Technical Progress and Growth since the Crisis
GAICIL Insights
Every slump revives the same gloomy word.1 Technical Progress and Growth since the Crisis, by Philippe Aghion and Céline Antonin, takes it on. The 2008 crisis revived doubts about growth and resuscitated the debate on secular stagnation, first raised by Hansen in 1938. The authors argue that growth theory built on innovation and creative destruction remains a valid framework for the post-crisis economy, even with very low growth, and apply it to three debates rekindled by the crisis.
Debate one: secular stagnation. Because of creative destruction, the productivity growth induced by innovation is underestimated. Productivity increases are not measured correctly and are largely understated. Economies follow secular trends linked to the diffusion of new technological revolutions, and once growth is correctly measured, it is difficult to speak of stagnation. The stagnation may partly live in the statistics.
Debate two: macroeconomic policy versus structural reform. The authors find complementarity between macroeconomic policies, fiscal or monetary, that are more reactive to the cycle, and structural reforms promoting fluid markets. They call the combination the Draghi approach. Reforms and supportive macroeconomic policy reinforce each other. The old quarrel between demand-siders and supply-siders dissolves into a partnership.
Debate three: inequality. Innovation helps increase the top 1% share of total income. Innovation and the reforms underpinning it also tend to stimulate social mobility through creative destruction. Innovation creates top incomes for successful innovators and opens opportunities for newcomers to rise, displacing incumbents. The top gets richer, and who sits at the top keeps changing.
Artificial intelligence gives all three debates new urgency. AI is a technological revolution whose diffusion will shape growth for decades. The measurement argument suggests official statistics may understate AI's productivity gains, especially when new products replace old ones. Before concluding AI's effects are disappointing, debates should account for this possibility. Disappointment measured by a flawed yardstick is a weak verdict.
The Draghi approach offers an AI playbook. Structural reforms making markets fluid, by easing entry, labor mobility and resource reallocation, let AI be adopted and its gains captured. Macroeconomic policy supporting demand in downturns helps firms sustain AI investment. Combining the two can speed diffusion. Fluid markets let the technology spread; steady demand keeps firms investing while it does.
The inequality argument reframes a fraught debate. Concern that AI will concentrate gains at the top is widespread. The framework recognizes that innovation can raise top income shares and highlights creative destruction's role in fostering mobility. AI-driven innovation by new entrants can create opportunities for people from diverse backgrounds. Keeping markets open to entry helps realize innovation's mobility-enhancing effects. The question is how open the door to the top stays.
Defending innovation-based growth theory in a low-growth period matters in itself. Pessimism can lead to policies neglecting innovation. The authors argue the framework remains relevant and offers solutions through growth policies. For AI, policies supporting innovation, competition and reallocation remain the right foundation, even when measured growth is weak.
New questions follow, including how to measure innovation correctly and how to design reforms and macroeconomic policies together. Both are central to the AI economy, where rapid technological change interacts with institutions and policy.
Distilled to one claim: innovation and creative destruction remain the engines of growth even when measured growth disappoints. Correctly measured, productivity may be rising faster than statistics suggest. Fluid markets and responsive macroeconomic policy reinforce each other. Innovation raises top incomes while fostering mobility. As AI drives the next technological revolution, these insights offer a constructive framework for policy supporting growth and opportunity.
Something for those already writing AI's obituary as a growth engine to sit with: check the measurement before the diagnosis. Secular stagnation has been declared before, and the tools to see a technological revolution clearly may lag the revolution itself.
Introduction
The 2008 crisis revived doubts about growth and resuscitated the debate on secular stagnation initiated by Hansen in 1938. Particularly in a post-crisis context of zero or very low growth, Schumpeterian theory may seem to be outdated. Nevertheless, in this article, we show that it remains a valid conceptual framework.We begin by recalling the main highlights of Schumpeter’s model of growth. We then argue that this conceptual framework remains relevant to many aspects of growth, notably secular stagnation, structural reforms and the debate on inequality. We show that because of creative destruction, the growth in productivity induced by innovation is underestimated. In addition, we explain why the Schumpeterian framework calls for a complementarity between structural reforms and macroeconomic policy. Finally, we show the positive impact of innovation and creative destruction on social mobility.
Takeaway
In this article, we examined three debates rekindled by the crisis of 2008: the debate on secular stagnation, the debate on the relationship between macroeconomic policy and structural reform, and the debate on widening inequalities and the link between inequalities, innovation and growth. We have tried to explain how, in each of these debates, the Schumpeterian paradigm makes it possible to reason differently and suggests both new questions about the growth process and some solutions in terms of growth policies. First, our discussion of secular stagnation has led us to believe that productivity increases are not measured correctly and are in fact largely underestimated, and that overall while our economies are actually subject to secular trends, linked to the diffusion of new technological revolutions, it is difficult to speak of stagnation once growth has been correctly measured. Our discussion on macroeconomic policy and structural reform showed that there is complementarity between macroeconomic policies (fiscal and/or monetary) that are more reactive to the economic cycle, and structural reforms that promote fluid markets: this is what we call the “Draghi approach”. Finally, our analysis of the relationship between innovation and inequality has shown that while innovation helps to increase the share of the top 1% in a country's total income, at the same time innovation and the reforms underpinning it tend to stimulate social mobility by virtue of creative destruction.1
Notes
- Philippe Aghion & Céline Antonin, Technical Progress and Growth since the Crisis, Revue de l'OFCE 55 (2019), https://doi.org/10.3917/reof.157.0055. Takeaway source: 5. Conclusion, reproduced from a free author or repository copy. ↩
Cite as: Philippe Aghion & Céline Antonin, Technical Progress and Growth since the Crisis, Revue de l'OFCE 55 (2019), https://doi.org/10.3917/reof.157.0055
Header image: Kuala Lumpur, Malaysia, Skyscrapers in city centre.jpg by Vyacheslav Argenberg, CC BY 4.0, via Wikimedia Commons.
