The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations, by Philippe Aghion, Céline Antonin, and Simon Bunel (Harvard University Press, 400 pp., $35)
“Ambitious” was my recurring judgment as I read through this marvelous book, which strives to shed light on, and to answer, just about every major political-economic question of the day. It’s hardly surprising that Philippe Aghion, Céline Antonin, and Simon Bunel fail to provide all the answers. That would take a kind of magic that lies outside human capability. But their ambition is welcome nonetheless, for it offers us valuable insight on some crucial matters.
Throughout, the authors rely on the theoretical construct in their title: “creative destruction.” Though they speak of a “new paradigm,” they readily acknowledge their debt to Joseph Schumpeter, the Austrian economist who first advanced the concept and coined the term in his 1942 book, Capitalism, Socialism, and Democracy. While the underlying thought is familiar to most economists and some general readers, the authors’ treatment offers remarkable clarity. I was reminded of Alexander Pope’s famous definition of wit: “what oft was thought but ne’er so well expressed.”
The opening chapter sets the tone. The authors note three succinct pillars supporting Schumpeter’s thought. First, innovation, bolstered by the wide diffusion of knowledge, lies at the heart of any economy’s growth. Second, societies can maximize innovation by offering incentives to those who assume the risk of beginning something new—notably by protecting private property, especially intellectual property. Protections like patents and copyrights not only enable innovators to enjoy the returns from their innovations but also encourage them to spread their ideas throughout society by removing the fear that they will be usurped. Third, because the creators of the new often destroy the old, prosperous societies must prevent established players from blocking the innovations that would supplant them. (A later chapter highlights a fourth pillar: an active financial sector that facilitates bringing innovations to market.)
Each succeeding chapter takes up major political-economic questions, providing insight and policy guidance into each by using this strong theoretical framework to organize an impressive array of statistical evidence marshalled from a broad reading of economic literature. The authors take politics into account as well as economics, and they draw on data from several economies over different time periods. As a result, their conclusions take on an almost universal applicability.
Aghion, Antonin, and Bunel focus first on the explosion of growth accompanying Great Britain’s industrial revolution beginning in the late eighteenth century. Their discussion here forms the base for an examination of more modern questions of economic development, such as why some economies stall while others become world leaders, and whether an economy can skip the industrialization phase (theoretically yes, but unlikely). Other chapters shed light on questions of globalization, competition (between both companies and countries), health, happiness, and economic inequality (both within societies and between them). At each turn, the authors examine ways to mitigate the collateral damage of the growth process without impeding it. In the final chapters, they try to tie all the threads together, offering thoughts on “the future of capitalism” and the most effective balance of economic organization—what they call the “golden triangle” between the state, markets, and civil society.
In their chapter on the Industrial Revolution, the authors demonstrate the power of Schumpeter’s thought by looking at political developments. This is a novel approach—a departure from the typical, almost exclusive focus on capital accumulation that characterizes explanations for development found not only in standard economic texts but also even in Marxist thinking. The authors note that Parliament’s growing dominance in England during the eighteenth century established one of the pillars of creative destruction: encouraging innovation by securing property rights and protecting patents. Meantime, the development of a reliable postal service and the associated growth of learned societies fostered the diffusion of knowledge and increased the interaction of science and technology. The development of finance, fostered by the same changes, brought the resulting innovations to bear in everyday commercial life. The authors use a variety of statistical sources to track progress in Britain over time and then throughout Western Europe, as the intense competition between European states spread the changes far and wide. Their estimates show that, after stagnating for centuries, per capita real incomes tripled over the course of the nineteenth century and have risen by a factor of ten since then.
The chapter on income inequality relies on the same theoretical structure but a still-subtler application of statistics to capture the interaction of several conflicting economic influences. Their data clearly show that innovations and the patents that protect them greatly enrich innovators and contribute to income inequality—but it is equally clear that innovation lifts all incomes and increases social mobility across the board. Thus the most innovative states exhibit not only the most extreme income inequality but also the greatest social mobility. The authors’ analysis of firm-by-firm data also shows that the most innovative companies, being the most productive, pay higher wages than their competitors. This applies in particular to these businesses’ lower-wage workers, who are better off than their counterparts at less-productive firms.
The authors conclude that income inequality arises less from innovation itself than from efforts by established players to protect their positions by blocking innovation. These anti-innovation efforts slow the growth of all incomes except for those of the entrenched companies. Using several statistical sources, the authors show that lobbying lies at the heart of such protectionism, and that firms that spend the most on lobbying have both the lowest productivity and the highest profits. The best remedy for income inequality, the authors conclude, is for government to mitigate the effectiveness of lobbying. Indeed, this approach is far superior to the innovation-discouraging use of taxation to redistribute income. For instance, they note that a 1 percent increase in the top individual income-tax rate prompts a 4 percent drop in patents filed, while a 1 percent hike in corporate tax rates depresses patent filings by 6 percent or more.
If there is anything that disappoints about this book, it comes in the later chapters, in which the authors try to characterize the ideal economic balance. Reality tends to abhor perfection, and so this effort thwarts the authors’ careful and impressive use of statistical analysis in earlier chapters. In place of data, they rely on historical narratives, which, though not without insight, are far less compelling.
The engaging subtlety of the earlier chapters is also missing. The authors argue, for instance, that effective modern economies must combine incentives for innovation with an effective safety net to protect citizens from the worst effects of economic shocks—a combination of an “innovative” and “insurance” economy. Similarly, when writing about the future of capitalism, the authors advocate for means to blunt the system’s rough edges. Such pleas are not new, and few on the left or right would argue against them. The real question is how much of each we need—or, to push the authors’ metaphor, the breadth and amount of insurance, and what kind of deductibles.
Such disappointments stand out, however, only because the rest of the book is so consistently thoughtful and, in its way, fearless. In The Power of Creative Destruction, readers will find much that transcends the facile arguments and moral posturing that too often characterizes today’s economic debates.