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Economy Updated: 19 Mar 2020

The economists Aghion and Howitt win Frontiers of Knowledge award for their research on economic balance based on creative destruction

The BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management has gone in this twelfth edition to Philippe Aghion and Peter Howitt for their fundamental contributions to the study of innovation, technical change, and competition policy. The joint research of these two economists builds on Joseph Schumpeter’s idea that productivity growth at the macroeconomic level stems from a process of creative destruction in which the continuous entry of new firms and technologies renders the incumbents obsolete.

The two economists started working together in 1987. Aghion’s specialization  in applied microeconomic theory found its ideal complement in the macro analysis that was the Canadian’s terrain. “I am very excited to share this award with Peter Howitt for developing what is now known as the Schumpeterian growth theory, which is a new way to look at growth economics,” said the French researcher On the other hand, professor Howitt dubbed his work with Philippe Aghion as the “most important of my career” and explained that the 33 years he’s devoted to these studies have taken up a very big part of his professional career “Now, to share such an important award with him; I just couldn’t be happier,” he added.

Until the end of the 1980s, the so-called neo-classical models explaining economic growth mostly confined themselves to the accumulation of physical capital, keeping technological change out of the equation. It was in the early 90, when endogenous growth models became more popular. These models started viewing a country’s growth as a product of its own system of economic and institutional organization. The first endogenous models simply assumed that technology exhibits constant returns to scale.

A partnership that gave birth to neo-Schumpeterian growth model

The Aghion-Howitt model provides an explanation based on the creative destruction produced by innovation at the microeconomic level. This, as professor Aghion explains, is based on three basic ideas: “The first is that innovation is the engine of long-term growth. To grow, you need innovation that builds upon previous innovation. The second is that innovation doesn’t come from heaven, but from entrepreneurs who pursue it. And the third is creative destruction, the fact that new technology displaces old technology.”

Philippe Aghion y Peter Howitt, BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management - BBVA Foundation

In this process, Professor Howitt expands, there are losers as well as winners: “New technologies not only generate lots of benefits, they also render old technologies obsolete along with the knowledge and skills of the human capital employed. This creates a conflict between the status quo and the entrepreneurs bringing new ideas into the marketplace. One that has to be resolved somehow, so society can enjoy the fruits of economic growth.”

The Aghion-Howitt model reflects the convergence of the two economists’ specializations. “My work,” Aghion explains, “was much more on the micro side, but I thought that answers could be found by putting micro into macro. Peter and I decided to harmonize our approaches to expand on Schumpeter’s ideas. We were a good fit together and that is how the model came about. The complementarity between macro and micro was what allowed us to progress.” The goal they set out to achieve was to build a growth theory that “puts firms and market structure at the heart of the growth process.”

They decided to pursue this goal via a two-way approach: developing models based on creative destruction that shed new light on several aspects of the growth process; and “establishing a continuous dialogue between theory and empirical research, with the purpose of using rich micro data to confront the predictions that distinguish our theory from other growth theories,” explains Aghion. The result, Aghion believes, “has improved our understanding of the underlying sources of growth.”

“Our thinking,” continues Howitt, “was influenced by the econometric research taking place in the 1980s which showed that short-run macroeconomic shocks tend to have long-run effects. This means that at least some of the technological change that sustains long-run growth arises from shocks that disturb economic activity in the short run. Creative destruction is a process that produces just this kind of result, and we were able to incorporate the process into a macroeconomic growth model by adapting the micro models developed by Jean Tirole.”

All this lead to the publication in 1992 of a joint paper in Econometrica entitled “A Model of Growth through Creative Destruction,” which provided a new economic framework which, the committee says, “is the basis for important positive and normative new insights, and identifies policies that can increase or decrease innovation and growth.” The neo-Schumpeterian growth model has proven a powerful tool to study a wide range of issues, like the linkages between innovation and job creation and destruction or its implications for wage inequality.