Schumpeterian Dynamics: A Disequilibrium Theory of Long-run Profits

In the traditional economic theory, whether classical or neoclassical, the long-run state of the economy is an equilibrium state in which all profits in excess of normal rate vanish completely. If there is a theory of long-run profits, it is a theory about the determination of the normal rate of profit. This paper challenges this long-held tradition in economics. It uses a simple evolutionary model of Iwai (Journal of Economic Behavior and Organization 5, 1984, 321-351) to demonstrate that what the economy will approach over a long passage of time is not a classical or neoclassical equilibrium of uniform technology but a statistical equilibrium of technological disequilibria which reproduces a relative dispersion of efficiencies in a statistically balanced form. As Joseph Schumpeter once remarked, "surplus values (profits in excess of normal rate) may be impossible in perfect equilibrium, but can be ever present because that equilibrium is never allowed to establish itself." The paper also shows that this evolutionary model behaves like a neoclassical growth model if we ignore all the complexity of the evolutionary process working at the microscopic level and only look at the macroscopic performance. It thus provides a critique of the neoclassical growth accounting which decomposes the overall growth process into a movement along an aggregate production function and an autonomous shift of that function.