Firm Turnover and the Rate of Macro Economic Growth: Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction

Investment project selection and firm turnover are integrated in a market self-coordinated macro model (Eliasson, 1976b; Eliasson, 1991a; Eliasson, 1991b; Eliasson, 1995). We simulate a Schumpeterian Creative Destruction process driven by endogenous entrepreneurial entry causing reorganization or exit of firms that acquire and release resources in markets under different institutional conditions. While too fast structural change may make endogenous prices unreliable as conveyors of information, increasing the rate of economic mistakes and slowing econmic growth, an optimal balance between the rate of firm turnover and long run sustainable growth is demonstrated to exist. Optimal growth depends on the balance between entries and exits, the performance and size of new firms compared to incumbents, and on variation in the same characteristics. There is also the general problem associated with selection based, initial state dependent non linear micro based models that the incidence of even minor mistaken investment decisions may cumulate with time into major macro consequences (“deterministic chaos”). We conjecture that the negative tilting (as some “high speed” market entry simulations close up with the 75 year horizon) of the macroeconomic trajectories depends on the incidence of Type II econmic mistakes, or winners getting lost along the way.