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Is creative destruction more helpful or harmful? Three economists discuss harnessing its power for good

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Podcast & Video

Today’s Hub Dialogue is with three economists and co-authors of the new book, The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations. Leading economist Philippe Aghion and his colleagues Céline Antonin and Simon Bunel published the book in April 2021 with the Harvard University Press. It has since received considerable acclaim for its deep thinking on innovation, technology, inequality, and other major economic questions. 

This conversation has been revised and edited for length and clarity.

The importance of creative destruction

SEAN SPEER: I’m honoured to be joined by Philippe Aghion and his colleagues Céline Antonin and Simon Bunel to discuss their thought-provoking, new book, The Power of Creative Destruction

My first question is a basic one. Why is creative destruction important? And can you have one without the other or, by the nature of how markets function, does the creative part necessarily involve the destructive part? 

PHILIPPE AGHION: Maybe I can have a start on this one. I think you can have destruction without creation. We’ve seen, for example, the Taliban destroying old vestiges. I don’t see much creation there. But I think any significant innovation, any significant advance, means that you have to change habits and the current ways of organizing things. You have to in effect threaten vested interests.

As we argue in the book, creative destruction is in the nature of progress: the progress of knowledge and the progress of society. The takeoff of growth in modern history is very much associated with the revolution of the steam engine which replaced waterpower. It wasn’t obvious at the time that the steam engine could replace waterpower but when it did, it made worldwide growth take off. 

Then there’s the separate yet related question: why did the growth takeoff occur in Europe in 1820 and not somewhere else before? Why not in China for instance where you had so many inventions since the middle age? We believe that in these other societies you had vested interests, whether economic or political, that were scared that new inventions would threaten their power. So they sought to block them. That was less of an issue in places like Europe where competition between European countries made it more difficult for any single government to prevent innovation and progress, as Joel Mockyr has argued. 

SIMON BUNEL: I totally agree with what Philippe said, and maybe to build on it: we observe an antagonism between the necessity to incentivize creation but also to minimize the negative consequences of any destruction that occurs during the process. There’s a role for government to do both. 

The knowledge economy

SEAN SPEER: As you said, Philippe, the book tracks the historical evolution of innovation and this process of creative destruction over a long period of time. How has the rise of the so-called “knowledge economy”, including the internet and computing, affected Schumpeter’s insights about creative destruction? Does the framework apply just the same to an “economy of thoughts” as it once did to an “economy of things”?

PHILIPPE AGHION: I think Schumpeter’s basic fear was that yesterday’s innovators would prevent subsequent innovation or would discourage subsequent innovation. And indeed we explain in chapter 6 of the book on secular stagnation, that the IT revolution has favoured the emergence of superstar firms. At first, the emergence of these superstar firms acted as an engine of growth: productivity growth increased in the U.S. between 1995 and 2005. But subsequently, once the superstar firms became pervasive, and invaded all sectors of the U.S. economy, they ended up inhibiting and stalling innovations by non-superstar firms.  

Yet the reason that we depart from Schumpeter in the book is that we reject fatalism. We don’t accept the notion that yesterday’s innovators are bound to turn into conglomerates that will prevent subsequent innovation, and that the capitalist system is doomed and there’s nothing that we can do about it. 

In fact, in our analysis of secular stagnation, we show that the problem in the U.S. and in other developed countries is that competition policy did not adapt to the digital era. We allowed superstar firms to do mergers and acquisitions without looking at the effects that might have on subsequent market entry and subsequent innovation. But if we managed to reform competition policy, a bit the way that Biden is doing it in the U.S., for instance, then hopefully we can at least partly deal with the stagnation problem: we can avert the possible prediction that super startups eventually come to stall subsequent growth. In other words, if policymakers manage to adapt competition policy to the new technological revolutions (such as IT and AI), then one can turn these revolutions into true engines of growth rather than impediments to growth. 

In short, a key difference between Schumpeter and us is that we are “Gramscian” optimists where he is more of a pessimist: we believe there are forces there that can be mobilized, and if you know how to use them, you can truly avert the danger that yesterday’s innovators turn into entrenched forces that will stall future innovation.

CÉLINE ANTONIN: It’s also this idea that we developed in our last chapter: the idea of a triangle whose three vertices are civil society, the market, and the state. It is the combination of the three, which enables us also to overcome this creative destruction, which, as Philippe just said before, is kind of a natural and evolutionary mechanism. There’s a Darwinian aspect to creative destruction. Innovation works like this, and we as the state and civil society, want to be able to cope with this natural mechanism and to make it a force for good.

