Philippe Aghion - The Power of Creative Destruction - Economic Upheaval and the Wealth of Nations

We began writing this book in November of 2019. Four months later an unprecedented, worldwide pandemic crisis struck. This crisis stimulated existential debate on how our society will lookand how we want to reshape itwhen we emerge from the crisis. At the heart of the debate we find creative destruction. Indeed, COVID-19 has destroyed jobs and pushed huge numbers of firms into bankruptcy. Yet at the same time, the crisis has created room for new, innovative activities.

As Barry Eichengreen explained in a recent article in Prospect (May 26, 2020) with the evocative title, Schumpeters Virus: How Creative Destruction Could Save the Coronavirus Economy, the retail sector will utilize artificial intelligence and automation more than ever, because consumers will not give up the habit of ordering online that they acquired during social confinement. Similarly, confinement revealed the virtues of remote working and of videoconferences. We also became acquainted with medical consultations by telephone or video.

However, the realization that creative destruction can serve as a lever of growth after COVID presents a challenge to policy makers. On the one hand, they must protect: support viable firms in order to save jobs and preserve the human capital accumulated in those firms. On the other hand, they must reallocate: encourage the entry of new firms and new activities that are more efficient or more responsive to the new needs of consumers. In other words, they must accompany the process of creative destruction, without obstructing it.

More importantly, the COVID-19 crisis acted as a wake-up call by revealing deeper problems that plague capitalism in the different forms it takes throughout the world: dysfunctional social welfare and health-care systems in the United States; inadequate innovation systems in Europe; and the lack of transparency or the excessive centralization of power in yet other countries.

More generally, in light of the rise of inequality, the concentration of rents, increasing job insecurity, and the deterioration of health and the environment that we have observed for decades, we hear more and more calls for radical change, even the overthrow of capitalism. However, in this book we argue that the answer to our problems is not to abolish capitalism. It is to invent a better capitalism by harnessing the power of creative destructioninnovation that disrupts, but that over the past two hundred years has also lifted societies to previously unimagined prosperity.

The challenge we face is therefore to understand the underpinnings of creative destruction in order to steer its power in the direction we choose. How can we direct creative destruction toward greener and more equitable growth? How can we prevent yesterdays innovators from using their rents to block new innovation? How can we minimize the potentially negative effects of creative destruction on employment, health, and happiness? What are the forcesfirms, governments, constitutions, civil societythat enable us to steer creative destruction in the direction we desire? These are the questions we will attempt to answer in the following chapters.

The raw material of this book comes from five years of lectures at the Collge de France, which themselves encompass more than thirty years of research on the economics of innovation and growth. This material was enriched and reorganized around a central theme: the power of creative destruction and how the transformation of capitalism can direct this power toward achieving more sustainable and inclusive prosperity.