This chapter accommodates in the Schumpeterian frame of the creative response recent advances in the economics of innovation, technological change and knowledge to articulate a comprehensive model of Schumpeterian growth. Schumpeterian rivalry in product markets engenders mismatches in product markets and the consequent flows of R & D expenditures. Knowledge appropriability declines over time so that additional knowledge piles up, increasing the stock of public knowledge. Because of knowledge indivisibility – articulated in knowledge complementarity, exhaustibility, cumulability and transient appropriability – knowledge externalities are diachronic. Diachronic externalities stemming from the stock of public knowledge favour the generation of new technological knowledge, the search for technological congruence and the consequent reduction in the cost of knowledge. The secular decline in the cost of technological knowledge induces the creative reaction of firms, the search for higher levels of technological congruence and the consequent introduction of biased technological changes that augment the output elasticity of knowledge as an input. Knowledge cumulability and induced technological change account for the secular trend towards the knowledge economy.
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