Nobel laureate Philippe Aghion reveals the key to GDP growth

Matthew Partridge: Philippe Aghion, you won the Nobel Prize in Economics, along with Joel Mokyr and Peter Howitt, for explaining “how innovation provides the impetus for further progress”, especially through “creative destruction”. How does creative destruction spur economic growth?

Philippe Aghion: My view of creative destruction is that growth is created by the emergence of new talents and ideas, which challenge yesterday’s innovators and force them to keep innovating, or be pushed out of the market – with the newcomers eclipsing them.

So a dynamic economy is one where talents are always allowed to enter a market to grow and make money, but once they’ve grown up, they should not be allowed to use their rents to prevent newcomers establishing themselves. That’s where competition policy is so important. Otherwise, yesterday’s innovators will use their power to collude, preventing new innovations and the emergence of rivals.

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Matthew Partridge: Over the past year, there has been a big move towards protectionism with Donald Trump’s tariffs, but also with the EU and its national champions. Do you see this as a threat to competition?

Philippe Aghion: Yes, competition is threatened on several levels. In the US itself, you see a collusion between vested interests and the governments, as epitomised by that photo of Elon Musk in the White House. Such “crony capitalism” inevitably leads to a situation where the incumbents collude with government to prevent new potential rivals entering the market, which is always bad news.

Similarly, trade barriers hamper innovation. Free trade gives you a bigger market for your innovations, which means bigger profits, as well as more pressure from competition. International trade also favours the transfer of technology from more to less developed countries, which is what allowed China to grow and India to escape poverty.

Matthew Partridge: Do you see the dominance of the “Magnificent Seven” as bad for competition, or an inevitable by-product of economic change?

Philippe Aghion: During the early stages of the IT revolution between 1995 and 2005, the big technology firms really boosted economic growth, as they knew better than other companies how to harness the power of IT. That is how you ended up with the likes of Google and Microsoft. Over time unrestricted mergers and acquisitions (M&A) and lax competition policy has squelched competition, restricting the entry of new companies. That is at least part of the reason why productivity growth has slowed down since 2005.

I’m worried we’ll see the same thing with AI, given Amazon and Microsoft’s dominance in cloud computing, a core part of AI. The sheer muscle of a handful of firms when it comes to chips could limit the adoption of AI. So, while AI has huge growth potential, we need a competition policy that either forces firms to share data, or breaks them up if they don’t. We must also block anti-competitive mergers.

Matthew Partridge: So essentially you’d like to see a more aggressive competition policy?

Philippe Aghion: Yes, although it’s a question of balance because over-regulation can harm competition too: incumbents always know how to deal with regulators better than new companies do. My advice is to extend the Digital Market Acts in Europe to the whole value chain of AI, including the cloud, and when you decide whether or not to allow a merger, don’t just look at market share, but also at the extent to which the tie-up might stifle future innovation and the emergence of new rivals.

Matthew Partridge: Creative destruction can be very positive for society. But by its very nature it involves losers. And sometimes, those losers are not only companies, but entire industries and the people who work in them. Is there a need to compensate the people thrown out of work, or revamp social safety nets?

Philippe Aghion: There will definitely be some job losses from AI, which makes it particularly important to have a good system in place to smooth things for the average citizen. I’m a particular fan of the Danish flexi-security system. There is a flexible labour market, but the unemployed get 90% of their salary for up to two years while the state retrains them. This makes creative destruction both more efficient and also much more friendly to the average citizen. However, remember that AI will create jobs as well as destroy them, not least because it makes it easier for people to come up with new ideas.

Matthew Partridge: Tell me more about your research on the impact of AI on productivity and employment.

Philippe Aghion: My feeling is that some jobs, particularly administrative and clerical jobs that involve many tasks that are highly substitutable by AI, might be at risk. However, there are two counteracting forces. Firstly, firms that adopt AI will become more productive and competitive, leading to increased demand for their products. AI is also an excellent tool for recombining old ideas to create new ideas, which in turn will create new tasks and new jobs. So, while there will be some job destruction, there is also scope for job creation.

