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Rethinking Capitalism: The Power of Creative Destruction

Published by Unai Admin

18/07/2025

Rethinking Capitalism: The Power of Creative Destruction

Let’s face it: Capitalism has a bad reputation these days. While it is still seen as the “least awful” of alternatives, many accuse it of having led to exploding inequality, disastrous climate change and fractured societies. For some, these consequences are enough to advocate abandoning it altogether. In The Power of Creative Destruction, economists Philippe Aghion, Céline Antonin and Simon Bunel argue that abolishing capitalism is not the solution. Historically, a market economy has proved to be a formidable engine of prosperity, enabling societies to develop in ways that were unimaginable even two centuries ago. However, market forces cannot be given free rein. The state and civil society both have a role to play in guiding the forces of disruptive innovation that underpin growth. Creative destruction refers to the process by which innovations continually displace existing technologies and ways of doing things. New firms continually step up to the plate and new jobs replace obsoleted ones. In sum, the new destroys the old. This constant innovation is the driving force of capitalism and the catalyst of long-term growth. However, feats of innovation aren’t heaven-sent. They are achieved by entrepreneurs motivated by the prospect of dominating over a given market. The problem is that once they manage that, they often use their might to maintain the status quo and block the natural Darwinian process. The originator of the notion of creative destruction, Joseph Schumpeter (1883-1950), was pessimistic about the future of capitalism. He believed that powerful incumbents – think conglomerates – would eventually dominate every sector. By stifling competition, they would kill innovation and growth softly. On the strength of about 30 years of global research that yielded the body of theory and empirical evidence that Schumpeter lacked, Aghion and his co-authors are unquestionably more upbeat. Advocating a fighting optimism, their book shows there are ways to reward growth-creating innovators and, at the same time, prevent them from entrenching themselves. Revisiting the main enigmas of economic history History has left us with some enigmas about economic growth. Among them: Why did economic growth suddenly pick up from 1820, after being negligible for close to 2000 years? Why do some countries start to converge to the standards of living of developed countries but sputter mid-way? And why have technological revolutions so far not brought about the mass unemployment feared by the Luddites in 19th-century England and by John Maynard Keynes in 1930? The body of knowledge accumulated around creative destruction helps us solve all these enigmas and more, as shown by the following three vignettes. The 1820 starting point of growth: The world per capita GDP was the same in the year 1000 as in the year 1 CE. From there, the average rate of yearly growth barely reached one twentieth of 1 percent. But in 1820, in the United Kingdom and then in France, economic growth suddenly picked up, reaching about 0.5 percent per year for 50 years. Why? Because of the convergence of four factors: greater transfer of knowledge (e.g. the Encyclopaedists, the weakening of overprotective guilds), effective protection of property rights, healthy competition between European nations (inventors not welcome in one country could take their brilliance elsewhere) and the development of financial instruments that dynamised innovation and risk taking. The middle-income trap: Developing countries must implement investment-focused policies to catch up initially, but at some point, they must switch to innovation-promoting policies to compete within the world of developed economies. A crisis can help with that painful transition to a more Darwinian setting. If not, the nation’s growth stalls as the well-fed incumbents guard their turf and block new competition. Technology as the end of jobs: The fear that machines will destroy human jobs began long ago. When William Lee presented a stocking-knitting machine to Queen Elizabeth I in 1589 (in order to get a patent), she refused, declaring: “Consider what thy invention could do to my poor subjects. It would assuredly bring them ruin by depriving them of employment, thus making them beggars.” However, we now have data to show that the impact of automation on jobs is not only positive, but it also increases over time. A 1 percent increase in automation in a plant today increases employment by 0.25 percent after two years and by 0.4 percent after ten years. This effect holds even for unskilled manufacturing workers. Automation generates productivity gains that benefit employees, consumers (via lower prices) and firms (via increased sales). Questioning some common bits of wisdom Creative destruction also gives us a useful lens through which to assess policy prescriptions. For instance, some believe that taxation is the sole method of making growth more inclusive. Along the same line of thinking, some insist we should tax robots, especially since they will (allegedly) create mass unemployment. Others view a complete ban on growth as the best way to fight climate change. Aghion and his co-authors believe these policies are misguided and explain why in the book. Taxation is but one economic tool; it is just as important for the state to promote innovation to boost social mobility and raise standards of living. The focus should be on investing in education and science. More recently, the state has emerged as an investor in innovation. This is a smart move. Taxing robots, or any new technology for that matter, goes against innovation. The state should always preserve the free entry of goods and services in the market. Will some jobs be displaced in the process? Of course, and that is why creative destruction has an important caveat, or perhaps corollary: The state must insure employees against the potentially adverse consequences of job loss. Zero or negative growth is not the best response to climate change. Green innovation is. However, a laissez-faire economy doesn’t move spontaneously towards green innovation. On the contrary, polluting firms will naturally prefer to innovate in the same polluting technologies. So, the state must provide incentives to redirect innovation efforts. Several levers can achieve this: a carbon tax, subsidies for green innovation, technology transfers to developing countries and carbon tariffs to discourage pollution havens. Civil society also has an important role to play to persuade firms to pursue green technologies. Rethinking the future of capitalism Lastly, the creative destruction paradigm helps us rethink capitalism. The Covid crisis has revealed the pitfalls of capitalism, which turn out to be very different across countries. The United States has a great model of innovation, but its social model is broken. Europe (broadly) offers social welfare, but its innovation model is inadequate. The book explains how we should work towards a model of capitalism that combines the dynamism of the US innovation with the social protections afforded by a country like Denmark. Despite Schumpeter’s initial gloom, capitalism isn’t doomed. There are ways to overcome its apparent curse. But just like innovation isn’t heaven-sent, fixing capitalism will require coordinated action, based on a solid understanding of the determinants of economic growth and prosperity. States should pursue two types of policies simultaneously: protecting intellectual property rights on innovation on the one hand and safeguarding competition on the other. Merger and acquisition policies should also take into account the impact on innovation. The entry of smaller, potentially more innovative players, cannot be left to the good will (or distraction) of the incumbents. Optimal innovation policies will never please the firms that have already achieved market dominance. Proper separation of power, supported and enforced by a strong civil society, is required to ensure minimal collusion between behemoth firms and the executive power. Think of it as a “magic triangle” that includes the state, the market and civil society acting as a watchdog. Does fixing capitalism somehow involve getting rid of the 1%? The short answer is no. While innovation does help the top 1% get richer, it doesn’t impact the Gini coefficient (an index of wealth inequality within a nation). This is because innovation lifts society as a whole through promoting social mobility. This contrasts with lobbying, which also helps the rich get richer, but does nothing for innovation on top of increasing the Gini coefficient. In sum, society can reward innovators, but should never leave them in charge of policymaking. As the engine of prosperity, creative destruction can generate a growth that is sustained, inclusive and green. Innovation is indispensable to growth, and capitalism is indispensable for innovation, but it needs to be regulated. Philippe Aghion is a Professor of Economics at INSEAD. He is also a Professor at the College de France, a visiting professor at the London School of Economics and a fellow of the Econometric Society and of the American Academy of Arts and Sciences. Aghion, P. (June 14, 2021). Rethinking Capitalism: The Power of Creative Destruction. INSEAD Knowledge. Recovered from: https://knowledge.insead.edu


