The first part of this article develops a critique of Anthony Downs’ An Economic Theory of Democracy and, more generally, of rational choice theories of party competition. Drawing on and adapting Joseph Schumpeter's critique of general equilibrium theory, it is argued that the use of the equilibrium method within rational choice theory precludes the analysis of policy innovation. Having developed this theoretical argument, the second part of the article offers a ‘Schumpeterian’ account of the dynamics of British electoral competition between 1950 and 2005. Drawing on an analysis of 1,984 policy commitments within Conservative, Labour and Liberal general election manifestos, the fate of 758 policy innovations is tracked. Policy innovation, it is argued, generates an ongoing process of divergence and convergence between the political parties very different to that predicted within rational choice equilibrium analysis.