Growth policy – one size does not fit all

 

The Swedish Schumpeter Lecture 2013 featured world renowned scholar Philippe Aghion, Professor Harvard University. Pontus Braunerhjelm started the lecture by introducing Philippe Aghion and welcoming the audience, a mix of academics, policy makers, and business and organization representatives.

- Philippe Aghion is an internationally leading economist who has made significant contribution to growth theory. He has also made contribution to R&D, investment, education and industrial policy, Pontus Braunerhjelm said.

Philippe Aghion commenced his lecture What Do We Learn From Schumpeterian Growth Theory? by explaining the basis of his theory. Basically, he built the model around the notion of creative destruction. This model makes distinct predictions on several aspects of the growth process and also allows the use of micro data. The aim was to bridge the gap between micro and macro and thereby also explain yet unexplained phenomena.

The theory has operationalized Schumpeter’s notion of creative destruction in two ways: 1) it has developed models based on creative destruction that make distinctive predictions on several aspects of the growth process and 2) it has allowed us to use rich micro data to test these predictions. In the process, the theory has improved our understanding of the underlying sources of growth.

As a background, Philippe Aghion outlined the main ideas of Schumpeterian growth theory. They are:  1) growth results from quality-improving innovations, 2) innovations result from motivated (R&D)investments, 3) innovations induce turnover and obsolescence (creative destruction).

Philippe Aghion continued talking about how growth and development interact. When growth meets development, explained Aghion, the Shumpeterian theory helps bridge the gap between micro and macro and it is a useful tool for growth policy design. Moreover, it suggests departing from the “Washington consensus” view whereby the same policies should be recommended everywhere. Finally, Philippe Aghion added, it also suggests that both policy and institutions matters.

 –          With this theory, we depart from the Washington consensus. Depending on where you are we do things differently and the level of development matters in designing policy.

-          Policy of innovation and growth is important, which one did not speak about 25 years ago.

Philippe Aghion also underlined that democracy itself is essential to the process of creative destruction. Without democratic institutions, firms and other interests collude and growth is reduced.

-          Lack of democracy is a constraint on the frontier of innovation and growth.

Philippe Aghion went on to talk about how the theory can be used, given these conditions for growth, to design constitutions and the political economy. In doing this he addressed various angles of the problem such as different levels of development and the double-edged sword that is competition.

-          The theory has implications for “the infant industry argument”. Developed countries have more firms that are neck at neck with each other.

Philippe Aghion’s research has provided better understanding of how firms gain advantages, fall behind or catch up.

-          Competition is a double edged sword. Good for leading firms but bad for firms that are falling behind.

Again, the level of development has to be considered when designing policy.  For example, important implications for one type of institutions are not successful for developed and frontier economies as compared to catching up economies.  When you are a catch-up economy competition is not really a concern; it’s more important to have flexibility and turnover. This has to be kept in mind when deciding on appropriate growth policy.  On a general note, Philippe Aghion voiced a relaxed attitude towards policy design. “You can experiment” he said.

Martin Ådahl, Kristina Nyström, Philippe Aghion and Pontus Braunerhjelm

Kristina Nyström, Associate Professor at KTH, was invited to comment on Philippe Aghion’s lecture. She was curious to know how Philippe Aghion perceived the future of Schumpeterian theory.

The new theories deal with the relationship between happiness and growth, Philippe Aghion responded. Growth and creative destruction creates life satisfaction but also stress. How we can reduce stress and still maintain satisfaction and flexibility is interesting to look at, Philippe Aghion added.

Martin Ådahl, Chief Economist at The Centre Party, was also invited to comment on the lecture.  He introduced himself saying that he is both a macro economist and a politician and therefore he found Schumpeter a bit problematic.

-          Nobody wants to put creative destruction on a poster.

Luckily, Martin Ådahl continued, Philippe Aghion mainly deals with the early, pre-politician Schumpeter. One question he directed to Philippe Aghion addressed the difficulty in categorizing, deciding where to put emphasis when formulating policy.

-          How do you make the public choice story?

Philippe Aghion agreed that it is hard to say who is “above the tipping point” and who is not.

-          The dividing line has to be discovered within countries. The data will show the way, Philippe Aghion concluded.