Abstract
Capitalism is like a spirited horse: it takes off readily, escaping control. But if we hold its reins firmly, it goes where we wish.
The book Power of Creative Destruction strives to explore the historical enigmas connected to the process of world growth through the lens of creative destruction. The book revisits the larger debates over innovation and growth in developed nations using the Schumpeterian model. It brings the role of the state and civil society in increasing the wealth of nations. This is done by stimulating innovations while protecting the citizens from the excesses of capitalism. The main axis of the book is predicated on the argument that creative destruction is the driving force of capitalism, by which new innovations make existing technologies obsolete. At the same time, new firms, jobs and activities that arise in this process ensure perpetual renewal and reproduction.
The book consists of 15 chapters, which may be classified into two broad categories. The first one includes the chapters that deal with growth and other socio-economic and political issues. The book lays the connection between these issues and the creative destruction and the wealth of nations. It further explores the enigmas of growth, the middle-income trap, deindustrialisation and transition to a service economy, and the effect of creative destruction on unemployment, health and happiness. The book further discusses how historically the state made decisions on simultaneously investing in innovation and dealing with the risks associated with it. In addition, the book analyses how checks on executives can prevent corruption that may hinder innovation. The book emphasises that a proper market-state-civil society triangle is indispensable for the functioning of an innovative economy—the golden triangle. The second part of the book broadly discusses the origin of innovation, its need, funding, and the importance of moving towards green innovation. The section discusses the relationship of innovation with competition, inequality and globalisation. Drawing from the analysis, the book concludes that there is a need to reckon with future capitalism and reform it to be more sustainable and equitable.
It lays out the stylised facts of take-off by arguing that the articulation between technology and institutional factors led to take-off in England and France. The new technologies enabled the production and diffusion of knowledge; meanwhile, the new institutions safeguarded the innovators and thus kept investment in innovation going. The authors emphasise that cumulative innovation, institutions and competition are the fundamentals of creative destruction. In this context, the book mentions the famous case of Eli Whitney and His Cotton Gin, where the inventor had to use up all the profits he made from the invention on the patents for enforcing intellectual property rights. This led to the famous declaration that ‘An invention can be so valuable as to be worthless to the inventor’.
In understanding the complementarity between the protection of intellectual property rights and competition, the book argues that competition is not inconsistent with a well-designed industrial policy. The author(s) classify industrial policies as horizontal and non-horizontal for stimulating innovation and growth. The horizontal policies are the ones that apply to all sectors of the economy, while the non-horizontal policies include multi-level policies. A typical example of a horizontal policy is investing in the knowledge economy, resulting in positive externalities. However, a state needs to have non-horizontal intervention in areas where individuals tend to underinvest, such as green innovation. This helps to overcome problems of coordination and path dependence. The path dependence is weighed by the high cost of change and habit, and by the coordination problem in sectors where initial entry costs are high (e.g., the aeronautics industry). Even with much acceleration in innovation, it does not show up in productivity growth. The book argues that it is due to structural rigidities and inappropriate economic policies, the mismeasurement of productivity growth, superstar firms discouraging new entrants, and the increasing difficulty of producing new ideas.
In the growth process, some developing countries move towards advanced countries, termed as club convergence, whereas some countries are caught midstream—the middle-income trap. This failure to catch up traces back to the same reasons for the lack of competition and appropriate structural reforms. Unlike the advanced countries, which undertake innovation-led growth, developing nations mostly go with imitation-led growth. In the case of Indian firms, there is an incumbent inability to grow beyond a specific size for many firms. In most Indian firms, the firm’s management is mainly within the family. The firm stops growing when the family is out of members to lead the firm. Thus, thinness in the managerial market, poor infrastructure and imperfections in the credit market hinder India’s growth. Another interesting observation in the book is the case of South Korea, a country that has escaped the middle-income trap syndrome. This is majorly because of the formation of large industrial and financial conglomerates by the government, known as chaebols.
The book further tries to answer the question: Should we fear or wish for technological revolutions? An interesting implication of the analysis is that firms that automate become job creators more than firms that do not automate sufficiently. The general-purpose technology (GPT) or fundamental innovation is where the technological revolution originates, which spreads to the entire economy through secondary innovations. Such diffusion of new GPT is similar to the spread of the COVID-19 pandemic—slow and progressive at first, then rising rapidly and reaching a peak. Contrary to the common belief that technology leads to unemployment, the book asserts that no technological revolution has led to mass unemployment in history. Along similar lines, the chapter titled Can We Bypass Industrialization starts by making a general observation that countries with a low standard of living generally have large agriculture sectors but less developed manufacturing and services sectors, whereas countries with a high standard of living work in the service sector. As the chapter goes on, the authors effectively unpack why industrialisation is a crucial phase in economic development, with India’s single standout example. This is an interesting counterexample where the nation based its development on services and offered an alternative development model.
In this sequel, the author(s) explore the possibilities of sustainable growth through green innovation. Public policy is more effective and should come to the fore to pursue green innovation, as the private sector exhibits path dependence. Moreover, there should be diffusion of green innovation by recognising the legitimate voice of emerging economies and allowing them to follow the path of developed nations to catch up with them. Thus, rather than all countries coordinating from the outset, unilateral coordination by developed nations with gradual dissemination to less-developed nations would suffice. This would help combat inequality. An interesting, paradoxical situation is that innovation increases top income inequality and social mobility. Thus, innovation, especially coming from new entrants, is a mechanism to generate social mobility.
The complexity and deep inequality of individuals’ access to becoming innovators, where their success depends on social and familial factors, and the role of lobbying, have been explored across chapters. Furthermore, innovation has widened the gender gap in remuneration in firms, with males benefiting more from innovations. Innovation has a central role in the take-off of per capita gross domestic product and life expectancy, but it needs democracy and less corruption for innovation to foster.
The book concludes by offering thoughts on reassessing the future of capitalism, exploring the possible synthesis of combining the positive elements of cutthroat capitalism and cuddly capitalism. This has been successfully done in Denmark and Sweden, where they prioritised innovation, keeping in mind the requirements of a welfare state. The authors assert that the way out of stalled growth and exploding inequality is not to abolish capitalism but to invent a better capitalism.
This impressive book provides valuable insights and has put together many stylised facts about growth. There is sheer optimism throughout the book regarding the future of capitalism, and it tries to explain the underpinnings of creative destruction. However, there is less focus on the solutions to the issues raised. I am less convinced by the way the book is concluded. Although the book recognises the possibility of a ‘both/and’ form of capitalism rather than an ‘either/or choice’ between cutthroat and cuddly capitalism, it does not throw light on how to make it happen in the real-life world. This critical question remains unanswered. Moreover, the book could have explored the concept of inclusive innovation through the lens of agency and intersectionality to understand the freedom and constraints of women in innovation.
However, the Power of Creative Destruction undoubtedly makes a valuable contribution to the literature on innovation and growth. The book can serve as essential background reading for any researcher interested in inequality, innovation and growth, and it helps guide policy.
