Peter Howitt, the Canadian who shared this year’s Nobel Prize in Economics, helped at least one future policymaker see the world more clearly when he taught at London, Ont.’s Western University. “I can still remember a few ‘aha’ moments in his classes where, because of his explanation, I could understand something that the day before seemed impenetrable,” Bank of Canada governor Tiff Macklem, who earned a master’s degree and a PhD in economics at Western in the 1980s, told the CBC.

More of us might benefit from Howitt’s guidance. He and Philippe Aghion won the Nobel for devising a way to model creative destruction, and thus showed mathematically how sustained economic growth requires the constant disruption of existing firms by more innovative upstarts. (Howitt and Aghion shared the award with economic historian Joel Mokyr, who is also worth reading.)

Canada is experiencing a productivity crisis and has slid down the innovation rankings. Howitt, who left Western for Ohio State University in 1996, admits he’s been away from home for too long to have precise ideas about what’s gone wrong since he left. But in an interview with The Logic, he shared thoughts on some of the bigger trends affecting advanced economies everywhere, including the fast advance of artificial intelligence and why industry concentration has become a drag on economic growth. 

This transcript has been edited for clarity and brevity.

I feel like it’s convention to ask a Nobel laureate what they were doing when they got the call. 

Well, I’m probably like most of the North Americans—I was asleep. 

My first call didn’t actually come from the Nobel Committee, and it didn’t actually come to me. I had been up the night before, and my phone had run out of juice. 

At a quarter-after-six in the morning, my wife’s phone started ringing, and even though it was on “Do Not Disturb,” somebody had found a way to get through it. It turns out it was a Swedish journalist calling to congratulate me. I thought at first it was a practical joke, because this has happened to other people, but then it didn’t take me long to figure out that it was for real. So it was quite a shock.

Given the times in which we live, what do you find you’re thinking about the most?

The current disruption of global trading patterns. The potential benefits and losses and disruption that is going to be caused by the development of artificial intelligence. I worry about the investment boom—most people seem to recognize it as an investment bubble that’s associated with AI. 

I worry also about competition policy in most countries. I don’t think that they fully take into account that firms don’t just compete through prices. They compete through innovations. That makes a big difference. 

And I worry about whether countries will be able to navigate all of the problems of adjusting to artificial intelligence, in particular, through reorienting educational policy. That’s a long list. 

It is a long list. Let’s pick up on that last point. What do you think we need to do to prepare the current workforce, and future workforces, for this AI age? 

In general, we have to recognize that a general purpose technology like artificial intelligence—and going back to the steam engine, we’ve had many very disruptive general purpose technologies—what’s obvious at first is that it’s going to replace labour. What happens as it develops—and I see no reason to think it’s going to be different in this case—is that, yes, it does replace some kinds of labor, but it really enhances the productivity of other skills. That opens up new jobs that hadn’t been thought of in the past.

And you have to be aware that artificial intelligence has the potential to [help] people, but not necessarily in doing what they used to do, which can now be done artificially. 

Radiologists, for example. A lot of their work can be done by computers already, but they have a certain empathy for people. They have a certain level of communication skills that are very important to help their patients when it comes to a question of diagnosis and prescription. Those human skills, personal skills and communication, are going to be made much more productive by this new technology, but they’re not necessarily the kind of skills that radiologists had to be trained in in the past. 

How should the education system adapt? Do we need to overhaul the way we think about education, or simply emphasize the sorts of things that you’re talking about?

It’s mostly a matter of emphasis. 

We’ve known that the way people benefit from acquiring human capital, especially at an early age in school, but even later on, is not so much from the facts and techniques that they’ve learned. It’s interpersonal skills. This was already calling for a reorientation of education to emphasize skills in teamwork and leadership, empathy and co-operation. This new wave of innovation and artificial intelligence is just going to make that all the more important.

You spoke of AI as a general purpose technology. Is it safe to assume this technological disruption will unfold roughly as previous technological disruptions have unfolded? Or is there something different about AI? 

The way a general purpose technology evolves and impacts society is very hard to predict. It requires a lot of further innovations before it even raises the level of output in an economy. 

At first, you can go for long periods of time when the new technology is being deployed all over the place, but you can’t see any increase in productivity. This is what happened in the 1980s, when [Nobel laureate economist] Bob Solow was famous for saying, ‘You can see the computer age everywhere but in the productivity statistics.’ And of course, what was happening, when we looked back, we realized people at first were spending a lot of time trying to figure out how to use their word processors. We were still hiring secretaries [when] people were willing to type their own things. It was supposed to save a lot on paper because we had digital copies of things, but people kept making photocopies anyway. 

The new technology is eventually going to replace the old technology, but for a while they get used side by side, so you might get a little bit more output, but you’re spending a lot more because you’re using two technologies instead of one, and people haven’t really learned how to completely dispense with the old one. It takes a lot of innovation. 

Who’s going to generate the real growth from this AI boom? Is it the hyperscalers, the people who are building the large language models? Or is the growth going to come from those who figure out how to deploy AI in creative ways? 

