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The Ecology of Innovation

Ever since Joseph Schumpeter developed his theory of economic development, economists have been updating and filling in the gaps in his growth model. More than just a uniquely powerful insight, "creative destruction" has been an invitation for scholars to think both broadly and deeply about how innovation works.

CAMBRIDGE – The two books under review are further vindication of Isaiah Berlin’s famous contrast between the fox, “who knows many things,” and the hedgehog, “who knows one big thing.” Dan Breznitz is an empirical fox who has studied regions that have achieved rising prosperity by exploiting various opportunities for innovation in different ways. Philippe Aghion is a hedgehog who for 30 years has played a leading role in formalizing the growth model pioneered by Joseph Schumpeter and using it to understand today’s economy. Together, the two books offer a broad yet rigorous education in the economics of innovation.

Methodologically, however, the two approaches could hardly be more different. Breznitz, a professor at the University of Toronto’s Munk School of Global Affairs and Public Policy, approaches the subject through fieldwork, constructing rich case studies of different regions and strategies. By contrast, Aghion, who holds professorships at the Collège de France, INSEAD, and the London School of Economics, mobilizes a vast array of empirical economic research to demonstrate the power and reach of his model.

Models of Economic Growth

Aghion and his co-authors, Céline Antonin of Sciences Po and Simon Bunel of the French National Institute of Statistics and Economic Studies, build on the model of economic growth originally developed by MIT’s Robert Solow (for which Solow was awarded the Nobel Prize in economics in 1987). Solow elegantly showed how increasing the application of the two factors of production, labor and capital, would increase output. But the mathematics underpinning his initial model was too simple. When applied to measured increases in output, it explained far too little: higher quantities of labor and capital accounted for less than half of observed economic growth. The remaining share came to be known as the “Solow residual.”