How ‘creative destruction’ drives innovation and prosperity
This defence of capitalism by Philippe Aghion and collaborators also stresses the need for regulation and a social safety net
Martin Wolf
Someone born in 1600 would find the world of 1800 quite familiar.
But someone born in 1800 would find today’s world beyond comprehension.
What explains this transformation?
The answer is: market capitalism.
Why has market capitalism proved so dynamic?
The answer is that it contains within it a powerful engine of change.
That is not just economic freedom, though this matters.
Nor is it science and technology, though that matters too.
It is what the great Austrian economist Joseph Schumpeter called “creative destruction”.
Philippe Aghion, a professor at the Collège de France and the London School of Economics, has spent a distinguished career bringing Schumpeter’s model into the rigorous theoretical and empirical world of modern economics.
In this important book, written with two collaborators, Céline Antonin and Simon Bunel, he brings his work to the wider public.
The result, The Power of Creative Destruction, is lucid, empirically grounded, wide-ranging and well-argued.
It is also rather dry.
But it does give a wonderful overview of the terrain.
As the authors explain, the model of growth through creative destruction has three elements.
First, “innovation and diffusion of knowledge are at the heart of the growth process”.
Growth is cumulative, because the innovators of today stand on the shoulders of all the scientists and technologists who went before them.
Second, innovators are motivated by the possibility of lucrative monopoly.
Those rents need to be protected, through property rights, including rights over intellectual property.
Finally, innovation threatens incumbents, who will fight to repress it.
Thus, “On the one hand, rents are necessary to reward innovation; on the other hand, yesterday’s innovators must not use their rents to impede new innovations.”
Again, in assessing today’s debate on why growth has been persistently disappointing, the authors argue that a competition policy that protects entrants against incumbents is essential.
The book reports a vast quantity of empirical research, most of it recent, which shows how creative destruction works in practice.
It shows, for example, that new businesses create a large proportion of new jobs.
Many of these businesses and jobs then disappear.
But the more intense this Darwinian process, the faster the economy grows.
The authors also note the distinction between “catch-up” economies, such as China, and frontier economies, such as the US.
In the former, growth is more about investing in existing ways of doing things.
But frontier economies can only grow by innovating.
If incumbents are allowed to block competitors, a frontier economy is bound to stagnate.
On the well-known “middle-income” trap, the book argues that the key failure of such countries is to create the institutions that promote frontier innovation.
It also argues that in today’s circumstances, in which sophisticated services can be technologically dynamic and internationally traded, it might be possible to develop without industrialising, as India has been doing.
Innovation is also path-dependent: incumbents build on what they know, while newcomers are willing to start afresh.
If governments want to ensure rapid innovation in new directions, they need to motivate new players who are not trapped by past successes.
This is why the emergence of new industrial sectors almost always means the emergence of new companies.
For this reason, a necessary condition for creative destruction is a financial system able and willing to invest in new companies.
The book explains how the US benefits from a skilled venture capital industry, which knows how to nurture nascent businesses, and from a large base of institutional investors, who will support these companies as they grow.
The authors also argue that the impact of creative destruction is complex.
The additional competition spurs innovation and productivity in frontier businesses, but kills off weaker ones.
New fortunes tend to increase top incomes, worsening that aspect of inequality.
But, they note, this is far better than the higher inequality created by lobbying directed at thwarting competitors.
On the great environmental challenges of our time, the authors insist that “de-growth” (a popular cause nowadays) is practically and politically unworkable.
We can only innovate our way out of our dilemmas.
But the right sort of innovation will not happen without guidance from incentives, regulation, government spending and pressure from civil society.
Of our era’s great environmental challenges, the authors insist that ‘de-growth’ is unworkable.
We can only innovate our way out of our dilemmas
Globalisation is yet another vexed issue.
The book concludes that protection is not the right answer to more competition from imports.
The better response is to support innovation and so promote new and dynamic businesses over older, uncompetitive ones.
Yet the political acceptability of this depends on the existence of a safety net that is not tied to specific jobs.
More broadly, there is no trade-off between creative destruction and basic security for the population.
On the contrary, people will be more willing to accept the former, if they enjoy the latter.
The Danish model of “flexicurity” is, they suggest, the best approach.
Crucially, the success of creative destruction depends on the existence of an effective, non-corrupt, law-governed, competition-promoting state.
This is possible only in a constitutional democracy, with an active civil society, independent institutions and free media.
Such a state plays a central role as macroeconomic stabiliser, subsidiser of basic science, promoter of applied research and development, investor in risky new technologies, financier of education and social insurance, and promoter of free competition.
This is, in brief, a subtle analysis of what has made capitalism such an incomparably successful — but also disruptive — economic system.
The system’s success depends on striking a balance not only between the competitive economy and social stability but also between letting capitalism rip and protecting it from the predatory capitalists.
Schumpeter himself feared capitalism would perish.
So far, he seems to have been wrong.
Another possibility is that democracy will die, as plutocracy allies with demagoguery.
Either way, the civilisations of the contemporary high-income democracies would perish.
By promoting a better understanding, this book could, with wisdom and luck, help us avoid that fate.
The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations, by Philippe Aghion, Céline Antonin and Simon Bunel, translated by Jodie Cohen-Tanugi, Belknap Press, RRP$35/ £28.95/ €31.50, 400 pages
Martin Wolf is the FT’s chief economics commentator
How ‘creative destruction’ drives innovation and prosperity | Financial Times (ft.com)
0 comments:
Publicar un comentario