Schumpeterian Economic Dynamics as a Quantifiable Model of Evolution

We propose a simple quantitative model of Schumpeterian economic dynamics. New goods and services are endogenously produced through combinations of existing goods. As soon as new goods enter the market, they may compete against already existing goods. In other words, new products can have destructive effects on existing goods. As a result of this competition mechanism, existing goods may be driven out from the market-often causing cascades of secondary defects (Schumpeterian gales of destruction). The model leads to generic dynamics characterized by phases of relative economic stability followed by phases of massive restructuring of markets-which could be interpreted as Schumpeterian business 'cycles'. Model time series of product diversity and productivity reproduce several stylized facts of economics time series on long timescales, such as GDP or business failures, including non-Gaussian fat tailed distributions and volatility clustering. The model is phrased in an open, non-equilibrium setup which can be understood as a self- organized critical system. Its diversity dynamics can be understood by the time-varying topology of the active production networks.