionist country lagging far behind.
Take the developing countries of Latin America and the former East bloc nations. They learned the hard way that erecting trade barriers to protect domestic industries isolated them from global technological progress and helped condemn them to years of stagnation. And without fierce competitive pressure from the Japanese auto companies, it's doubtful U.S. carmakers would have felt compelled to engineer productivity gains of 10% a year in the 1980s.
Beyond trade, the theory has far-ranging implications for economic policy. Governments, business, and universities have a key part to play in affecting the pace of innovation. Some Schumpeterians would like to see stronger government support of commercial technology, especially in the service sector, and others more industry collaboration to develop world-class products. "To achieve long-run success, economic policy must support the institutions that generate ideas and technological progress," says Romer.