Summary of The Reallocation Myth

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8 Importance

9 Innovation

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The term “creative destruction” describes the sometimes painful shift of capital, labor and assets to higher levels of dynamism and productivity. This reallocation across an economy augurs stronger long-run growth and increasingly vibrant activity, particularly if new companies displace legacy firms. Some blame sluggish US growth since 2006 on a lack of creative destruction. But economists Chang-Tai Hsieh and Peter J. Klenow disagree. Their technically complex report on the ebb and flow of an economy will interest researchers and analysts.

In this summary, you will learn

  • How creative destruction affects companies, industries and economies;
  • How creative destruction and innovation are interrelated; and
  • Why existing firms drive most of the innovation in a marketplace.
 

About the Authors

Chang-Tai Hsieh is an economics professor at the University of Chicago Booth School of Business. Peter J. Klenow is a professor of economic policy at Stanford University.

 

Summary

Economist Joseph Schumpeter’s concept of “creative destruction” – in which new firms spur economic growth by displacing older, less productive businesses – remains popular today. However, the theory demands greater scrutiny. A starting point concerns an economy’s “allocative efficiency,” a gauge of the market’s effectiveness in producing and distributing goods and services. US manufacturing shows little to no increase in allocative efficiency since the 1980s. Studies of other sectors reveal similar results.


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