How Schumpeter would view the economy today
The power of creative destruction. By Philippe Aghion, Céline Antonin and Simon Bunel. Translated by Jodie Cohen-Tanugi. Belknap Press; 400 pages; $ 35 and £ 28.95
JOSEPH SCHUMPETER thought capitalism was doomed. Incumbent companies would become too powerful, leading to corruption and, eventually, socialism. His mid-20th century pessimism has become fashionable today as societies grapple with inequality, climate change and tech giants. Still, some of Schumpeter’s professional heirs are optimistic. In “The Power of Creative Destruction”, Philippe Aghion, Céline Antonin and Simon Bunel, three economists, apply his most powerful idea to contemporary debates in their discipline. The result is radical, authoritarian and, for the time, remarkably optimistic.
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Basic models of growth focus on capital accumulation, with technological progress and productivity advances being assumed but poorly explained. The Schumpeterian paradigm of creative destruction, of which Mr. Aghion is a modern champion, places innovation at the heart. From this perspective, ideas stimulate long-term growth. People are motivated to innovate by the prospect of monopoly rents (an aberration in a simplistic economy). But innovation also destroys rents by displacing the previous generation of entrepreneurs.
Take development. Critics of free markets like to argue that the rapid growth of Asian economies such as South Korea at the end of the 20th century proves the value of state intervention, given that these places have often put companies shielded from competition and subsidized their exports. The Schumpeterian paradigm emphasizes knowledge. When countries are far from the innovation frontier, the important thing is to learn how to emulate the best, what government and business could manage together. But the economies must then become innovative themselves. In South Korea, this was done by chance. In the late 1990s, the Asian financial crisis went bankrupt chaebols (industrial conglomerates) and exposed others to competition in part because of policies imposed as a condition of IMF bailout. The happy result has been an economy that produces ideas.
The authors are not market fundamentalists. They emphasize that innovation is self-perpetuating. Advances in one area, like internal combustion engines, will naturally lead to more – and the state can push companies on the right track. To fight climate change, they recommend subsidies for green innovation in addition to taxing carbon emissions. They are not afraid to call for industrial policy in sectors such as aerospace, where up-front costs of entry are high and demand is uncertain (meaning the private sector has an incentive to wait for someone. ‘someone else innovates first). It is essential, they insist, that governments always encourage newcomers rather than hinder them.
What about labor markets and inequalities? The authors are skeptical of contemporary gloom and gloom. Automation creates more jobs than it eliminates, they say. Innovation pays off all the way up, but doesn’t appear to increase overall inequality, as measured by the Gini coefficient – a subtle retort to those who think billionaire success is America’s biggest problem. Creative destruction is a force for social mobility: California elites have higher incomes than Alabama’s, but the poorest also have more opportunities. Capital income tax cuts, like those in Sweden in the early 1990s, spur innovation and growth.
The inequalities resulting from lobbying and regulatory capture, however, are cancerous: they lead to slower growth and less social mobility. The authors also call for an “insurance state” to redistribute wealth and protect workers against the vicissitudes of a dynamic economy. And they worry about the runaway success of tech giants stifling ingenuity, arguing that competition regulators should be as concerned with the incentive to generate ideas as they are with companies’ market share.
Schumpeter was an outsider among the Keynesian economists of his day. His ideas were rooted in the real world of business, not in the Ivory Tower. This book, on the other hand, is in part a defense of economics (and third-way liberalism). Its brevity in relation to its ambition means that it is not always convincing; sometimes the evidence presented is thin. But the overall argument is compelling, and with the creative destruction falling from political favor, it bears a trace of Schumpeterian subversion. ■
This article appeared in the Books and Arts section of print publishing under the title “Innovate to accumulate”