COVID-19, Schumpeter, and the Size of the Market

During the first quarter of 2020, the global economy was rapidly hit by a pandemic which led to state-wide lockdowns and the worst economic crisis since the World War II. Both the supply and the demand sides of economies were severely affected, followed by a dramatic dip in global GDP. As a response, policymakers introduced an unprecedented number of interventions to back up employees, firms, and industries to counteract the collapsing markets. Our main objective is to explore how these fundamental policy interventions are likely to influence the future potential and functioning of markets. Historically swings in the pendulum favoring either market-based solutions or more regulated public sectors have coincided with disruptive crises. The overall question is what will happen during post-COVID-19, will governments withdraw their crisis policies and how will a possible retreat be organized? Are we entering an era of permanently increased governmental interventions? More precisely, we identify three specific threats to the market-oriented economy: the extension and development of governmental expenditures, protectionistic measures, and the level of state aid and the degree of competition at markets. We are particularly interested in the effect of the COVID-19 measures, and their possible extension, on Schumpeterian dynamics, both in terms of entry and exits (Schumpeter I) and how the position of large firms will be affected (Schumpeter II).