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On Thursday, June 24, Philippe Aghion joined Markus’ Academy for a lecture on his book “The Power of Creative Destruction”. His book discusses the lessons of COVID for rethinking capitalism. Aghion is a Professor at the College de France and at the London School of Economics, and a fellow of the Econometric Society and of the American Academy of Arts and Sciences.

Watch the full presentation below and download the presentation slides. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

  • [0:00] Creative destruction is the process whereby new innovations displace old technologies. Basic “Schumpeterian growth” paradigm is based on the fact that long-run growth is driven by the cumulative process of innovation, innovations resulting from entrepreneurial activities motivated by the prospect of innovation rents, and creative destruction. The contradiction: innovators are motivated by monopoly rents, but those rents can be used ex post to prevent future innovations and block new entry. The book is about why Schumpeter’s pessimistic prophecy is untrue, and advocates for an “optimism of the will.” 
  • [13:34] Some historical enigmas are discussed in the book: industrial take off, secular stagnation, middle income traps, and sources and dynamics of inequality. The book uses the lens of creative destruction to revisit these enigmas, question common wisdoms, and rethink the future of capitalism. 
  • [14:03] Industrial take off never lasted for a long time, but in 1820 the major take off occurred in Europe. This is because of institutions that would favor cumulative innovation such as printing, postage services, and the encyclopedia, encouraging people to build knowledge. It did not occur in China because of creative destruction caused by the emperor. 
  • [19:05] Secular stagnation can be viewed by looking at the rise and decline of TFP Growth, especially at the times of the IT and the AI revolutions. Possible explanations can be drawn from the fact that growth occurred at different times for IT producing and IT using sectors. Measurement tends to explain why we underestimate growth and overestimate inflation, but does not explain more than 10% of the decline in growth. Aghion suggests that the IT revolution favored the development of superstar firms. We may need to adopt competition police in the digital era. 
  • [25:32] The middle income trap is well exemplified in Argentina, as between 1870 and 1930, the per capita GDP remained at a constant ratio with the US, but declined since then. People use the idea that Argentina may have been doing well up to a certain point, but then stopped doing as well. 
  • [28:02] The sources and dynamics of inequality are interesting to study, as one source of inequality is innovation. Innovation, however, is of course not the only source. A paper written by Aghion and others in 2018 shows the causal link from innovation into inequality. 
  • [37:27] Part of the book’s task is questioning common wisdoms, such as taxing robots to protect employment. However, this is not necessarily true as when looking at the correlation between automation and employment, because with a positive elasticity, firms that automate seem to create more employment. When a firm automates, the prices go down, and prices going down mean that sales increase, so the productivity effect more than counteracts the substitution effect. Thus taxing robots would stifle employment, which would be worse for the economy. Even if automation steals employment from other firms, they are more likely to be abroad in open trading scenarios, meaning that it will not harm the domestic economy. 
  • [43:47] Another conventional wisdom questioned is whether taxation is the only instrument to make growth more inclusive. Aghion believes in taxation to support many public goods, but believes that taxes should not discourage innovation. Innovation creates jobs, and can help social mobility. 
  • [48:07] Although some may believe that protectionism is the way to regain control of the value chains, this is not the case. As seen with Germany and France’s exports and imports of anti-Covid products, Germany was investing and innovating. This meant that France ended up losing out on trade and falling behind as a leader. Innovation is the way to regain leadership, more than by trade wars and retaliation. 
  • [1:00:40] Zero or negative growth is not the best response to climate change. Rather, encouraging green innovation would be better in the long-run than preventing growth.
  • [1:05:28] Rethinking capitalism with Covid as a revelator of the broken social model in the US. The European ecosystem does not favor innovation, but workers in Denmark do not see the same uptick in use of antidepressants or heart attacks following job loss. The loss of employment in the US often means the loss of health insurance. Both increased during Covid, along with risk of poverty. Innovation was higher in the US, partially because of greater funding to universities. Thus, an ideal capitalism would have both American innovation and European protection.