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Especial Latam Approaching the Future 2021 Tendencias en Reputación y Gestión de Intangibles

Published by Unai Admin

18/07/2025

Especial Latam Approaching the Future 2021 Tendencias en Reputación y Gestión de Intangibles


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Proposed climate law divides France

Published by Unai Admin

18/07/2025

Proposed climate law divides France

Less meat in French cafeterias. Bans on short-distance flights. Gas heaters on cafe terraces would be outlawed. As President Emmanuel Macron moves to make France a global champion in the fight against climate change, a wide-ranging environmental bill passed by the French National Assembly this month promises to change the way the French live, work and consume. It would require more vegetarian meals at state-funded canteens, block expansion of France's airports and curb wasteful plastics packaging. Polluters could be found guilty of "ecocide," anew offense carrying jail terms of up to 10 years for destroying the environment. If Mr. Macron gets his way, the fight against climate change would even be enshrined in the French constitution through a referendum. But those lofty ambitions are running into a barrage of resistance. Environmentalists and_ politicians from France's Green party, rather than backing the legislation, have accused Mr. Macron's government of watering down ambitious measures and putting corporate interests above tough proposals by a 150-person "citizens climate panel," which Mr. Macron himself convened last year to address climate concerns. France's influential business federations have joined forces to push back against what they view as overregulation and job-killing populism that could threaten their ability to recover from the economic blow of the Covid-19 pandemic. The bill now moves to the Senate where, if approved, it would go to a joint parliamentary commission for final approval. If the commission fails to come to an agreement, the National Assembly, which is controlled by Mr. Macron's party, will have the final say. Mr. Macron's signature is not necessary for the bill to become law. The clash comes at a delicate time for Mr. Macron, who is facing re-election next year against an array of challengers. He prides himself as a leader on climate issues and wants the legislation to bolster his credentials. "We must find a smooth transition to a low-carbon economy," he said shortly after taking office. "Let's face it: There is no Planet B." But the sharp divide could destabilize one of his major campaign platforms before the voting even starts. On a recent Sunday in cities throughout France, tens of thousands of climate activists took to the streets to denounce the legislation. They issued a warning that was also an insult: The bill had been so diluted that France would be unable to meet its commitments to the Paris climate agreement, the 2015 international accord signed in its own capital to avert a climate catastrophe. Extinction Rebellion activists in Paris chained themselves to gates of the National Assembly and lit smoke bombs that poured out a thick red fog. Camille Etienne, 22, a leading figure among climate change demonstrators, said in an interview that the bill would amount to a "greenwashing" operation. Mr. Macron has sought to burnish his image as a champion of the Paris accord ever since former President Donald J. Trump withdrew the United States from the agreement in 2017. The same day, a defiant Mr. Macron rebuked the American president, riffing off Mr. Trump's campaign slogan as he declared from the Elysée Palace that he wanted to "make the planet great again." Since then, European countries have enacted laws to cut greenhouse gas emissions at least 40 percent by 2030 compared to 1990 levels. The European Union agreed to anew 55 percent reduction target in December. Environmental concerns have gained traction in France as the climate crisis becomes more pressing. Cafe terraces (warmed by outdoor heaters) and holiday skating rinks (chilled to create ice in above-freezing temperatures) have prompted consciousness-raising. Elite university students are demanding climate change curriculums, and local mayors have defied the national government in banning some pesticides. Mr. Macron last fall sought to make the transition to a greener economy a cornerstone of a 100 billion euro, or $122 billion, "Relaunch France" stimulus package to reverse the pandemic-induced recession. With the climate becoming a major election theme, he faces fresh pressure as France's main Green party rises on the political stage, mirroring a wider rise of environmental parties around Europe. Even Marine Le Pen, the leader of the far-right National Rally and Mr. Macron's chief rival for the presidency, has embraced her own brand of downto-earth environmentalism. But Mr. Macron has had to walk a tightrope between addressing climate change and economic insecurity since the Yellow Vest movement exploded across France in