Class struggle in a Schumpeterian economy

Abstract

This study explores class struggle between workers and capitalists in a Schumpeterian economy, in which economic growth is driven by innovation in a market economy. We consider the limit on the market power of firms as a policy instrument and derive its optimal levels for workers and capitalists, respectively. Capitalists prefer powerful monopolistic firms, but even workers prefer firms to have some market power because profit provides incentives for innovation. Workers’ utility-maximizing degree of monopoly power is decreasing in their discount rate but increasing in innovation productivity and the quality step size. Capitalists’ utility-maximizing degree of monopoly power is increasing in the quality step size. We use the difference in these two degrees of monopoly power to measure the severity of their conflict, which becomes less severe when workers’ discount rate falls or innovation productivity rises. Finally, at a small (large) quality step size, enlarging it mitigates (worsens) their conflict.