Article by By Philip Ball: “…Economic growth at a rate of 1–2% annually is the norm for industrialized nations today. But such growth rates did not happen in pre-industrial times, despite technological innovations such as the windmill and the printing press.
Mokyr showed that the key difference between now and then was what he calls “useful knowledge”, or innovations based on scientific understanding1. One example is the advances during the Industrial Revolution, beginning in the eighteenth century, when improvements in steam engines could be made systematically rather than by trial and error.
Aghion and Howitt, for their part, clarified the market mechanisms behind sustained growth. In 1992, they presented a model showing how competition between companies selling new products allows innovations to enter the marketplace and displaces older products: a process they called creative destruction2.
Underlying growth, in other words, is a steady churn of businesses and products. The researchers showed how companies invest in research and development (R&D) to improve their chances of finding a new product, and predicted the optimal level of such investment…
According to Ufuk Akcigit, an economist at the University of Chicago in Illinois, Aghion and Howitt highlight an important aspect of economic growth, which is that spending on R&D does not by itself guarantee higher rates of growth: “Unless we replace inefficient firms from the economy, we cannot make space for newcomers with new ideas and better technologies.”
“When a new entrepreneur emerges, they have every incentive to come up with a radical new technology,” Akcigit says. “As soon as they become an incumbent, their incentive vanishes” and they no longer invest in R&D to drive innovation.
Thus, because companies cannot expect to remain at the forefront of innovation indefinitely, the incentive for investing in R&D coming from market forces alone declines as a company’s market share grows. To guarantee the societal benefits of constant innovation, the model suggests that it is in society’s interests for the state to subsidize R&D, so long as the return is not merely incremental improvements.
The work of all three laureates also acknowledges the complex social consequences of growth. In the early days of the Industrial Revolution, there were concerns about how mechanization would cause unemployment among manual workers — a worry echoed today with the increasing use of AI in place of human labour. But Mokyr showed that, in fact, early mechanization led to the creation of jobs.
Creative destruction, meanwhile, leads to companies failing and jobs being lost. Aghion and Howitt emphasized that society needs safety nets and constructive negotiation of conflicts to navigate such problems.
Their model “recognizes the messiness and complexity of how innovation happens in real economies”, says Coyle. “The idea that a country’s productivity level increases by companies going bust and new ones coming in is a difficult sell, but the evidence that that’s part of the mechanism is pretty strong.”…(More)”.
