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Animal Spirits Through Creative Destruction

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  • Patrick Francois
  • Huw Lloyd-Ellis

Abstract

We show how a Schumpeterian process of creative destruction can induce rational, herd behavior by entrepreneurs across diverse sectors as if fueled by "animal spirits." Consequently, a multisector economy, in which productivity improvements are made by independent, profit-seeking entrepreneurs, exhibits regular booms, slowdowns, and downturns as part of the long-run growth process. Our cyclical equilibrium has higher average growth, but lower welfare than the corresponding acyclical one. We show how a negative relationship can emerge between volatility and growth across cycling economies, and assess the extent to which our model matches several features of actual business cycles.

Suggested Citation

  • Patrick Francois & Huw Lloyd-Ellis, 2003. "Animal Spirits Through Creative Destruction," American Economic Review, American Economic Association, vol. 93(3), pages 530-550, June.
    • Handle: RePEc:aea:aecrev:v:93:y:2003:i:3:p:530-550
    Note: DOI: 10.1257/000282803322156972
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    References listed on IDEAS

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