That’s where public policy is so important. It touches on competition policy like Philippe said but also on the labour market, for instance, with job training and reskilling. All these regulating mechanisms enable us to live with creative destruction, to take what is positive in innovation, and at the same time to make a society where there is always more well-being for people because that’s the aim at the end.

PHILIPPE AGHION: So, in other words, creative destruction is a force that can lead you very far, but it can also produce bad outcomes. Hence you need the state and civil society to make sure that the power of creative destruction will be harnessed to achieve greener and more inclusive growth. Creative destruction can lead to the best or the worst depending on whether you have the appropriate competition policy, education policy, and labour market policy. That requires the state, but also civil society because the state can be captured by private interests. What will limit the scope for the state to be captured by private interest is the intervention of civil society, and that’s why you need the triangle between firms (who innovate), the state (which can regulate), and civil society (which monitors the state).

SIMON BUNEL: From this point of view, the book is relatively in line with Tocqueville’s thinking: civil society has an important role to play because it contributes to preventing the state from being captured by private interests.

The role of the state

SEAN SPEER: My next question builds on your last answer, Céline, about the role of the state in civil society to harness the forces of creative destruction. Your book talks about what you describe as “an optimism of will as a key contributor to the positive feedback loop of growth, innovation, and collective optimism.” What do you mean by it? And how can we cultivate such an optimism of will in a moment of attenuation and polarization and nagging questions about state capacity?

PHILIPPE AGHION: What we mean is that there are forces that potentially can help overcome the danger that vested interests prevent new innovation, and there are forces that can also help to reconcile creative destruction with inclusiveness and greenness as well. Now, granted that green innovation is very important—we have a whole chapter on that—creative destruction is part of the solution because we know that incumbent firms that used to innovate in dirty technologies will keep innovating in dirty technology in the future.

But there’s something bigger going on here. COVID revealed weaknesses of capitalism, which differ across countries. It revealed, on one hand, the broken social model in the U.S., and on other hand an inadequate innovation system in Europe. Can you have a capitalism that is both innovative like in the U.S. and protective like in Denmark, for example? Some people believe that you cannot. That if you choose to be innovative, it’s at the expense of inclusivity, or if you choose to be inclusive it’s at the expense of being innovative. We disagree. We identify policies, like labor market policy, education, and competition, which make you both more innovative and more inclusive. 

The key is to identify the forces and policies that push in a desired direction. Take green innovation for example. The state can use a carbon tax and industrial policy to incentivize green investment. For us, it’s important to have a clear idea of things as a first step towards mobilizing resources. What do you want to achieve? What’s the goal? Answering these questions can make a big difference. That’s what we call optimism. 

It’s not the idea that anything good will just happen. But it’s the notion that we can influence forces in the economy and society. You can have an effect on policymaking and try to make the world better. That’s the optimism of will. 

SEAN SPEER: I read it as a push back against the kind of fatalism that is taking over our discourse about the economy and public policy. One of the flaws of neoliberalism is a tendency to assume that we have no agency over these trends in our economy. In fact, we do have agency, and I read the book as a restoration of political economy—the recognition that public policy invariably shapes market outcomes.  

PHILIPPE AGHION: Yes. We mention in the book, for example, the Defense Advanced Research Projects Agency (DARPA) which was launched when the U.S. was racing against the Soviet Union in defence and space, and they realized that there were areas where they needed to achieve some strategic missions. They needed to advance technological development in some key areas. It worked. Within a short period, they put a man in space. They set the goal and then brought the basic research and coordinated resources and the private sector to make it happen. That was due in large part to DARPA. 

Today similarly we see the progress on the mRNA vaccines was driven in part by the Biomedical Advanced Research and Development Agency (BARDA). It helped to turn this new technology into mass production of vaccines within a year. In these examples, it was not just laissez-faire. The state took a big step there. It’s very important to understand that. 

But they did it in a way that was not anti-competition. Because what’s great about DARPA and BARDA is that even though it’s top-down in the sense that the money comes from the ministry, they also have highly autonomous team leaders. These team leaders can elicit competing projects, public-private partnerships, and new and different ways to deliver on the particular technological goal. That’s what’s great with DARPA: it’s this mixture of top-down and bottom-up. There’s room for decentralized and innovation but the state has a role too. It cannot just be purely laissez-faire. There’s a role for the state as an investor, insurer, and regulator. 

What about the losers?

SEAN SPEER: We’ve spoken a lot about the creative part of creative destruction, but there’s also the disruptive part and the industries in the firms and the people affected. In your historical research, did you identify a typical adjustment path or pattern for dislocated industries, firms, and workers? And what should policymakers be doing to help those who are the so-called losers of this dynamic process?

