The Innovation Nation — Part II: Creative Destruction and the Case for Canada's Leap

March 2026 | midagent | John Pope

Peter Howitt, Canadian Economist & 2025 Nobel Prize Winner

For decades, Canada has been playing the same children's game as many other nations around the world: Follow The Leader.

It turns out, there is a much better game for nations to play, if the objective of your nation is to increase the living standards for every citizen: Leapfrog.

Innovation is not a policy preference. It is fundamental to a nation's wellbeing and the only sustainable economic strategy there is in a capitalist society.

There is a question that economists have been circling around for over a century, and that policymakers have been largely avoiding for decades: what actually makes a healthy capitalist economy grow? Not just for a fiscal quarter or an election cycle, but sustainably and generationally, in ways that compound over lifetimes?

The comfortable and conservative answer — the one that fills budget documents and campaign platforms from Ottawa to Wellington — is that economic growth comes from investment, from education, from infrastructure, from stable institutions and sound monetary policy. All of those things matter. But none of them is the answer.

The answer, as a remarkable body of evidence has been telling us since at least the 1950s, is innovation. Not as a variable that economies occasionally produce when conditions are right, but as the singular, irreplaceable driver of long-run prosperity in any market economy. Break that chain, and everything else — the investment, the education, the infrastructure — slowly becomes a more expensive way of standing still.

In October 2025, the Nobel Committee in Stockholm made this case as explicitly as an academic institution ever does. It awarded the Prize in Economic Sciences jointly to Joel Mokyr, Philippe Aghion, and Peter Howitt — specifically, in the committee's own precise language, "for having explained innovation-driven economic growth." The recognition was long overdue. The work it honoured had been reshaping how serious economists think about growth for three decades. What it has not yet reshaped — with sufficient urgency — is how Canada thinks about its own economic future.

That is what this post is about.

The Theory Behind the Urgency

Peter Howitt is, by any measure, one of the most consequential economists Canada has ever produced. Born in Canada, trained at Northwestern, and for decades associated with Brown University and the University of Western Ontario, he is the co-architect — alongside his long-time collaborator Philippe Aghion — of what the Nobel Committee cited as "the theory of sustained growth through creative destruction."

The intellectual lineage runs back to Joseph Schumpeter, the Austrian economist who first coined the term "creative destruction" in the 1940s. Schumpeter's insight was simple and devastating: capitalism grows not by adding to what already exists, but by replacing it. Every major technological breakthrough since the industrial age — the steam engine, the electric motor, the microchip — did not merely supplement what came before. It rendered it obsolete. The candle did not coexist peacefully with the light bulb. The typewriter did not quietly share an office with the word processor. The destruction was the point.

What Schumpeter gave us as an evocative metaphor, Howitt and Aghion transformed into a rigorous analytical framework. Their 1992 paper, "A Model of Growth through Creative Destruction," published in Econometrica, built a mathematical model that showed precisely how this process works at the level of firms, industries, and whole economies. It demonstrated that technological progress is not an external force that arrives like weather — it is an endogenous outcome of deliberate choices: firms investing in R&D, entrepreneurs risking capital on new ideas, economies structuring their institutions to reward innovation rather than protect incumbency.

The model's core mechanics are worth understanding, because they have direct consequences for policy. In the Howitt-Aghion framework, innovation works like a quality ladder. Each new breakthrough climbs a rung above the previous one, capturing temporary monopoly rents while destroying the value of whatever occupied that rung before. The innovator wins, temporarily. The incumbent loses, permanently. And growth emerges from the aggregate of countless such contests, perpetually and relentlessly, across every sector of the economy simultaneously.

This has two immediate implications that are deeply uncomfortable for anyone invested in the status quo.

The first is that protecting incumbents from creative destruction — shielding existing industries from competition, preserving existing firms from disruption, allowing existing monopolies to calcify — is not a conservative economic strategy. It is a growth-suppressing one. As Howitt himself noted in a recent interview following the Nobel announcement, the framework suggests that economies should probably be more vigorous in enforcing competition policy than they have been, precisely because it is competitive pressure — the threat of being displaced — that motivates the R&D investment that drives growth. Monopolists without rivals have every incentive to preserve the status quo and every reason to resist the next quality ladder rung.

The second implication is that innovation creates winners and losers, and not just among companies. Entire categories of employment become obsolete. Communities built around industries that get disrupted face genuine upheaval. Howitt is direct about this: creative destruction is creative and destructive, in roughly equal measure, and pretending otherwise — running an innovation agenda without an honest conversation about transition costs — is a way of generating political backlash that ultimately stalls the agenda itself.

Canada, right now, in the specific historical moment of 2026, is experiencing both dynamics simultaneously. The AI transition is producing enormous creative destruction across white-collar professional services, financial back-offices, logistics operations, and government administration. And the political reaction — anxiety, hesitation, a reflexive instinct to slow things down — is precisely the response that the Howitt-Aghion framework would predict from an economy that has not yet resolved the tension between the old quality ladder and the new one.

The question is not whether this transition will happen. It is already happening. The question is whether Canada will lead it, follow it, or get run over by it.

