French economist Philippe Aghion has long been associated with the model of growth through creative destruction – the so-called “Schumpeterian Paradigm”. In The Power of Creative Destruction he, together with his two French co-authors, seeks to summarise this paradigm and explain its implications. The authors believe, surely correctly, that “innovation and the diffusion of knowledge are at the heart of the growth process” (page 4) and they thus focus on the causes, impediments and consequences of innovation.
The scope of the book is vast and its pace breath-taking. The authors state that their purpose is to “Penetrate some of the great historical enigmas associated with the process of world growth… Revisit the great debates over innovation and growth in developed nations… [and] Rethink the role of the state and civil society” (page 2). The history of the world’s economy is reviewed in 20 pages and is followed by 13 further chapters dealing with issues as diverse as whether we should fear technological revolutions, whether competition is a good thing, the impact of innovation on inequality, whether developing countries can bypass industrialisation by moving immediately to a service economy, the impact of creative destruction on health and happiness, managing globalisation, the role of the state and the “golden triangle” of markets, state, and civil society. All this in 319 pages!
Inevitably, the result is broad but shallow and the reader’s reaction to it will depend upon what they are looking for. Those seeking insights based on new original research or indepth analysis of issues and carefully argued conclusions should look elsewhere, perhaps to some of Philippe Aghion’s other works; on the other hand, those who wish to think about a broad range of issues and to have some previously unexamined assumptions challenged will find the book stimulating and, probably, an inspiration for further exploration.
It is based on the authors’ lectures at the College de France and it could well serve as a student text. However, the preface strongly suggests that the real target audience is policymakers: it contains much advice, even instructions, for Western Governments, of which perhaps the most stern is that “they must accompany the process of creative destruction, without obstructing it” (page vii).
The book was written between late 2019 and mid 2020 against the background of the Covid pandemic. The authors suggest that the pandemic has acted “as a wake-up call by revealing deeper problems that plague capitalism” (page vii) and they argue that what is required is a reformation of capitalism. So many recent books have adopted this starting point that there is a danger of it being greeted with a yawn and the expectation that what will follow will comprise the standard left-wing prescription of more government intervention and redistributive taxation. However, as the emphasis on creative destruction should suggest, this is not what Philippe Aghion and his colleagues advocate.
They see a role for the state that is larger than that which many free market economists would support. In particular, they see a role for it in financing and generally promoting the development of certain technologies that might otherwise not be developed (particularly those associated with the transition to a low carbon economy). However, they accept that “Objections to industrial policy from the 1950s through to the 1980s are difficult to counter, all the more because later work, such as that of Jean-Jacques Laffont and Jean Tirole, pointed to several sources of inefficiency in state intervention” (page 68). In particular, they recognise that national industrial policy has the effect of limiting or distorting competition, that governments are not great at picking winners and that governments may be receptive to lobbying by large incumbent firms. Consequently, they recognise that we must look primarily to the market rather than to governments to secure economic prosperity.
Some parts of The Power of Creative Destruction are basic, even to the point of distortion. For example, the description of the drivers of the industrial revolution is hopelessly superficial and does not even consider the role of beliefs, ideas and culture (which Deirdre McClosky has analysed so carefully in Bourgeois Equality). There are also some irritating inaccuracies in the book. For example, James Watt did not invent the steam engine (as is stated on page 40), the wheel was not invented in China (as is wrongly stated on page 20) but most likely in Eastern Europe and there was no “year zero” (which is bizarrely referred to on both page 22 and page 26). However, these errors are minor and the book contains a lot that is of real substance. Most readers will, at the very least, find thought provoking material within it.
For example, the authors draw attention to a number of studies that should at least cause pause for thought among those who see greater equality and better social outcomes coming primarily from government action: a comparison among different American states that suggests that innovation increases “both the share of income of the richest 1% (top income in equality) and social mobility” (page 82); other evidence points to a very strong positive correlation between job creation and job destruction (i.e. that the preservation of “zombie” corporations is an obstacle to the creation of new jobs; page 214ff); and evidence from Finland suggests that parental influence remains a decisive factor in whether a child will become an innovator even in a country where the educational system is highly egalitarian and of high quality (page 199ff).
Other parts of the book presents challenges to those who favour less government intervention. For example, the authors present evidence that “strongly suggests that as a firm gains greater market power and moves towards market dominance, it focuses its efforts less and less on innovation and more and more on political connections and lobbying” (page 92). There are also some tantalisingly brief policy suggestions, perhaps the most interesting of which is the idea (originally put forward by Richard Gilbert in Innovation Matters) that antitrust authorities need to change the way that they look at mergers by not using the definition of existing markets as their loadstar and instead evaluating the extent to which a merger could discourage the entry of new innovative firms (page 123).
Much of the evidence supporting these assertions and suggestions is set out in innumerable graphs. These are interesting and informative but a few words of warning need to be sounded: the graphs require careful study and this is rendered more difficult in some cases by the inadequacies of their labelling; furthermore, in a number of cases, it is difficult properly to understand and evaluate the relevant graph without access to the book or paper from which it has been extracted.
More generally readers need to be careful that the readability of the text does not cause them to be swept along by the authors and fail to spot the points at which the evidence presented fails adequately to support the argument being made. This is not to say that the relevant arguments are wrong but merely to warn that, in many cases, the authors have not proved that they are right.
That said, The Power of Creative Destruction is a good read: it avoids overly technical language, does not assume a lot of prior knowledge, has been well translated by Jodie Cohen-Tanugi and clearly presents important ideas.
“The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations” by Philippe Aghion, Céline Antonin and Simon Bunel was published in 2021 by The Belknap Press of Harvard University Press (ISBN-13:9780674971165).319pp
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.