Clearly, a lot of the rents, a lot of the profits are going to accrue to the people that are developing these large language models. But they’re going to be intermediate products and when we take a look at [gross domestic product], we only count the final products. The benefit to society is going to have to come through some final output that’s generated more efficiently by this new technology. 

If it’s like all other previous general purpose technologies, we won’t know perhaps for decades, when the real benefits are going to come. In the meantime, there’s going to be a tremendous investment boom, as there was in the dot-com boom back in the 1990s; as there was in railroads back in the 19th century and so on, which is ultimately going to lead to a huge number of bankruptcies and collapses, just as we had with the dot-com crash. But in the end, somebody is going to emerge from all this as having developed a technology that’s really going to be productive and beneficial. 

You mentioned that the AI bubble was on your list of concerns. How do you think we’re set up to absorb the fallout from a collapse?

Canada is particularly fortunate in having a conservative kind of financial system, which is quite sensibly regulated. It’s generally thought among economists that Canada has the worst financial system of all until there’s a financial crash, and then it’s the best of them. So I think Canada’s probably going to do as well as anybody when that happens.

To me, what’s really unusual is that so many people who are still riding the bubble acknowledge that, ‘Yes, it’s a bubble. It’s going to burst.’ But they’re quite confident that they can get out in time and they won’t be hurt by it. But of course, we know that not everybody can, right? 

Productivity growth in Canada, Europe and other advanced economies has become weak. Do you have a sense of what happened?

In the U.S., I attribute a lot of the productivity slowdown to the rise of the superstar firms. A lot of industries, not just high-tech sectors, but throughout the economy, have become increasingly concentrated. So the market share of the top one or two or three firms has grown quite dramatically since, say, 2000. There are a number of reasons to believe that this has led to a slowdown in innovation and slowdown in new technologies being developed by the potential upstarts. 

It’s something that the theory that Aghion and I developed, I think, has something to say about, because that theory emphasizes the potential conflict that starts with disruptive new technologies who want to break into an industry and the existing incumbent leaders of that industry, who at one time in the past, were the disruptive innovators who broke through. 

It’s this conflict between the new and the old that always has to be resolved one way or another for technological change to take place and therefore for economic growth to occur over the long run. And I believe that the U.S. needs a reorientation of the competition policy to deal with this. In Canada, I expect it’s very similar—that people used to, and still do to a large extent, think that competition policy should focus on how firms compete with price. The competition policy should try to make sure that firms don’t restrict trade so as to artificially raise prices, collude to raise prices.

What we emphasize in our theory is that firms don’t just compete through prices. In many cases, more importantly, they compete through innovation, through product quality and product design. It’s very important to the firms that their products have a high reputation and they’re often reluctant to compete through prices. Lowering their prices might give a signal that it’s not such a high-quality product, after all. 

Firms that are established leaders in an industry have many instruments they can use to suppress competition by making it difficult for people to innovate so as to effectively compete against them or even replace them in certain markets. They can set up patent thickets. They can engage in pre-emptive mergers. They can use their political connections to influence regulators and policymakers to favour them over any potential new competition. There are just a lot of ways. 

So: competition. Is there something else that the policymakers can do to increase economic dynamism, to bring more new firms into the economy? 

Openness to international trade goes hand-in-hand with that. I know it’s a very turbulent environment now with respect to global international trade. I have been following to some extent the Canadian government’s efforts to try to restructure their trading relationships so as to get something a little more reliable than what they’ve got right now, a little less dependent on the United States. I think that’s very important, not just in order to enjoy the benefits of trade, but also because international trade is a mechanism for technology transfer, being open to international trade in many ways facilitates that transfer. It makes people more aware of technologies that are being developed elsewhere. It puts businesses more on their toes when they see people importing new products that incorporate new ideas, and makes them a little quicker to improve their own products. And this can be a real win-win situation, and countries that fall off from world leadership and begin to stagnate, very often, are characterized by restrictive trade policies. Many countries have restricted trade in order to protect certain favoured producers in different industries. That’s rarely a recipe for continued success.

The prime minister talks about a rupture with the U.S., and it feels like everything is on the table. What should Canada do?

From what I can see, the federal government is doing what it should be doing right now, which is calmly finding alternatives to a lot of the trade with the United States and not sort of punching itself in the eye by imposing retaliatory tariffs, much as you would like to do that. 

But you know, tariffs, it’s not a zero-sum game. It’s not as if you can hurt the other side [while] helping yourself. Typically, when you impose tariffs, you hurt yourself and your trading partners. You lose some of the gains from trade. It’s more common than not that the economically optimal reaction to a trade war is just not to take part. It’s hard to do politically, because it looks like you’re just sitting there being knocked around and not defending the country. It takes some political skills that I certainly wouldn’t have.

I also think that it’s likely that Canada should be rethinking competition policy, trying to make it even more possible for young, new, innovative firms to get a foothold in established industries.