late 2018, Those violent protests began as a grass-roots rebel lion among working class people after the government raised taxes on gasoline and diesel to fight global warming. Mr. Macron attempted to defuse the anger by setting up a panel of randomly selected people from across France to formulate proposals, with the help of experts, for ambitious climate legislation balanced with economic fairness. The climate bill, which now heads to the Senate, whichis dominated by opposition conservatives, for debate in June, stems largely from those proposals. It prohibits domestic flights for journeys that can be made by train in less than 2.5 hours (unless they connect to an international flight). Outdoor gas heaters used to warm cafe patrons would be banned beginning next April. Supermarkets will have to reduce wasteful plastics packaging, while clothing and other goods would carry an "ecoscore" of their environmental impact. Landlords won't be allowed to rent poorly insulated properties, and advertising for fossil fuel energy, like gasoline, would be phased out. Business groups have zeroed in on certain measures that they say amount to costly overregulation. They have also cast doubt on the wisdom of having citi zens propose climate change policy. The main employers lobby, the Movement of the Enterprises of France, or Medef, which represents large corporations, went through the citizens' group's proposals line by line, highlighting those considered to be the harshest and recommending softened versions of the text, according to Journal du Dimanche, a weekly newspaper. Medef was especially opposed to making "ecocide," - defined as deliberate and lasting pollution - a crime. Geoffroy Roux de Bézieux, Medef's president, told a Senate panel that his members worried that it would stigmatize business and penalize economic activity. He said lawmakers, not random citizens, should write laws. Tougher rules could also hobble companies weakened by the pandemic, Francois Asselin, president of the Confederation of Small and Medium-Sized Enterprises, told the panel. "So be careful not to bring them to their knees with too restrictive measures," he said. BASE, a German multinational chemical company and a major producer of pesticides with operations in France, was more blunt. In a post on its website, it singled out recommendations by the citizens panel to reduce pesticides and fertilizer in agriculture, saying they "reflect a profound ignorance of reality." "In seeking to re-energize democracy,' BASF added, referring to the citizens' proposals, "aren't we running the risk of weakening our democratic institutions and fueling populism?" The criticism may be having an impact. In the legislation passed by the National Assembly, "ecocide" was changed from being labeled a crime, as proposed by the citizens' panel, to a civil offense. It could still result in jail time. The proposal to ban short-haul flights originally barred trips that could be covered by a four-hour train trip. After airlines and airports objected, the rule was scaled back to cover only flights that could be replaced by a rail trip of 2.5 hours - achange that barred only eight routes. A measure that would have made it more difficult to pave over empty fields and lots for Amazon-style warehouses now exempts e-commerce companies. The climate bill in its current form will make it nearly impossible for France to fulfill its Paris accord pledges by 2030, the High Council on Climate, an independent body, warned in arecent report. Inresponse, the government said that the modified measures, combined with other climate change regulations passed since 2017, would allow it to meet the goals. But another independent study commissioned by the government, by the Boston Consulting Group, concluded that France would fall short even in the best-case scenario. And this month, the French Senate replaced language that would have the constitution "guarantee" the fight against climate change with wording stating that France would "protect" the climate. Daniel Boy, a political scientist at Sciences Po university in Paris, said that environmentalism "was not really part of Macron's DNA." But he added that Mr. Macron had favored a "pragmatic ecology" made of small steps and concrete measures, reflecting a liberal electorate sensitive to economic interests, and had opposed "a more radical ecology" with wide-ranging changes. That cautious approach is what has drawn the ire of many climate activists - and pulled protesters back into the streets. Ms. Etienne, the activist, said the climate bill in its current form amounted to a "betrayal" of the citizens' convention's proposals and a wasted opportunity for Mr. Macron. "They had the science, the people, the political moment,' she said. "To deliberately lack the will and fall for industry lobbies now - I can't think of any other word than betrayal." Alderman, L. (May 22, 2021). Proposed climate law divides France. The New York Times. pp. 7


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