Building Bridges 2022 Spotlight Series: an interview with Philippe Aghion MAE
Philippe Aghion has received the Erasmus medal and delivered the accompanying AE-Heinz-Nixdorf Erasmus Lecture. In our interview with Professor Aghion, he tells us about his work on growth and innovation.
About Philippe Aghion MAE
Philippe Aghion is a professor at leading institutions in business and economics, including the Collège de France, at the London School of Economics, and the INSEAD Business School, and also an invited professor at the Paris School of Economics. His research on the economics of growth and contract theory is considered ground-breaking. With Peter Howitt, he pioneered the so-called Schumpeterian Growth paradigm, later extending it to analyse the design of growth policies and the role of the state in the growth process. International honours include the Yrjo Jahnsson Award for the best European economist under age 45 (2001), the John Von Neumann Award (2009), and the BBVA “Frontier of Knowledge Award” (2020), which he shared with Peter Howitt for “developing an economic growth theory based on the innovation that emerges from the process of creative destruction.” He was elected Fellow of the American Academy of Arts and Sciences in 2009 and Corresponding Fellow of the British Academy in 2015. He was elected to AE in 2016.
The interview
Congratulations on the award of Academia Europaea’s Erasmus Medal for 2022. It is the highest award that the Academia Europaea can bestow on eminent scholars and recognises sustained achievement and contributions to scholarship over a career period. What does the award mean to you?
“It’s a great honour. When you receive a big award like this, it both humbles you and encourages you to pursue more research. I think it’s important to use it to push ideas and encourage young talented researchers.”
You have had a truly international career, working in France, America and the UK, for example. What impact has that had on your work?
“In the US, I did my PhD at Harvard and then joined MIT as an assistant professor. My neighbour at MIT was Peter Howitt, who was visiting during the academic year 1987-1988 from Western Ontario. We immediately started to work on developing a new theory of growth through creative destruction (now known as Schumpeterian growth theory).
In the UK, I started to collaborate with empiricists, in particular with Richard Blundell and his team at the Institute of Fiscal Studies. Through working with Richard Blundell and his team in the mid-1990s, we could confront our Schumpeterian growth theory with microdata, in particular to analyse the effect of competition on innovation-led growth.”
Your work focuses on growth and innovation. Your book, The power of creative destruction (co-authored with Céline Antonin and Simon Brunel, English translation 2021), focuses on growth and its benefits. Could you say more about the arguments you set out – what is ‘creative destruction’ and what are its merits and difficulties?
“Creative destruction is the process whereby new innovations displace old technologies, making these technologies obsolete. Our paradigm rests on 3 main ideas. Firstly, long-term growth stems mainly from innovations. The second idea is that innovations are the result of entrepreneurial activities, motivated by the prospect of innovation rents[1]. And the third idea is creative destruction – new innovations displace old technologies.
You can see that there is a contradiction at the heart of the growth process. On the one hand, you need innovation rents to motivate investments but on the other hand, yesterday’s innovators are tempted to use their rents to prevent subsequent innovators from entering the market because they themselves do not want to become subject to creative destruction. Regulating capitalism is all about how you manage this contradiction. When thinking about inequality, secular stagnation[2], the middle income trap, green innovation, you always come across this contradiction and how you should manage it to achieve sustained, green and inclusive growth. What we explain in the book is that the state plays a big role, but civil society also comes into play. You need to rely on the triangle between firms that innovate, the state that regulates and civil society that makes sure the state is not captured by private vested interests.”
What policies does it lead to that we could apply to solving the challenges we face in 2022?
“Different kinds of policy tools can be considered. Firstly, you have what I call horizontal policies: an inclusive education base, competition policy (otherwise incumbent firms prevent new entrants into the market) and labour market policies that protect individuals who move from one job to another, whilst also making it easy for firms to both hire and lay off. A good example of successful labour market policies is Denmark.
You also need instruments to finance innovation. First, to finance basic research, it is important to have well-funded and well-organised universities and institutions (such as the National Science Foundation). You also need a financial ecosystem which favours the creation and growth of new start-up firms – venture capital and institutional investors that turn basic research into industrial projects. And the state can also provide research tax credits to innovative firms. On top of that, there is more vertical support to innovation that the state can provide. In particular, there are some technologies where the basic research has been done but there is a need to coordinate resources and actors to turn it into industrial applications. DARPA (the Defense Advanced Research Project Agency) was created in the US in the 1950s and resulted in innovations like GPS, the Internet and autonomous navigation. More recently, BARDA (Biomedical Advanced Research and Development Authority) has turned mRNA -based technology into the mass production of vaccines against COVID.
Overall, we see that the state can intervene both horizontally (education, competition, labour market policies) and also vertically (in sectors like defence, space, energy and biosciences) to boost innovation.”
It’s often said that Europe lags behind other parts of the world when it comes to innovation. Do you have insights on this, and what might be done?
“Europe doesn’t have a really good system of innovation. The US has very well-funded universities and organisations, like the National Science Foundation and the National Institute of Health, private donors and organisations that finance basic research. The US also has very well-developed venture capital, private equity, business angels and institutional investors, all of which are much less developed in Europe. There isn’t the equivalent of DARPA or BARDA in Europe. Overall, the US has an ecosystem of innovation which is far superior to what we have in Europe. And what you see now is that the US is on the top in terms of innovation worldwide, China is rising fast and Europe and Japan are declining.”
You have written about the impact of innovation on long-term challenges like societal inequalities and climate change. Could you say a little more about this within the context of Europe – are we proceeding far enough and fast enough, in your view?
“Our economies have to become more innovative and more inclusive. Firstly, you need to have a good education system accessible to everybody, like you have in Finland for example. That ensures that you will have more innovation and also more inclusive growth. Secondly, we have a competition policy in Europe, but it’s too market share-based and not geared enough towards innovation and entry. In deciding whether or not to allow a new merger and acquisition in Europe, we look at the effect of the merger on market share, and we don’t look so much on its effects on subsequent entries and innovation. Also, I told you about ‘flexicurity’, which Denmark has, but you don’t have in other European countries. These are all policies that could make growth more innovative and inclusive, and it’s a form of social mobility. With more and better education, more people can become innovators and that reduces inequality. With greater competition, there is more room for new entry, creative destruction and increased social mobility. And when you have a good labour market policy, that also reduces inequality. We also have to ensure that we make innovation greener. Firms that innovated in dirty technologies in the past keep innovating in dirty technologies in the future, so the state needs to redirect change towards greener technologies. For that, you have various tools, including the carbon tax, subsidies for green innovation and green industrial policy. In the US, they have the Advanced Research Projects Agency for Energy (ARPA-E). We need to have an equivalent European agency to push for green technologies.”
Finally, where might your research interests lead you in terms of future projects?
“My research interest nowadays is very much on green innovation. I want to understand how the state and civil society together can push firms to innovate ‘greener’ – the kinds of tools we can use, the macro-economics of green innovation and the management of that. That’s a big topic I want to pursue.
The other big issue I want to get deeper into is the notion of economic rent. Rents from innovation and those from a windfall monopoly are not the same, and you should not treat them in the same way. So, when you deal with redistribution policy, with inequality, you have to distinguish between innovation-driven rents and those that stem more from lobbying, entry barriers etc. This will help improve the design of R&D policies – should we favour small firms, large firms, how should we decide to allocate R&D subsidies?”