🇺🇸▼
For many decades after World War II, European policymakers prioritized stability and predictability above all else. They valued steady, reliable growth over the chaotic but potentially revolutionary process of breakthrough innovation. This strategic choice served the continent well for a long period, allowing nations to rebuild and prosper. However, this approach has created significant challenges in the modern era. As the United States and China compete fiercely for dominance in artificial intelligence, a stagnant Europe struggles to regain its place at the technological frontier. The geopolitical shocks of recent years, including Russia’s invasion of Ukraine and shifting foreign policies from the United States, have exposed Europe’s deep economic and strategic vulnerabilities. Yet, it is the global race for artificial intelligence supremacy that has made Europe’s lagging innovation and declining competitiveness impossible to ignore.
Simon Johnson, an economist at the Massachusetts Institute of Technology, sat down with Nobel laureate Philippe Aghion to examine what ails the European economy. Their conversation explores how to revive the continent's dynamism. Their discussion addresses the high costs of excessive regulation, the critical role of creative destruction in fostering healthy competition, and the urgent need for robust social safety nets to support workers through technological transitions. The dialogue highlights the inherent tension between protecting existing industries and encouraging the disruptive innovations that drive long-term economic growth.
To understand Europe’s current challenges, one must first understand the concept of creative destruction. This term was originally coined by economist Joseph Schumpeter to describe the economic process by which new technologies displace old ones. In the mid-twentieth century, there was no formal growth model that incorporated this idea into mainstream economic theory. Consequently, Peter Howitt and Philippe Aghion developed a model to explain the mechanics of this process. The basic idea is that sustained economic growth is driven by successive generations of talented entrepreneurs who create new firms and expand them into major market players.
Innovation is a cumulative process. New inventions build upon the intellectual foundation laid by those who came before. At the heart of this process lies a fundamental tension. Societies must generate enough profit, often called innovation rents, to motivate investors to fund risky research and development. However, yesterday’s innovators often attempt to use their accumulated market power to block new entrants who might subject them to creative destruction. Therefore, societies must strike a delicate balance. They must allow talent to flourish by rewarding success, while ensuring that today’s successful firms do not become insurmountable barriers to the next generation of innovators.
When discussing the European economy, Aghion clarifies that Europe is not on the verge of a major, sudden crisis. Instead, the danger is a long, persistent period of stagnation or sluggish growth. Between 1945 and the late 1980s, per capita gross domestic product in the eurozone was successfully catching up with that of the United States. Much of that rapid growth came from rebuilding Europe’s capital stock, which had been devastated during World War II. It also came from catching up with the Second Industrial Revolution that transformed the United States in the early twentieth century.