PHILIPPE AGHION: In chapter 11 we contrast the U.S. and Danish social models. In Denmark, when you lose your employment, there is no negative effect on health, and no increase in mortality or things like that you have in the U.S., because they invented a system in Denmark where when you lose your job, you receive an income support payment for two years that reflects 90 percent of your salary. The state helps you to retrain and to find a new job. But of course, they tell you, “If you don’t accept new jobs, then you lose your unemployment insurance.” So, it’s a system that works very well. They found a system that makes creative destruction work much more efficiently and better, which is productive. 

Also important is the education system. You manage creative destruction much better if you have a well-educated labour force: at school, we do not just acquire knowledge, but we also learn to learn, and therefore we learn to become more adaptable. 

There’s also a role for countercyclical policies, whereby the government helps consumers and firms during recessions. A good example is what the Obama administration did to help General Motors survive and restructure during the 2008 financial crisis. The state has a key role to play to help with these transitions to minimize the harms to workers and to help them transition into new and different opportunities. 

SIMON BUNEL: As Philippe mentioned, education and unemployment insurance are very relevant policies for the so-called “losers” of the process, in addition to redistribution policies. Indeed, inequality is not only about the top 10 percent revenue share, but it’s also about intergenerational social mobility—the fact that wherever you are born, whatever is the education of your parents, you should have the opportunity to benefit from the creative destruction process. That is why even if redistribution policies are crucial they should not be the unique policy tool to deal with the social consequences of creative destruction.

CÉLINE ANTONIN: Yes, just maybe to rebound on your question, because you were asking if there were times in the past when we experienced these big changes and what the consequences were for the economy and society. We’ve seen that in the past when each industrial revolution took place, many economists and other scholars reported the fear that the number of workers might collapse and that there might be massive unemployment. Keynes reported this in the thirties, as well as Leontief twenty years later. Every time there were these big industrial revolutions that were the prediction, but it didn’t actually happen. It doesn’t mean that it isn’t important to manage the transition—it certainly is because the transition can be brutal—but the idea that creative destruction and industrial revolution will end employment has been a longstanding assumption and a wrong one.

So, as Philippe explained, the role of the state is to manage this transition. And this will be all the more important since we are at the beginning of a new revolution based on artificial intelligence, big data, and the Internet of things. Some authors predicted that 47 percent of jobs in the U.S. were at risk of automation in the next 20 years. Even though these predictions appear very unrealistic, we cannot condone the fact that artificial intelligence will displace or change deeply the nature of many jobs, especially in the service sector. Therefore initial and vocational training policies will be crucial to avoid social breakage.

The energy transition

SEAN SPEER: In Canada, our government has passed legislation establishing the goal of net-zero emissions by 2050. Yet the oil and gas industry is a major source of employment and has been a bulwark against job polarization for the past two decades. It’s important therefore that we’re thinking carefully about labour transition in general and in the context of energy transition in particular. 

PHILIPPE AGHION: Yes. That speaks to another part of the book, in which we discuss the energy transition towards cleaner sources of energy (renewables) when intermediate sources of energy, less desirable than renewables but yet less polluting than coal, are available. A good example is gas or nuclear energy. You don’t want to shut down gas or nuclear at once. Instead, you want to move from coal to gas or nuclear while you invest in making better sources of energy cheaper and more easily accessible. The goal must be to move away from coal as much as you can and then use gas for a while as a transition to investing massively in new innovation, in nuclear fusion, photovoltaic, aeolian, and other renewable energy You should not shut down everything but renewable right away. The challenge is to manage the energy transition so as to make use of the intermediate sources of energy while not discouraging research and innovation in cleaner sources of energy. Indeed there is the danger that moving into intermediate sources of energy might divert research resources from innovating in cleaner sources of energy. For that purpose, you need both, taxes and R&D subsidies. 

CÉLINE ANTONIN: Yes. Not to get caught into the trap. 

PHILIPPE AGHION: The middle energy trap. We have the middle-income trap which we describe in chapter 7, but we also have the middle energy trap. 

But I wanted to go back to a previous question. The reason why the technological revolutions—the steam engine, electricity, and more recently IT—did not lead to mass unemployment is the following: true, each of these revolutions entailed some substitution of manpower by machines; but at the same time they made firms become more productive, and because they became more productive, their market size worldwide increased, and therefore also the demand for labour in those firms. In other words, technological revolutions generated productivity effects which more than counteracted the substitution of manpower by machines.

SEAN SPEER: Well Phillipe, Simon, and Céline, this has been a fascinating conversation. The book is The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations. Thanks for joining me. 

PHILIPPE AGHION: Thank you so much for inviting us. 

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