Three Countries That Decided

Part I of this series introduced Estonia and South Korea as proof points for the proposition that national transformation through deliberate innovation strategy is not theoretical — it has been done, repeatedly, by countries with fewer natural advantages than Canada possesses. It is worth returning to those examples, and adding a third, with more analytical precision now that we have the Howitt-Aghion framework as a lens.

What each of these countries did, in their respective ways, was recognize that economic history does not reward patience. It rewards position. The question was never whether the next technological wave would arrive. It was whether you would be producing it, distributing it, governing it — or simply consuming it on terms set by someone else.

Estonia made its foundational decision in the mid-1990s, when the internet was a novelty and most governments were still treating digital infrastructure as a departmental IT expense rather than a national asset. The Tiger Leap programme invested in connectivity and digital literacy across the entire country. The e-Estonia identity framework turned a bureaucratic necessity — a national ID card — into the keystone of a complete digital society. The result was not just efficiency gains. It was a compounding platform: each digital service built on top of the last, each efficiency saving reinvested into the next layer, until Estonia found itself exporting not just software companies but a model of digital governance that governments on six continents were importing.

The Howitt-Aghion framework explains why this worked. Estonia didn't just lower the cost of existing government services. It moved the country up a quality ladder in digital governance — and then, critically, refused to protect the incumbents of the old ladder. Paper-based bureaucracy, legacy ministerial processes, analogue identity verification — none of it was protected from disruption. The destruction was deliberate. The creation was compounding.

South Korea is a larger and more complicated story, but the same logic operates at industrial scale. The Miracle on the Han River was not a miracle. It was an engineered outcome of a society that treated innovation as a survival strategy. Between 1996 and 2015, South Korea's R&D spending as a share of GDP grew by nearly ninety percent, ultimately reaching levels higher than both the United States and Japan. The national education system was restructured to prioritize technical capability. The relationship between government and the private sector — particularly the great chaebol conglomerates — was coordinated around strategic export industries rather than managed as an adversarial regulatory encounter.

The crucial detail, through the lens of creative destruction theory, is that South Korea was willing to let old industries die. The transition from agriculture to light manufacturing to heavy industry to semiconductors and consumer electronics involved enormous disruption at each stage. Workers were displaced. Communities were restructured. The political economy of each transition was painful. But the government's commitment to moving up the quality ladder — rather than subsidizing the industries of the previous rung — is precisely what produced the compounding growth that turned a country devastated by war into one of the world's ten largest economies in a single lifetime.

China adds a third dimension that is essential to understand, because it is the most recent and the most aggressive application of deliberate innovation strategy in modern economic history. China's trajectory is often described in Western policy discussions primarily through the lens of geopolitics — as a challenge to be managed, a threat to be contained. That framing is both politically understandable and analytically incomplete.

What China has actually done, from the Made in China 2025 plan through the Next Generation AI Development Plan of 2017 and the AI+ Initiative launched in 2024, is execute a structured, phased, whole-of-government commitment to moving up quality ladders in precisely the industries that will define the next century of economic activity. By 2024, China's total data output had reached 41 zettabytes — a twenty-five percent year-on-year increase. Its AI industry was valued at over $70 billion and encompassed more than 4,300 companies. DeepSeek's open-source model releases in early 2025 challenged previous assumptions about US dominance in frontier AI, and demonstrated that the gap between Chinese and American AI capability had closed far faster than most Western analysts had anticipated.

The mechanism, again, is recognizable through the Howitt-Aghion lens. China did not merely invest in AI as a technology. It treated AI as national infrastructure — as foundational as roads and electricity — and organized its policy, regulatory, and capital allocation systems around that premise. It regulated and incentivized simultaneously. It coordinated across ministries and levels of government to create an ecosystem in which the gains from innovation compound rather than dissipate. And critically — unlike most Western economies — it was willing to disrupt its own existing industries, not merely the industries of its competitors.

There is a policy lesson in this that transcends the geopolitical frame entirely: the countries that are winning the innovation race are doing so because they have adopted innovation as an organizing principle, not as a departmental priority. The difference is not one of degree. It is one of kind.

The Canadian Trap

Which returns us, uncomfortably, to Canada in 2026.

Canada is not an innovation laggard in every dimension. We have world-class AI research institutions in Mila, the Vector Institute, and the Alberta Machine Intelligence Institute. We have Cohere and a constellation of serious AI companies. We have the most highly educated workforce per capita on the planet. We have financial institutions — the Maple Eight pension funds — that collectively manage over $2 trillion in assets and have demonstrated that they can be world-class allocators of capital when they choose to be.

What we do not have is an organizing principle.

Our innovation policy is, in effect, a collection of well-intentioned programmes sitting inside silos that do not talk to each other, coordinated by departments that do not share incentive structures, evaluated against metrics that were designed to measure the last economy rather than accelerate the next one. We fund research without systematically commercializing it. We commercialize ideas without providing the scaling capital to make them global. We celebrate Shopify — as we should — while failing to ask why it took a fifteen-year company-building odyssey for one Ottawa entrepreneur to prove the concept, rather than a deliberately constructed national ecosystem that makes such outcomes routine rather than exceptional.

