Growing Through Cycles

This paper presents models of growth, which put the neoclassical and neo-Schumpetarian growth models in a unified framework. In doing so, it is argued that these two views of growth, one based on factor accumulation and the other based on innovation, are complementary in that they may capture different phases of a single growth experience. It is shown that, under an empirically plausible condition, the economy achieves sustainable growth through cycles, perpetually moving back and forth between two phases. One phase is characterized by higher output growth, higher investment, no innovation and a competitive market structure. The other phase is characterized by lower output growth, lower investment, high innovation, and a more monopolistic market structure. Both investment and innovation are essential in sustaining growth indefinitely, and yet the only one of them appears to play a dominant role in each phase.