Today's Letter IEDI addresses the recently published book "The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations" by French economists Philippe Aghion, Céline Antonin and Simon Bunel. 

The book seeks to demonstrate that growth driven by disruptive innovations is the solution to the current problems of modern capitalism, such as the exacerbated increase in inequality, climate change and the COVID-19 pandemic crisis. 

The thread of the work is the idea, originally developed by the Austrian economist Joseph Schumpeter, of creative destruction triggered by the introduction of innovations that make existing technologies obsolete. 

Using a wide range of empirical evidence, the authors analyze how economic growth through creative destruction interacts with competition, industrialization, middle-income trap, inequality, the environment, finance, unemployment, health and happiness. 

The authors point out that the idea of creative destruction introduces a contradiction at the heart of the innovation-driven growth process. On the one hand, profits are needed to reward innovation and thus motivate innovators. On the other hand, past innovators use their profits to prevent the emergence of other innovations and the entry of new competitors. 

According to the authors, because of this contradiction in the dynamics of growth via creative destruction, the future of capitalism envisioned by Schumpeter was adverse: capitalism was doomed to failure precisely because it would be impossible to prevent established conglomerates from obstructing new rounds of innovation and driving out small and medium-sized companies. 

Aghion and his co-authors consider it possible to overcome this contradiction through state regulation. For this, it is necessary to prevent the State from being co-opted by the interest groups of incumbent companies that try to preserve their profits by blocking the entry of new innovative firms. 

The driving force of capitalism, the process of creative destruction promoted by innovative companies, while guaranteeing their perpetual renewal and reproduction, generates potentially harmful effects for employment, health and the well-being of citizens as well as for the environment. These negative impacts must be managed, regulated and mitigated by state action.

For the authors, it is essential that the State acts, through various public policy instruments, on three fronts: 

• Encouraging research, development and innovation activities, investing in education, science and basic research and ensuring protection of property rights; 

• Defending competition to prevent incumbent companies from obstructing the entry of new innovators into the market for goods and services;

• Combating the possible adverse consequences of creative destruction in terms of job loss as well as the exacerbated expansion of inequality and the worsening of environmental deterioration. 

For the State to act in this direction, two forces would be essential: international competition and civil society. International competition encourages state actions in favor of disruptive innovations, while an active and vigilant civil society prevents collusion between public officials and incumbent companies to preserve their incomes, and presses for greater efficiency, ethics and justice in the workings of the market.

The book suggests that countries should reinforce pro-competition policies as they become more developed and recognize that an abrupt intensification of competition can have a negative effect on innovation throughout an economy in which companies far from the world's technological frontier predominate.

For a country as a whole, the closer it is to the technological frontier, that is, the closer its aggregate productivity is to the productivity of the most productive economy in the world—today, the United States—the more competition will drive innovation and economic growth. 

The relationship between competition and innovation goes beyond greater exposure to international markets. For the authors, it is imperative to rethink competition policy and, in particular, the antitrust policy that regulates mergers and acquisitions, so that technological revolutions, such as IT and artificial intelligence, increase growth in both the short and long run. 

Aghion and his co-authors also defend the idea that competition is not incompatible with a well-designed industrial policy. They claim that studies show that public investments aimed at strategic sectors that are intensive in qualification and/or at more competitive sectors are effective in stimulating productivity growth.

In this sense, they recommend that policy makers initially address the country's economic and social priorities, such as combating climate change and developing renewable energy, health and defense. And then focus on sectors that operate with a high degree of competition or use highly qualified labor. 

However, the authors warn that it is necessary to avoid that the granting of subsidies to incumbent companies prevents new potential participants, reconciling as much as possible industrial policy and competition policy in order to favor growth driven by cutting-edge innovation. 

In summary, Aghion and his co-authors defend the idea that the market, the State and organized civil society are central to the "evolution of capitalism towards a system that is better regulated, more inclusive, more protective of citizens and a better guardian of the environment." 

In this sense, they advocate the combination of characteristics of the different forms of capitalism existing in developed nations, in order to:

• Ensure the full action of creative destruction, carrying out reforms that favor innovation and enable long-term sustained growth driven by innovations at the technological frontier, and

• At the same time, provide its citizens with greater equality and security against the risk of unemployment and obsolescence of professional knowledge and skills, and better public and social services.

The full text is available in Portuguese.