I had the honor of interviewing Henry George \lecturer and potential Nobel Peace Prize candidate Philippe Aghion on Thursday. Aghion has centered his research on a growth and contract theory called the Schumpeterian paradigm, which is also the subject of his book, “Endogenous Growth Theory.” He is a well-respected economist, as well as a Professor at the prestigious Harvard University.
The Schumpeterian paradigm is a complex theory stemming from in-depth economic theories. I asked Aghion to simplify his theory, as if he were explaining it to someone who is unfamiliar with economics. He centered his theory on three basic principles: innovation, entrepreneurism and motivation. In addition, he believes in the positive effects of “creative destruction.” According to creative destruction, new technology continuously replaces old technology, such as the development of simple cellular phones into smartphones. This notion of creative destruction can be applied to economies as well. Capitalism destroys previous economic orders, and it devalues existing wealth in order to clear the ground for the creation of new wealth. Aghion strongly believes that this cycle is beneficial to economic growth since it paves the way for new wealth to be formed.
Aghion also believes competition is directly connected to growth. He claims that more competition forces firms to become innovative and creative. As a result, there are more quality products and services being produced to stay competitive. The constant competition between Android and iPhone devices displays the positive benefits of competition. Consumers reap the benefits of firms trying to reach market dominance, since the firm creates new features and benefits to stay ahead.
Even though Aghion perceives competition as being beneficial, he also warns about the harmful effects it could have on the economy. Aghion argues that competition-oriented objectives are counterproductive to raising revenue and profitability; this is because they limit the options of strategies for firms, as well as firms’ ability to offer innovative responses to changes in the market. If a firm is unable to compete with the competition, it will fall behind. Going back to the phone example, very few mobile carriers possess market dominance. The two names that often come to mind are Verizon and AT&T. Even though Sprint and T-Mobile are still relevant, they fall behind the dominance of these two leading characters. As a result, it is extremely hard for new carriers to penetrate the market due to the competition that already exists.
Aghion said his theory aims to take a complex model and simplify it so it can be practical for many applications. His standpoint on competition is relevant to many businesses and firms. With the continuing increase in globalization, competition will always be relevant. If a company is able to be innovative and motivated, it will succeed economically.
Nov. 6, 2014