This is why it is crucial is to have a good education system (as measured by the OECD’s Pisa assessment), which ensures that the average citizen knows how to master everything from basic skills, such as reading, through to more advanced concepts such as calculus. So the solution to job losses caused by AI is better education and flexi-security.

Matthew Partridge: In a recent paper, you and Simon Bunel came up with the estimate of AI boosting productivity by around 0.68% a year.

Philippe Aghion: If we just look at the number of tasks that AI automates, then the measured benefits are probably going to be around 0.68% a year, slightly less than the impact of the digital-technology wave of the late 1990s and early 2000s in the US, but roughly in the same ballpark. But this probably slightly underestimates the impact of AI because it omits the extra growth gains from the fact that AI can help generate new ideas and technologies. Of course, if we don’t adapt our competition policy, and the incumbents manage to squelch innovation, then the boost might be much smaller. Like my co-laureate Joel Mokyr, I am rather optimistic about technology, but only moderately optimistic about the speed of institutional change.

Matthew Partridge: You’ve talked about the importance of intellectual property (IP) rights for encouraging innovation. Given that a lot of AI consists of copying or adapting people’s work, does there need to be some sort of change to simply prevent AI becoming a tool of mass piracy?

Philippe Aghion: I definitely don’t believe in a complete free-for-all. We need at least some regulation to secure IP rights, otherwise we discourage innovation altogether. But the thing is not to over-regulate and thus discourage new entrants. We need the right balance.

MP: You’ve also done research on the middle-income trap: the fact that some countries seem to reach a certain level of development and then just get stuck there. Could you tell us about that?

Philippe Aghion: A good way to understand the middle-income trap is to take South Korea. After the Korean War, it left North Korea in the dust, growing at a high rate thanks to a successful education system, which produced a workforce with a high level of scientific knowledge that allowed it to imitate more advanced technologies. The problem, however, is that at some point you exhaust the power of imitation and need to start moving into innovation-based growth, or “frontier innovation”, as I call it.

However, frontier innovation requires competition, and during the catch-up phase South Korea developed large firms called chaebols. They discouraged the entry into the market of non-chaebol firms and put pressure on the government not to move towards institutions that would favour frontier innovation, as that would threaten their monopoly, which has slowed down South Korea’s overall economic growth.

Even Japan, a much more successful nation, has had a similar problem with the keiretsu, companies whose post-war dominance has prevented the government from adopting more pro-competition policies.

Matthew Partridge: What about Europe?

Philippe Aghion: Europe suffers from some of the same problems as South Korea. It did a very good job of catching up with the US between 1945 and 1995, but since then, the gap in per-capita GDP has started to widen again. This is because, as Mario Draghi’s report The future of European competitiveness – A competitiveness strategy for Europe notes, the single market in goods and services hasn’t really been completed, so there isn’t enough competition between firms. Many companies are therefore still making incremental improvements rather than engaging in disruptive innovation.

Europe also doesn’t have a proper financial “ecosystem” for frontier innovation, especially in terms of venture capital. Institutional investment into start-ups is underdeveloped in Europe compared with the US. And while Europe funds some research into science through the European Research Council, we don’t have enough money for long-term research that might only pay off ten years down the line. We need an equivalent of America’s Defence Advanced Project Agency (DARPA), a pro-competition way to do industrial policy.

Matthew Partridge: How should the UK boost its poor productivity?

Philippe Aghion: I think it has definitely suffered from Brexit, especially given the negative effect that leaving the single market has had on competition and reducing the total size of the market. My hope is that the UK now wants to collaborate a lot more with European countries, which can only be good for both sides. I’m very much in favour of the EU working with the UK on defence, on health, and in energy. Where the EU and UK can implement the Draghi report together, they should.

Philippe Aghion is chair of Economics of Institutions, Innovation and Growth at the Collège de France and the Kurt Björklund chaired professor in Innovation and Growth at INSEAD. He is also a visiting professor at the London School of Economics.

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