Innovation Without Competition: A Recipe for Secular Stagnation by Lex Gillard

Lex Gillard
4 days ago
4 min read

This article is written by Lex Gillard, a WES 2026 student journalist and writer for The Boar.

Growth is slowing not because capitalism has run out of ideas, but because dominant firms have suppressed the very creative destruction that drives growth in a bid to protect their own profits.

In a talk at the Warwick Economics Summit, Philippe Aghion, the 2025 Nobel Prize winner in economics, explained his theory of creative destruction.

The idea of ‘creative destruction’ was first authored by Austrian economist Joseph Schumpeter in the 1940s. However, for over 50 years, his analysis was largely descriptive.

Philippe Aghion and Peter Howitt transformed the theory in their 1992 article in Econometrica, turning the once qualitative theory into a framework with quantitative backing. Their work has over 17,000 citations, bringing Schumpeter’s theory to life.

The Schumpeterian Growth paradigm, the growth model they created, relies on three main ideas. Firstly, long-run growth is driven by a cumulative process of innovation where each innovator builds upon the last. The second idea is that “innovations do not come from heaven” and are instead the result of “entrepreneurial activities motivated by the prospect of innovation rents”. Innovation rents are earned when you discover a new product or a cheaper way to produce a current one, until you are superseded by new innovators. The third idea is that new innovations make old technologies obsolete.

Aghion discusses a “contradiction” within the theory. You need innovation rents to motivate innovation, but yesterday’s innovators are likely to use their rents to prevent subsequent innovation, as they do not want to be subject to creative destruction themselves. According to Aghion, “regulating a market economy is largely about how to manage this contradiction”.

In theory, these temporary monopoly rents provide incentives to innovate. However, in practice, dominant firms are increasingly converting these temporary rents into entrenched monopoly power through data protection, introducing barriers to entry, and acquiring any firm that could challenge them. One of the model's main predictions is that firm turnover is positively correlated with per capita GDP growth, and therefore, if firms rely on monopoly power, we may not see the GDP per capita growth we would like.

We saw a surge in growth from firms like Amazon, Microsoft, and Google during the IT revolution. These insurgent firms increased competition, reduced prices and forced incumbents to adapt or die. We saw this with Yahoo, which had significant search engine dominance but lost it to Google’s better algorithm.

However, the companies that once embodied creative destruction are now so large that they constantly try to kill it. In 2014, Facebook acquired WhatsApp for $19 billion, despite the company having annual revenue of less than $10 million. Mark Zuckerberg recognised the potential threat in the messaging space, and, given the firm's low annual turnover, the acquisition was not caught by traditional merger controls. Facebook swooped in to eliminate a potential competitor, protecting its own dominant position. This is known as a ‘killer acquisition’ and is very common.

This is a direct assault on creative destruction. If entry is bought out before the firm scales, destruction will never occur, leaving old, likely inefficient firms to continue operating.

Western economies, especially in Europe, are suffering from secular stagnation. This is characterised by persistent low growth, weak investment demand, and high savings, often leading to low or negative real interest rates. The average firm markup in the UK has increased by approximately 10% in the last 25 years, according to government research. With innovation, you should expect to see costs fall as technology improves, but we have seen the opposite.

In America, what went wrong was that “competition policy did not adapt to the IT revolution”. Aghion argued that the USA should’ve been much more demanding on data sharing and on green-lighting mergers and acquisitions. Acquisitions should not be allowed to have negative effects on future innovation. I would argue the same for Europe as well, but also note that the lack of American competition oversight has led to global monopolies like Apple, Google, and Microsoft, which all benefit from significant monopoly rents.

In 2023, it was reported that Apple had $167 billion in cash, while Alphabet had $150 billion in cash not in use. These firms have significant funds they could use for productive economic activity, but because they lack competition, they have no need to invest them.

Currently, Western economies are struggling to grow, largely because the

Schumpeterian Growth paradigm is hindered by monopolies intent on maintaining their profit margins. Governments need to challenge these large firms and prevent acquisitions that may further entrench their position. We have allowed these dominant firms to construct moats so wide that competition cannot reach them. If growth depends on creative destruction like Aghion argues, policy needs to stop deepening the

moat and lower the drawbridge for new entrants.

The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.

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