Can recessions be “productive”?: Schumpeter and the moderns

Joseph A. Schumpeter never ceased to inspire new generations of economists. One of his major contributions concerns his view of business cycles and economic development as closely interrelated dynamics. Among the different lines of research proposed by Schumpeter in order to allow economists to capture how growth and cycle dynamics intertwine, one can find the analysis of the investment decisions during recessions. Schumpeter considered this process of Creative Destruction as “the essential fact about capitalism” since the Industrial Revolution. According to him, the process of liquidation and reallocation of productive resources taking place in the recession and particularly in the depression phase is not only an essential and unavoidable characteristics of capitalist evolution, but also necessary and, finally, beneficial for long-run development.

More recently, one can notice in the literature a revival of interest for these questions. This line of research has been developed again in the 1990s by Aghion and Saint-Paul (1991, 1993, 1998) and Saint-Paul (1994) but also Caballero and Hammour (1994, 1996). They elaborated the so-called “productive recessions” analysis respectively the “cleansing effect” of recessions.

Focusing exclusively on neo-Schumpeterian contributions which explicitly analyze the impact recessions can have on growth, our objective is to examine the mechanisms involved in the modern literature mentioned above and to compare them with Schumpeter’s original writings. The objective of this paper is to question the ‘Schumpeterian character’ of this recent literature and then to investigate the degree of continuity as well as the differences. Some focus will be on potential differences with regard to economic policy.