Revue Européenne du Droit
A better regulated capitalism
Issue #4


Issue #4


Philippe Aghion

Revue européenne du droit, Summer 2022, n°4

The last two years have been marked by an extremely dense literature inviting us to reinvent or rethink capitalism and, more broadly, our social models. What do you think the current crisis says about our economy and our social model?

Covid-19 has pointed to a number of existing dysfunctions that affect capitalism as it is practised around the world. In particular, the crisis has highlighted the failure of the US social model to protect the most vulnerable of its members. Many Americans lost their jobs as a result of the pandemic, lost their health insurance at a critical time and fell into poverty. In Europe, and in France in particular, the pandemic highlighted a cruel innovation deficit: the country of Pasteur, François Jacob and messenger-RNA proved unable to produce a vaccine against Covid-19, the only way out of the crisis, and the vulnerability of an economy that had gone too far in delocalising its value chains, including in strategic sectors such as health. In China, Covid-19 showed the limits of a capitalism without freedom of expression, where the withholding of information and self-censorship delayed awareness of the danger of the new virus, which greatly contributed to its proliferation. These limits have thus brutally reminded us of the need to define the features of a more innovative, protective and inclusive policy by combining the strengths of American and European capitalism without accepting the necessity of a dichotomy.

Is capitalism under threat today? 

Capitalism is facing an identity crisis like it has never experienced before. No one can deny that capitalism, especially when unregulated, has several negative consequences: it exacerbates inequality and allows the strongest to inhibit the weak; it can lead to fragmented societies and a loss of a sense of community; it makes work more precarious, increasing stress and deteriorating the health of individuals; it allows incumbent companies to prevent the entry of new innovative companies through lobbying; it aggravates global warming and environmental deterioration; it causes financial crises which then generate major recessions such as those of 1929 and 2008.

However, getting rid of capitalism is not the solution. In the last century, we have experienced an alternative system of central planning in the Soviet Union and the communist countries of Central and Eastern Europe. This system did not allow these countries to move beyond an intermediate level of development because it did not provide the freedom and economic incentives for individuals to push the frontiers of innovation. We have also recently experimented with degrowth, but do we really want to sustain the way of life that was ours during the first lock-down? Capitalism is a spirited horse: it can easily run away, out of control. But if you hold the reins firmly, it goes where you want it to. Despite favourable developments, the United States is still far from a system that protects individuals against the risks of job loss or illness, against macroeconomic shocks such as the 2008 or Covid-19 crisis, or against climate risk. As for the European countries, they have not yet been able to create the ecosystem – universities, institutional investors, venture capitalists, patrons, DARPA – that would allow them to be initiators and not followers in the technological revolutions to come, and they are in great danger of being overtaken by China. I believe in the convergence of these models rather than in the overcoming of the capitalist system.

Faced with the ‘rise in inequality’, the ‘concentration of rents’, the ‘casualisation of work’ and the ‘deterioration of health and the environment’, you call in your latest book 1 for a better regulation of capitalism in order to direct creative destruction towards the objective of fairer and greener growth. What would be the essential features of this? 

We must seek to better regulate capitalism rather than trying to overcome it at all costs. Creative destruction, which is its driving force, has enabled a considerable growth in our living standards since the first industrial revolution. Our main challenge today is to better understand the drivers of this power and then to direct it towards the goal of greener and fairer growth: new innovations are constantly occurring and rendering existing technologies obsolete, new businesses are constantly competing with existing businesses, and new jobs and activities are being created and are constantly replacing existing jobs and activities. On the one hand, there is a need to protect: to support viable companies in order to save jobs and preserve accumulated human capital, but on the other hand, there is a need to reallocate resources, in order to encourage the entry of new companies and new activities, either more efficient or more responsive to consumers’ needs.

The state, business and civil society form an essential triangle to accompany, rather than halt, the process of creative destruction. 

