YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 6

SCHUMPETERIAN PROFITS
AND THE ALCHEMIST FALLACY

William D. Nordhaus

April 2005

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. The paper derives the underlying equations for Schumpeterian profits. It then estimates the value of these profits for the non-farm business economy and for major industries. It concludes that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. These results indicate that the bubble of new-economy stocks in the 1990s resulted from the alchemist fallacy.

Keywords: Shumpeter, Profits, Innovation

JEL Classifications: 030, 031, 04