Peter Howitt has a prescription for what ails the Canadian economy.
The Nobel laureate economist, a native of Guelph, Ont., believes the success formula for a thriving economy is free trade, competition and a skilled workforce.
Yes, that is what you learned in Economics 101. But we have only a casual regard for putting those basics into practice.
At this advanced hour in our trade conflict with the U.S., Canada is still hobbled by internal trade barriers that the provinces have vowed to remove but remain in place with few exceptions.
Canada is dominated by oligopolies that stifle competition and have little incentive to innovate.
And our education system too often trains people for vocations that might become obsolete, when they should be teaching analytics and adaptability suited to all economic conditions.
Howitt and his longtime collaborator Philippe Aghion, a French economist, were jointly awarded half of the Nobel Prize in Economic Sciences last month for redefining “creative destruction” as the relentless pursuit of innovation and productivity gains. The other half of the prize was awarded to Dutch-born economic historian Joel Mokyr of Northwestern University for his work on the factors leading to the Industrial Revolution in Europe.
Creative destruction is the constant renewal that occurs in a healthy economy.
Companies and industries that were once viable are rendered obsolete by the new and more innovative ones that replace them — unless, that is, the basics noted above are lacking.
For lack of a truly open Canadian market, for instance, contractors in Nova Scotia can’t win business in other provinces. That stunts their growth and means less choice and higher prices for provinces with barriers to interprovincial trade.
Free trade exposes companies to new ideas in product development and efficient manufacturing methods.
Only when Ontario dropped its discriminatory pricing against out-of-province wines did Ontario vintners start making world-class wines.
The impoverishment of real competition is widespread in Canada, with its oligopolies in grocery retailing, banking, insurance, telecoms, airlines and other sectors.
And while Canada helped invent artificial intelligence (AI), its education system has not nurtured an entrepreneurial class to commercialize AI inventions, ceding that lucrative activity to Silicon Valley.
Popular use of the term creative destruction dates from Austrian economist Joseph Schumpeter’s 1942 book, “Capitalism, Socialism and Democracy.”
Howitt and Aghion showed its practical application in their oft-cited academic paper “A Model of Growth Theory Through Creative Destruction,” published in 1992.
Howitt, who retired in 2013, described the creative destruction process in a nutshell in a talk last month.
“This is a simple idea,” Howitt said, “that in order to understand technological progress, you have to understand it takes place through waves of innovation that bring great benefits to mankind, but also generate tremendous losses to many people whose livelihoods depend upon technologies and capital that are rendered obsolete by these new technologies.”
And so, the BlackBerry was swept aside by the cheaper, more user-friendly iPhone. And factory automation, not offshoring, has claimed millions of working-class jobs with unceasing advances in robotics.
That process is now underway in AI applications that can already do the job of a junior accountant or legal assistant.
“Mass unemployment is always predicted from new technologies, and typically it doesn’t happen,” Howitt, 79, said last week.
Most often, dynamic change makes workers more productive and the value of their labour increases as they move to more efficient workplaces.
For governments, the best defence against technological unemployment, Howitt has said, is education, or investments in “human capital.” And yet education in Canada, and conspicuously Ontario, is chronically underfunded.
Howitt counsels that governments should not give in to pressure to bail out struggling enterprises that are doomed by their failure to reinvent themselves.
“There is always a conflict between protecting people’s jobs and investments and promoting technological change and economic growth,” Howitt has written.
That conflict is often resolved in favour of the status quo, which perpetuates stagnation as incumbents block new entrants to an industry.
For example, Ottawa and Ontario have spent billions of dollars subsidizing GM Oshawa. Yet its workforce has steadily dropped to a mere 1,000 from a 1980s peak of 23,000 with yet another mass layoff scheduled for January.
Western automakers have botched an electric vehicle (EV) transition they’ve never really believed in. So, the future of automaking belongs to BYD and other Chinese automakers, relative newcomers with superior technology that are running circles around “legacy” automakers.
And governments should ease up on their lavish support of small business. It’s new businesses, not small ones, that drive the innovation that creates jobs and higher productivity, Howitt observes.
It’s upstart Microsoft dethroning IBM. It’s Instagram helping push Kodak into the grave. It’s a young Ottawa outfit called Shopify helping e-commerce merchants take market share from traditional retailers in more than 175 countries.
In its “buy Canadian” procurement practices, the Carney government will be tested to choose innovative new suppliers rather than give into the political pressure to rely on incumbents.
Our national rebuilding project is a chance to help create a generation of innovative startup enterprises ready to take on the world.
