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Understanding 'The Essential Fact about Capitalism': markets, competition and creative destruction

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  • Carlin, W.J.
  • Haskel, J.
  • Seabright, P.

Abstract

This paper examines two ways in which competition works in modern capitalist economies to improve productivity. The first is through incentives: encouraging improvements in technology, organisation and effort on the part of existing establishments and firms. The second is through selection: replacing less-productive with more productive establishments and firms, whether smoothly via the transfer of market shares from less to more productive firms, or roughly through the exit of some firms and the entry of others. We report evidence from the UK suggesting that selection is responsible for a large proportion of aggregate productivity growth in manufacturing, and that much of this is due in turn to selection between plants belonging to multi-plant firms. We also investigate whether the nature of the selection process varies across the business cycle and report evidence suggesting that it is less effective in booms and recessions. Finally, although in principle productivity catch-up by low-income countries ought to be easier than innovation at the frontier, in the absence of a well functioning competitive infrastructure (a predicament that characterises many poor countries), selection may be associated with much more turbulence and a lower rate of productivity growth than in relatively prosperous societies. We report results of a survey of firms in transition economies suggesting that, particularly in the former Soviet states (excluding the Baltic states), poor output and productivity performance has not been due to an unwillingness on the part of firms to change and adapt. On the contrary, there has been a great deal of restructuring, much new entry and large reallocations of output between firms; but such activity has been much more weakly associated with improved performance than we would expect in established market economies.

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File URL: http://discovery.ucl.ac.uk/16058/1/16058.pdf
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Bibliographic Info

Paper provided by University College London in its series Open Access publications from University College London with number http://discovery.ucl.ac.uk/16058/.

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Date of creation: Jan 2001
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Publication status: Published in National Institute Economic Review (2001-01) v.175, p.67-84
Handle: RePEc:ner:ucllon:http://discovery.ucl.ac.uk/16058/

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Web page: http://www.ucl.ac.uk

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Cited by:
  1. Ivaldi, Marc & Seabright, Paul, 2003. "The Economics of Passenger Rail Transport: A Survey," IDEI Working Papers 163, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. J. Stan Metcalfe & John Foster, 2009. "Evolutionary Growth Theory," Discussion Papers Series 388, School of Economics, University of Queensland, Australia.
  3. Uchida, Yuichiro & Cook, Paul, 2004. "The Effects of Competition on Technological and Trade Competitiveness: A Preliminary Examination," Centre on Regulation and Competition (CRC) Working papers 30654, University of Manchester, Institute for Development Policy and Management (IDPM).
  4. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and enterprise performance in transition economies: evidence from a cross-country survey," Working Papers 63, European Bank for Reconstruction and Development, Office of the Chief Economist.
  5. Christine Greenhalgh, 2002. "Rich Man, Poor Man, Beggar Man, Thief - But Who is Who in the Capitalist Economy," Economics Series Working Papers 119, University of Oxford, Department of Economics.
  6. Carlin, Wendy & Schaffer, Mark & Seabright, Paul, 2003. "Infrastructure, Competition and Innovation : New Survey Evidence from Transition," IDEI Working Papers 243, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. John Metcalfe, 2008. "Accounting for economic evolution: Fitness and the population method," Journal of Bioeconomics, Springer, vol. 10(1), pages 23-49, April.
  8. Wendy Carlin & Mark Schaffer & Paul Seabright, 2004. "A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth," CERT Discussion Papers 0402, Centre for Economic Reform and Transformation, Heriot Watt University.
  9. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and Enterprise Performance in Transition Economies from a Cross-Country Survey," CERT Discussion Papers 0101, Centre for Economic Reform and Transformation, Heriot Watt University.
  10. Paul Seabright, 2005. "National and European Champions - Burden or Blessing?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 6(2), pages 52-55, 08.
  11. J.S Metcalfe, 2004. "Accounting for Evolution: An Assessment of the Population Method," Papers on Economics and Evolution 2004-21, Max Planck Institute of Economics, Evolutionary Economics Group.
  12. Ajit Singh, 2002. "Competition, corporate governance and selection in emerging markets," ESRC Centre for Business Research - Working Papers wp247, ESRC Centre for Business Research.
  13. John Stanley Metcalfe & Ronnie Ramlogan, 2006. "Creative Destruction and the Measurement of Productivity Change," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 373-397.
  14. Carlin, W & Fries, S & Schaffer, M & Seabright, P, 2003. "Competition, restructuring and firm performance: evidence of an inverted-U relationship from a cross-country survey of firms in transition economies," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.

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