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The Impact of New-Product R&D on the Circular Flow

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  • James E. McClure
  • David Chandler Thomas

Abstract

Closed-system circular flow models have been ubiquitous in economics for at least half a century. Because these models account for neither new-product R&D, nor the attendant leakages and injections, they obscure understanding of (a) the distinction between new-product and process R&D, (b) the circular flow leakages and injections attending new-product R&D, and (c) Schumpeterian “creative destruction†and “swarming.†To shed light upon these matters, we present an open-system circular flow model and a price theoretic explanation of the swarming overinvestment that characterizes business cycle downturns. JEL Classifications : B20, O31, E30

Suggested Citation

  • James E. McClure & David Chandler Thomas, 2019. "The Impact of New-Product R&D on the Circular Flow," The American Economist, Sage Publications, vol. 64(1), pages 45-59, March.
    • Handle: RePEc:sae:amerec:v:64:y:2019:i:1:p:45-59
    DOI: 10.1177/0569434518774774
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    References listed on IDEAS

    as
    1. Roger E. Backhouse & Yann Giraud, 2010. "Circular Flow Diagrams," Chapters, in: Mark Blaug & Peter Lloyd (ed.), Famous Figures and Diagrams in Economics, chapter 29, Edward Elgar Publishing.
    2. Modigliani, Franco, 1986. "Life Cycle, Individual Thrift, and the Wealth of Nations," American Economic Review, American Economic Association, vol. 76(3), pages 297-313, June.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
    4. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    5. James E. McClure & David Chandler Thomas, 2018. "Can sticky consumption cause business cycles?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 31(1), pages 51-72, March.
    6. McClure, James E. & Thomas, David Chandler, 2017. "Explaining the timing of tulipmania's boom and bust: historical context, sequestered capital and market signals," Financial History Review, Cambridge University Press, vol. 24(2), pages 121-141, August.
    7. Morgan,Mary S., 2012. "The World in the Model," Cambridge Books, Cambridge University Press, number 9781107002975, December.
    8. Morgan,Mary S., 2012. "The World in the Model," Cambridge Books, Cambridge University Press, number 9780521176194, December.
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    More about this item

    Keywords

    circular flow; new-product R&D; process R&D; leakages; injections; Hayek; Keynes; Knight;
    All these keywords.

    JEL classification:

    • B20 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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