Re-Thinking Growth in Europe, by Professor Philippe Aghion

By Philippe Aghion

30 years ago, my friend, Peter Howitt, and I developed a theory based on three main ideas.

The first idea is that long-term growth results from innovation - you need innovation for long-term growth.

The second idea is that innovation does not come from heaven – it results from entrepreneurial activities and investment.

The third idea concerns creative destruction. New technologies replace old and this means that growth is a conflictual process between the old and the new. The innovators of yesterday tend to be the entrenching companies of today and they will try to prevent new innovations because they want to keep their market. So, the whole challenge from governments is to at the same time to give incentives for people to become innovators and make sure they don’t use these to later on prevent new innovators from coming in. 

If we want to revive the idea of Europe, people to love Europe, Europe has to deliver growth. If we don’t deliver growth, it is over.

When you do reform, you have to worry about the losers. Because if you don’t, you get Brexit in England and you get Trump in the US.

You need to compensate the losers. Thatcher and Reagan, they understood that you had to make structural reforms. But they operated on the patient without anaesthetic and they didn’t care about the losers.

You need in particular to ensure that you invest in education. I admire those countries in Europe that decided that education should be high quality for everybody… Finland for example, because it’s very important to have a labour market system that whenever you lose your job you get an income guarantee, good training, and help in finding a new job.

Industrial policy should be more competition-friendly. I agree with sectoral state aid in some cases but they should be pro-competition, pro-entry, and if the money doesn’t work well, you need a mechanism to exit.

So, I am not a priori against it, so long as competition is preserved. That’s why I very much hope that industrial policy and competition policy will work hand in hand.

This piece is an extract from the inaugural Schumpeter ‘Innovation in Enterprise’ Lecture at the 2016 SME Assembly.