Universidad Tecnológica de El Salvador
The Reallocation Myth
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The Reallocation Myth

Chang-Tai Hsieh and Peter J. Klenow
Fed Kansas City, 2017
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8

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Recommendation

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.

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.

That turns economists’ attention to the notion of new versus existing firms in the...

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.

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