Schumpeterian economic dynamics as a quantifiable minimum model of evolution

TL;DR

This paper introduces a simple quantitative model of Schumpeterian economic dynamics, capturing how innovation and destruction of goods lead to cyclical market restructuring and reproduce stylized economic time series features.

Contribution

It presents a novel minimal model that explains economic cycles and stylized facts through endogenous innovation, competition, and network dynamics in a non-equilibrium framework.

Findings

Model reproduces stylized facts like fat-tailed distributions and volatility clustering.

Captures phases of stability and restructuring in economic activity.

Explains diversity dynamics via active production network topology.

Abstract

We propose a simple quantitative model of Schumpeterian economic dynamics. New goods and services are endogenously produced through combinations of existing goods. As soon as new goods enter the market they may compete against already existing goods, in other words new products can have destructive effects on existing goods. As a result of this competition mechanism existing goods may be driven out from the market - often causing cascades of secondary defects (Schumpeterian gales of destruction). The model leads to a generic dynamics characterized by phases of relative economic stability followed by phases of massive restructuring of markets - which could be interpreted as Schumpeterian business `cycles'. Model timeseries of product diversity and productivity reproduce several stylized facts of economics timeseries on long timescales such as GDP or business failures, including non-Gaussian fat tailed distributions, volatility clustering etc. The model is phrased in an open, non-equilibrium setup which can be understood as a self organized critical system. Its diversity dynamics can be understood by the time-varying topology of the active production networks.