The Nobel Prize Justifies Economic Nationalism, Part 3: When Creative Destruction Fails

This is the final installment in our series examining the theories of Joel Mokyr, Philippe Aghion, and Peter Howitt, who are the 2025 Nobel Prize winners in Economics. We delve into the relationship between innovation and economic growth.

In previous articles, we discussed Mokyr’s insights into political division and sovereignty, and we explored Aghion and Howitt’s theories regarding creative destruction, particularly how China’s theft of intellectual property stifles innovation. Today, we will focus on Aghion’s empirical findings, revealing how offshoring, unlike domestic innovation, harms communities.

It’s crucial to understand that not all job losses are equal; the nature of what causes these job losses greatly affects the wider community.

Offshoring Detracts from Innovation: Aghion’s Findings

Philippe Aghion later utilized his Nobel-winning framework of creative destruction for empirical research, unveiling politically significant insights. Not all job loss predicted by his theory results in positive, creative outcomes.

In a 2015 study with authors including Angus Deaton (a Nobel laureate himself), Aghion examined how varying turnover rates impact community welfare, corroborating long-held beliefs of factory workers.

Their findings indicate that domestic innovation boosts turnover rates, which in turn lifts community morale. Creative destruction leads to genuine creativity when new tech startups replace outdated manufacturers. This creates jobs and stimulates growth.

However, job loss from offshoring produced adverse effects in places like China, leading to long-term welfare declines that persisted even when unemployment numbers were managed or when unemployment benefits were in place. The issue extended beyond temporary joblessness; it often involved the absence of new opportunities, a key aspect of creative destruction.

If a factory closes because a superior American competitor emerges, that’s progress. But when the factory relocates to Shenzhen, we see destruction without creativity.

Why Were Factory Workers Correct?

This distinction validates what factory workers have long sensed: the welfare implications of various types of turnover aren’t equally distributed.

Workers in manufacturing hubs weren’t irrational or protectionist. They were responding to a genuine economic pattern that subsequent rigorous research has confirmed.

Economists and commentators often labeled their concerns as mere “economic insecurity” or dismissed them outright. The emerging data now contradicts those dismissals.

Moreover, these findings clarify why initiatives like trade adjustment support failed consistently; the assumption that workers only required retraining overlooked deeper structural issues.

When entire sectors relocate overseas, the domestic mechanisms for creative destruction falter. There simply aren’t new, productive companies waiting to hire the laid-off workers. Instead, jobs vanish.

We can theoretically retrain factory workers in the Midwest, but if no jobs exist in their vicinity, such training becomes futile. The problem isn’t a skills gap, but rather a lack of job opportunities.

Industrial Policy and Creative Destruction

Aghion’s study presents certain conclusions: policies that retain industry within national boundaries support, rather than hinder, creative conditions that enhance welfare.

When industries remain domestic, competition among American companies fosters innovation. Productive businesses grow while less efficient ones shrink. Workers have the chance to shift between employers within the country, adhering to the Aghion-Howitt model. Thus, creative destruction leads to both growth and enhanced living conditions.

In contrast, when foreign industries are subsidized, and domestic jobs aren’t generated, job loss becomes inevitable. Workers face ongoing challenges, and communities witness genuine welfare decline. All that remains is the destructive aspect. Aghion’s research underscores this reality.

The core choice isn’t between free trade and protectionism; it’s about whether to foster domestic disruption or allow it to be sidelined by offshoring.

China’s competition extends beyond simple efficiency. As highlighted previously, it employs subsidies, offers below-market resources, demands local manufacturing for market access, and engages in systematic intellectual property violations. This isn’t about comparative advantage but rather state-sponsored efforts to undermine foreign industrial capabilities.

Trump’s Tariff Strategy

President Donald Trump’s tariffs addressed distortions in the Chinese market and fostered the domestic competitive framework necessary for creative destruction, in line with Aghion and Howitt’s predictions.

His previous assertions that these tariffs would lead to economic upheaval proved to be incorrect. Many economists indulged in speculative predictions of severe retaliation, trade wars, global recessions, price surges, and export declines.

However, what unfolded was quite different: many nations chose to negotiate and agreed to lower their trade barriers while investing in the U.S. Global trade remained stable, and U.S. economic growth continued its upward trajectory this year. Prices on affected consumer goods did not spike significantly either.

The data backed the policy—as Aghion’s framework suggested. Maintaining domestic competition enables the mechanisms of creative destruction to thrive, driving innovation and overall well-being.

A robust domestic market characterized by healthy competition fuels innovative pressures. Indeed, as demonstrated within Aghion-Howitt’s model, dynamic competition is essential for fostering innovation and growth.

The belief that competition with China is crucial for American firms to stay innovative lacks empirical support. While competition is necessary, it must be domestic, as that’s where the creative destruction cycle operates effectively and benefits American communities.

Vindicating Economic Nationalism

Over these three articles, we’ve examined how this year’s Nobel Prize has provided credibility to economic nationalism across various dimensions.

• Mokyr’s historical study: Political fragmentation and sovereignty, not centralized control, drive innovation. EU regulatory unification threatens the innovative landscape of Europe.
• Aghion-Howitt theoretical framework: Innovation flourishes when firms can capitalize on breakthroughs. China’s intellectual property theft undermines this mechanism while demonstrating how reasonable competition cultivates innovation without offshoring.
• Aghion’s empirical research: Offshoring detracts from community well-being compared to domestic innovation. The welfare ramifications are unequal, and the factory workers against the China trade agreement reacted to tangible economic damage.

Those who awarded the Nobel Prize likely didn’t intentionally endorse economic nationalism, but their recognition of these achievements inadvertently highlights the importance of sovereignty, fair trade, and domestic competition in promoting prosperity.