State intervention is essential to redirect technical change towards green innovation, and thus avoid an environmental disaster: without substituting itself to private firms, it must act on affecting the latter’s incentives. In the absence of state intervention, companies will spontaneously choose to innovate in polluting technologies and will do so more and more intensively over time because of the path dependency effect. A recent study 2 showed that car companies that innovated in combustion engines in the past tend to innovate in combustion engines in the future, to the detriment of green innovation. The consequence will be an increase in pollution, and an acceleration of global warming. The introduction of a carbon tax or a subsidy for green innovation has the effect of making the change of technology less costly and redirecting the innovative forces of car companies towards electric engines. But the state cannot be the only actor in the ecological transition. There are limits to what the state can achieve on its own, as Roland Bénabou and Jean Tirole explain 3 . On the one hand, governments are often exposed to lobbying by different interest groups. On the other hand, global warming is a global problem, over which the government of a particular country has little control. 

Civil society may also be able to play a role, and in particular consumers, who appear to be increasingly willing to integrate social and environmental considerations into their product choices. Indeed, consumers have the power to greatly influence the choices of firms 4 . For example, in countries where consumers express genuine concern for the environment, increased competition in the automotive market is leading companies to innovate more in green technologies, such as electric engines. The idea here is intuitive: Since competition leads firms to innovate more to improve their price-performance ratio and escape competition from rival firms, in an economy where consumers value the environment and innovation is oriented, increased competition leads firms to innovate to lower the ratio between the price and the environmental cost of the product, ie to innovate in the discovery of new, greener products to escape competition. Conversely, in an economy where consumers are more concerned about the price of goods than their environmental cost, increased competition will not encourage green innovation and will exacerbate the environmental problem. This is the ‘China Syndrome’: increased competition lowers prices and increases consumer demand; production increases and so does pollution.

You also see civil society as playing an important role in the implementation of an ‘incomplete contract’. 

Constitutions are ‘incomplete contracts’, there is no guarantee in reality that these instruments will actually be implemented or activated.  The role of civil society is to give substance to traditional checks and balances and to move executive control from the notional to the actual. As Bowles and Carlin 5 have shown, civil society has been the necessary complement to the ‘state-market’ pairing to stem the pandemic. The decisive role of the market and competition in encouraging the discovery of new treatments and vaccines, the irreplaceable role of the state in managing the health crisis in the short term, particularly through the ‘whatever it takes’ approach, and in enabling the economy to recover in the medium term, must not overshadow the role of civil society as the third – and indispensable – pillar of an exit strategy from the epidemic. Korea’s good performance during the epidemic owes much to the self-discipline and civic spirit that prevailed in that country and that made it possible to implement social distancing measures and care for infected individuals very early on, without relying solely on the power of the state and on coercion. 

The mobilisation of civil society thus continues to move the capitalist system towards a better regulated, more inclusive and protective, and more environmentally friendly system.

What seems to undermine the cohesion of civil society today is inequality. Traditionally, it is considered that fiscal policy is the tool of choice for the redistribution of wealth, so that all stakeholders benefit from the economic system. Would you say that tax policy is still the main instrument for reducing inequality today? 

The fiscal tool is certainly essential to stimulate growth and make it more inclusive: both because it allows the state to invest in the levers of growth such as education, health, research and infrastructure; and because it allows the state to redistribute wealth and insure against individual (job losses, illness, deskilling) or macroeconomic (wars, financial crises, pandemics) risks. 

However, taxation is an essential lever but should not be considered as the only lever for making growth fairer. Innovation is certainly a source of inequality ‘at the top’ of the income distribution, but the innovative company is a formidable lever for social mobility insofar as it enables its employees, particularly the least qualified, to be trained and promoted. A recent study 6 based on British data for the period 2004-2015 showed that at any age, the salary of a low-skilled individual is substantially higher if he or she is employed by an innovative firm than if he or she is employed in a less innovative firm. It can also be seen that wages increase significantly with age in an innovative firm. The State can in turn stimulate social mobility by encouraging innovative companies to create sustainable and qualified jobs, ie good jobs, and to really invest in the professional training of their employees, in particular the less qualified. 

