Schumpeter vs Arrow? Technological Revolutions, Microsoft, and Antitrust Policy

Kenneth Arrow and Joseph Alois Schumpeter, two of the most prominent economists of the 20th century, are often pitched against one another in the literature on competition and innovation. In this debate, Arrow is painted as a defender of competition for innovation, while the so-called ‘Schumpeterian thesis’ reduces the latter to a monopoly-loving strawman. Nevertheless, their understanding of innovation may not have been as distinct as competition economists would have us believe. 

This talk examines Arrow’s work in the context of the famous Microsoft antitrust litigation of the late 1990s, US v Microsoft. In an affidavit submitted to the Department of Justice during the case, Arrow approached technological change as a long- term phenomenon and treated technological revolutions separately from other types of innovation – quite similar to Schumpeter’s understanding of innovation. As the affidavit also shows, Arrow did not believe that technological revolutions at the scale of the internet could be orchestrated by antitrust policy – a feeling Schumpeter had shared, albeit over half a century before Arrow. This talk brings together some of Schumpeter and Arrow’s writings to demonstrate the parallels between their approaches to innovation. In so doing, it aims to debunk the caricaturised portrayals of the two economists often found in the competition law and economics literature. It also aims to bring Arrow’s affidavit into light since the affidavit can contribute to a better understanding of technological change in antitrust policy.