CREATIVE DESTRUCTION

To summarize the previous sections, regional spillovers seem real, but based on the limited evidence we have, probably not powerful enough for the task of keeping growth going at the national level.

Romer was describing a force that ensured technologies would constantly keep improving, and more so in countries pursuing pro-innovation policies. Unlike in Solow’s world, technological progress would no longer be some mysterious force we have no control over.

To build a model where there is ongoing innovation and unbridled growth, Romer needed a force to counterbalance what every scientist and engineer knows: the more things have already been invented in the past, the harder it is to find an original idea. To get there, Romer assumed that once produced, new ideas become freely available for others to build on. Knowledge spills over. The advantage of building on previous ideas is that the new inventor is standing on the shoulders of giants. The inventor just needs to tweak the previous invention, not invent something entirely novel. In this way, the growth process can continue unabated.

Romer is a true optimist, as is perhaps evident from his faith that he would be able to entirely ring-fence his charter city project from the notorious politics of Honduras. The same optimism inspires his vision of the innovation process. In his world, new ideas just waft in like the smell of roses on a summer breeze.

In the real world, it seems, the production of new ideas is a much more fraught affair. Many marketable ideas are produced by firms, and firms tend to be possessive of their discoveries. Pharmaceutical companies and software firms, for example, do many things, legal and sometimes not so legal, to acquire and retain control over new ideas.

This shift in perspectives is not without its consequences. In Romer’s world, innovation is a boon innovators offer the world. They do make some money, but what the economy gets in return is incomparably more valuable because future generations of innovators get to build on it, for free. As a result, Romer in particular wants us to bend over backward to make the world as friendly as possible for innovators—low taxes on profits and capital gains, incubators and innovation cells, patents that protect the innovators’ rights as long as possible, and so on.

Aghion and Howitt have a much less romantic view of innovators. Interestingly, Aghion is the rare economist who had a chance to observe the innovative process close at hand. His mother, who was from a French-speaking Jewish family, founded the well-known designer brand Chloe when she moved to France, after being forced to leave her home in Egypt in the early 1950s. The years when Chloe went from being a dressmaker to a global brand were exactly the years of Philippe’s growing up. Nevertheless, inspired by Joseph Schumpeter (the Harvard economist of the mid–twentieth century and braggart extraordinaire⁵⁰), Aghion sees innovation as a process of creative destruction, in which each innovation involves both creation of the new and destruction of the old.⁵¹ In his world, sometimes the creative dominates, but at other times the destructive holds sway; novelties get created not because they are useful but because they defeat someone’s existing patent. Making it more rewarding to innovate might backfire as a result. Innovators may worry that the time interval between the moment they displace the previous incumbent patent holder and the less happy moment they lose their own patent to someone else could be frustratingly short. Patent protection is important to get people to innovate, but it is easy to get too much of it, permitting the incumbents to rest on their laurels. Instead, there needs to be a balance between greenfield innovation and the possibility of adopting other people’s ideas.