The calls for the development of a new industrial policy is becoming increasingly strong in Europe. Should European competition policy be reviewed to meet these new ambitions? 

Competition and industrial policy are not necessarily mutually exclusive. In the aftermath of the Second World War, national champions were the spearhead of industrial policy in many countries. This was the case in France, where industrial policy was a pillar of the reconstruction and growth that characterised the Trente Glorieuses. In the United States, it proved to be a determining factor, particularly in the fields of defence, aeronautics and aerospace, in gaining supremacy over the Soviet Union. Although the various sources of state inefficiency – linked to information asymmetries or the possibility of collusion between the state and certain private actors – have led to a decline in industrial policy, they do not disqualify it. 

Beyond horizontal policies, intended to stimulate innovation and growth in all sectors of the economy (via investments in the knowledge economy, vocational training, or reforms of the goods and labour markets), a vertical industrial policy can be justified by certain rigidities, such as the weight of habits or the high cost of change (ie, path dependency). 

State intervention can also solve coordination problems and accelerate the entry of new actors into strategic sectors when such entry requires significant costs. This is precisely the reason for the success of state intervention in the aeronautics sector (Boeing, Airbus) where fixed costs are high and demand uncertain, or the Defense Advanced Research Projects Agency set up in the United States in 1958 to facilitate the transition from fundamental research to applications and marketing for breakthrough innovations (Internet, GPS, etc.). 

These state interventions, which are necessarily limited in number, must focus on the economic and social priorities that dictate government choices (energy transition, health, defence) in competitive sectors with high added value. Industrial policy therefore retains a role, provided that it is compatible with competition and, more generally, with growth through innovation.

Beyond the case of industrial policy, do you think that competition law needs to be more widely reformed to take into account the new characteristics of our economies?

While affirming the need for a strong competition policy in Europe, as led by Commissioner Vestager, it is indeed necessary today to review our competition standards. Our policy has remained too focused on the concepts of ‘market definition’ and ‘market shares’ and on a set of standards of proof that are too rigid. We need to encourage a shift from an overly passive and static view of competition to a more dynamic view that encourages innovation and large-scale industrial projects. Measures of competitive intensity need to be reviewed. Highly concentrated sectors, in which only one company operates, are nevertheless highly competitive insofar as they have contestable markets, insofar as any new supplier would be able to enter freely or to leave at no additional cost: in these markets, any price increase by the incumbent company would immediately provoke the entry of another company producing the same product. The much-maligned Alstom Siemens decision should be a wake-up call on these issues.

The work on the Digital Markets Act also shows the challenges raised by the digital economy and the so-called structuring power of a number of digital platforms which, because of their size, are able to significantly limit the ability of users to carry out an economic activity or communicate online. The first criterion must be whether or not a player prevents the entry of a new player into the market and therefore prevents innovation. By their nature, some segments of the economy may host fewer firms than others, hence the need for a segmented analysis incorporating the notion of vertical integration.


  1. P. Aghion, C. Antonin and S. Bunel, The Power of Creative Destruction, Harvard University Press, 2021 (originally 2020).
  2. P. Aghion, A. Dechezleprêtre, D. Hémous, R. Martin, J. Van Reenen, “Carbon taxes, path dependency and directed technical change: Evidence from the auto industry” Journal of Political Economy, 2016, 124 (1) p. 1-51. 
  3. R. Bénabou, J. Tirole, “Individual and corporate social responsibility”, Economica, 2010, 77 (305), pp. 1-19.
  4. P. Aghion, R. Bénabou, R. Martin and A. Roulet, “Environmental preferences and technological choices: Is market competition clean or dirty?”, NBER Working Papers, April 2020, No. 26921.
  5. S. Bowles and W. Carlin, “The coming battle for the COVID-19 narrative”, Voxeu, 10 April 2020.
  6. P. Aghion, A. Bergeaud, R. Blundell and R. Griffith, “The innovation premium to soft skills in low-skilled occupations”, mimeo, Collège de France, 2019
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Philippe Aghion, A better regulated capitalism, Aug 2022, 198-200.

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