The Nobel Prize Justifies Economic Nationalism, Part III: When Creative Destruction Fails
Today is the third and final part of our series on the theories of Joel Mokyr, Philippe Aghion and Peter Howitt. 2025 Nobel Prize Laureates in Economics — which explore how innovation drives growth.
Monday on Breitbart Business Digest we reviewed Mokyr's study of political fragmentation and sovereignty. Yesterday we researched How Aghion and Howitt's theory of creative destruction shows why intellectual property theft in China is killing innovation. Today we will look at Aghion's empirical discovery that Offshoring disrupts communities in ways that domestic innovation does not..
We'll look at what happened when economists tested these theories against real data and discovered a truth that… confirms what Rust Belt voters have been saying for decades.
Not all job cuts are created equal. The impact on communities depends entirely on what is destroying jobs.
Offshoring destroys innovation: Aghion's late discovery
Building on the concept of creative destruction that won him the Nobel Prize, Philippe Aghion later conducted empirical research that revealed a politically explosive conclusion: not all job destruction leads to the creative benefits predicted by theory.
In a 2015 paper, along with colleagues including Angus Deaton (himself a 2015 Nobel laureate), Aghion explored How different types of employee turnover affect the well-being of society. The findings provide stark confirmation of what factory workers have been saying for years.
They discovered that Job turnover driven by internal innovation improves people's well-being. When a new technology startup displaces an old manufacturer, creative destruction is truly creative. New opportunities arise, displaced workers can find jobs at more productive companies, and communities benefit from higher growth rates.
But job losses due to offshoring in China showed the opposite effect. Communities experienced long-term welfare losses that persisted even after unemployment measures were enacted and even with unemployment insurance in place. The problem was not only temporary unemployment. It was constant lack of new opportunities which usually accompany creative destruction.
When a plant closes because it has been passed over by a stronger American company, that's progress. When the factory closes and moves to Shenzhen, it destruction without creativity.
Gravestones bearing the names of local closed mills lie across the street from the closed NewPage paper mill in Kimberly, Wisconsin, on December 11, 2008. (Matt Luedtke/Bloomberg via Getty Images)
Why the factory workers were right
This difference confirms what factory workers intuitively understood. The welfare effects of different types of job outflows are fundamentally asymmetric.
Voters in industrial regions were not irrational or protectionist when opposed the normalization of trade relations with China. They were not motivated by racial animus or xenophobia. They were responding to a real economic phenomenon, which is now confirmed by careful research.
Economists and journalists who dismissed their concerns as “economic anxiety” or worse, they were simply wrong. The data confirms this.
The results also explain why Trade Adjustment Assistance Programs Have Consistently Failed. The programs assumed that workers simply needed retraining and temporary support.
But the real problem was structural. When entire industries are exported, the internal mechanism of creative destruction breaks down. There is no new, more productive firm willing to hire displaced workers. There are simply no jobs.
You can retrain a Midwestern factory worker; but if there are no jobs in their community, retraining will do nothing. The lack of employers is not a qualification problem.
Industrial Policy Perpetuates Creative Destruction
Here's a rethink that emerges from Aghion's research: policies that keep industry domestic are not protectionism in the old sense – support for inefficient industries. They preserve the conditions for creative destruction that promotes prosperity.
When industries remain domesticcompetition stimulates innovation among American firms. Productive companies are expanding and unproductive companies are shrinking. Workers can move between local employers. The Aghion-Howitt cycle functions as the model predicts: creative destruction generates growth and improved living standards.
When will offshore industries subsidize foreign production?job cuts occur without creating jobs within the country. Workers face constant displacement. Communities are experiencing real welfare losses. You only get the destructive part – exactly what Aghion's empirical research has documented.
Choice not between free trade and protectionism. It is a choice between maintaining the conditions for domestic creative destruction and allowing those conditions to be disrupted by offshoring.
China does not compete on pure efficiency. It subsidizes production, provides land and energy at below market prices, requires foreign companies to produce locally to gain market access, and engages in systematic theft of intellectual property – as we discussed yesterday. This no comparative advantage. This is government-sponsored dumping designed to destroy foreign industrial potential.
Trump Tariffs Triumph
Donald Trump's tariffs correct China's market distortions and to maintain an internal competitive environment in which creative destruction can function as Aghion and Howitt's theory predicts.
Confident predictions that Trump's tariffs would lead to economic disaster turned out to be completely false. Economists decided to play half-educated political scientists, predicting massive retaliation, escalating trade wars, a global recession, soaring consumer prices and a collapse in exports.
President Donald Trump speaks at the signing ceremony for his tariff order on “Emancipation Day,” April 2, 2025, in the White House Rose Garden. (Official White House photo by Daniel Torok)
Instead, most countries reacted to tariffs with an offer to negotiatelower their own trade barriers and invest in the United States. There has been no collapse in global trade, U.S. economic growth has accelerated this year, and prices of consumer goods subject to tariffs are not rising rapidly.
The data confirmed the policy– exactly as Agion's structure suggests. The persistence of internal competition preserves the mechanism of creative destruction that stimulates innovation and prosperity.
Large domestic market with healthy internal competition. creates a lot of innovation pressure – it is the kind of dynamic competition that the Aghion-Howitt concept demonstrates that drives innovation and growth.
The argument that we need Chinese competition to keep American firms innovative is empirically false. We need competition, but this competition can and should be internalwhere the cycle of creative destruction functions properly and benefits the American community.
Economic nationalism is justified
Over three days, we explored how this year's Nobel Prize affirms economic nationalism at all levels:
- Historical research of Mokyr: Political fragmentation and sovereignty, rather than centralized harmonization, drive innovation. Unification of EU regulation threatens the very conditions that made Europe innovative.
- Aghion-Howitt theoretical model: Innovation requires companies to be able to profit from breakthroughs. Intellectual property theft in China disrupts this mechanism. The model also shows that moderate competition stimulates innovation, which domestic markets can provide without offshoring.
- Aghion's empirical findings: Offshoring disrupts communities in ways that domestic innovation does not. The impact on welfare is asymmetrical. Factory workers who opposed the China trade deal were rationally responding to real economic harm.
The people who award the Nobel Prize in Economics probably did not intend to support economic nationalism. But in honor of the work that explains why sovereignty, fair trade and internal competition promote prosperity, they have done just that.