The Howitt-Aghion framework identifies this pathology precisely. When incumbent firms have "significant political weight and the ability to influence economic policy," they will use it to protect their position on the current quality ladder — slowing the introduction of new technologies that would displace their monopoly rents. Canada's incumbent industries — financial services, telecommunications, retail, professional services — are not villains. They are rational economic actors doing exactly what the theory predicts. The problem is that the political economy has been structured to amplify their voices and mute the voices of the innovators who would displace them.

The result is an economy that is very good at discovering things and considerably less good at becoming the dominant global supplier of those things. We discover the Transformer architecture for neural networks at the University of Toronto, and OpenAI and Google build the products. We produce world-class AI researchers and then watch them decamp to San Francisco. We identify the potential for an AI-powered sovereignty stack and then find ourselves debating, in committee, whether it constitutes an appropriate use of public funds.

Estonia had 1.3 million people and no natural resources, and it built the world's most advanced digital state.

South Korea had a per-capita income of $100 in 1960, and it built Samsung, and one of the most technically-advanced nations on Earth.

China had a largely agricultural economy two generations ago, and it is now competing for AI supremacy with the United States, after already becoming the manufacturing and green energy superpower of the world.

Canada has world-class universities, the most educated workforce on the planet, $2 trillion in pension capital under management, abundant natural resources, a stable legal system, predictable governance and the extraordinary advantage of having watched all three of those national transformations happen in real time.

And Canada also has a new leader who has elevated our status and presence on the global stage in a way that no other Canadian prime minister has in decades.

What Canada lacks is not the ingredients. It is only the decision.

What a Decision Looks Like

A decision, in this context, is not a budget announcement. It is not a national strategy document with seventeen pillars and a five-year horizon. It is not a panel of expert advisers producing recommendations that get filed in the same drawer as the previous panel's recommendations.

A decision is the moment when a society agrees, collectively and irrevocably, that its organizing principle has changed. Estonia decided, in the mid-1990s, that it was going to be a digital state. South Korea decided, in the aftermath of the Korean War, that it was going to build an innovation-driven export economy or perish. China decided, with the Deng Xiaoping reforms and then with each successive five-year plan, that it was going to move up the quality ladder in whatever the most strategically important industries of the next decade turned out to be.

None of those decisions were comfortable. All of them involved accepting creative destruction at scale — displacing incumbents, restructuring industries, absorbing the short-term pain of transition in exchange for the long-term compounding of innovation-driven growth. All of them required governments that were willing to do something that runs against the grain of most democratic political incentives: prioritize a twenty-year outcome over a four-year electoral cycle.

Canada is not constitutionally incapable of this kind of decision. We have made them before. The construction of the Canadian Pacific Railway. The creation of Medicare. The establishment of the Canada Pension Plan. Each of these was, in its moment, a decision that looked radical and that subsequent generations regarded as obvious. The pattern is consistent: the decisions that define national character are the ones that were hardest to make when they were being made.

The AI transition is that kind of decision, arriving at that kind of moment. The transition from legacy industrial and service economies to AI-first systems is not a gradual shift that can be managed incrementally. It is a quality ladder change — the kind that Howitt and Aghion spent their careers modelling — and the countries that are positioning at the top of that ladder right now are not doing so by waiting to see how things develop.

Canada's version of this decision has a particular character, because our advantages are different from Estonia's or South Korea's or China's. We are not a small country rebuilding from occupation. We are not a war-ravaged economy with nothing to lose. We are not a centrally planned state with the institutional capacity to direct capital allocation by decree.

What we are is a mid-size liberal democracy with extraordinary latent assets, a political culture that tends toward caution, and a window of opportunity that is, right now, genuinely open — but that does not stay open indefinitely.

The Howitt-Aghion framework tells us that innovation is endogenous: it responds to incentives, to institutions, to the competitive environment that policy creates. It also tells us that the economies that protect incumbents from creative destruction — that slow the introduction of new technologies to preserve existing monopoly rents — pay for that protection in long-run growth. The protection feels safe in the short term. The cost accrues over decades. By the time it is obvious, it is very difficult to reverse.

Canada is, right now, in a position where the cost has not yet fully accrued. The talent is here. The capital is here. The research is here. The institutional framework, with modifications, could support a serious innovation strategy.

What is needed is not another report. What is needed is the decision to adopt innovation as the organizing principle of the Canadian economy — not as a policy priority that competes with other priorities, but as the lens through which every policy decision, from competition law to pension capital allocation to procurement to immigration, is evaluated.

Estonia chose digital. South Korea chose industrial export. China chose AI infrastructure. The specifics of each choice were shaped by circumstances. The meta-level decision — that innovation is the organizing principle, that moving up the quality ladder is the national mission — was the same in every case.

Canada's moment is now. The quality ladder is visible. The rung above us is AI-first economic infrastructure, and we have more of what it takes to climb it than almost any other country on Earth.

The question — as it has always been — is whether we are ready to make the decision.

Peter Howitt spent his career proving that the growth engine exists and explaining how it works.

Now it is Canada's turn to run it.