In the sections that follow, I will report what I have learned from the works of the 2025 Nobel Prize winners in Economics and apply these insights to the challenges facing Europe, and Germany in particular. The question at stake is not only Europe’s future prosperity and growth, but whether a humane form of capitalism—one that combines innovation, production, and social protection—can ultimately succeed.
2. The Decline of the Roman Empire and the Decline of Productive Activity: Incentive Structures
What struck me most in The Invention of Enterprise was not its discussion of entrepreneurs around the Industrial Revolution, but its treatment of entrepreneurship in the pre-modern world. These early activities resemble prototypes of human economic behavior, revealing how incentives shape the use of talent under different institutional conditions.
In ancient Greece and Rome, the dominant forms of entrepreneurship were conquest, plunder, enslavement, and rent-seeking through tax farming. These activities required creativity, coordination, and risk-taking, and were often regarded as virtuous within their societies. In classical China, social status followed the hierarchy of scholar–farmer–artisan–merchant, with commerce placed at the bottom. In the Greco-Roman world, trade and business were frequently delegated to slaves. Despite their differences, these systems shared a common feature: most entrepreneurial effort was extractive. As Daron Acemoglu argues in Why Nations Fail, wealth in such systems was often created by harming others rather than by expanding overall economic surplus.
This is not to say that productive entrepreneurship did not exist. Workshops, trade networks, and manufacturing were present, though limited in scope. In ancient Mesopotamia, temples used slaves and asylum-seekers to produce surplus goods: arguably an early form of state-owned enterprise. James C. Scott describes this in detail in Against the Grain. The Babylonian entrepreneurs discussed in the second chapter of The Invention of Enterprise further illustrate these dynamics. This raises a central question: why has human creativity been so abundant in exploiting others, yet so limited in productive activity throughout most of history?
The book draws on Douglass North’s concept of incentive structures to provide an answer. Every society contains individuals who are creative and willing to take risks. What they choose to do depends on the institutional environment they face. When social norms and rewards favor predation and extraction, innovation and institutional change will follow that path. When landowners and rentiers are granted prestige and power, talented individuals will invest their efforts accordingly. The same logic applies today. If becoming a civil servant or banker offers higher returns than becoming an entrepreneur or scientist, career choices will adjust, and elites in those sectors will then reinvest even more resources. It should not surprise us if mathematicians and physicists gravitate toward investment banking or bureaucracy rather than productive entrepreneurship.
The economist Yang Xiaokai once criticized neoclassical economics for focusing excessively on the optimal allocation of scarce resources, rather than on how new resources are created. This misplaced emphasis may also shape left wing intellectual traditions. When social elites concentrate on redistributing wealth, the political response from the left often takes the form of stronger redistribution as well. As Joel Mokyr argues in Chapter 7 of The Invention of Enterprise, institutions determine whether human effort results in wealth creation or merely in redistribution.
The first chapter of The Invention of Enterprise goes further, suggesting that the collapse of the Roman Empire and of Roman urban civilization, was the outcome of an anti-productive culture and institutional framework. As rent-seeking and external conquest replaced commerce as the main sources of imperial wealth, and as oligarchy and polarization eroded domestic markets, the empire weakened. Rent-seeking, after all, is often just an economics jargon for corruption. In this sense, creativity in destruction came to dominate creative destruction. An excessive focus on activities that are profitable but do not generate real economic surplus ultimately hollowed out the state’s productive capacity.
One paradox I found particularly interesting concerns slavery. While slavery is often assumed to be inherently inefficient, in ancient Greece and Rome it sometimes functioned as part of the productive sector. In the classical world, productive opportunities were scarce and often socially stigmatized. The most “productive” forms of slavery—such as Roman silver mining—were also the most brutally exploitative. By contrast, in less productive forms of slavery, such as household or luxury slaves, living standards could be higher. The role of slavery in imperial decline therefore deserves closer examination, especially the extent to where surplus was reinvested into further production.
Finally, the first chapter of The Invention of Enterprise notes that in classical societies the three most profitable activities were tax farming, public construction contracts, and supplying courts, temples, or armies. These were all closely tied to the state, rather than to the kind of productive entrepreneurship associated with modern capitalism. It is not difficult to see parallels today in government procurement, defense industries, contractors, and the corruption that often surrounds them. Relying on such sectors as engines of growth is short-sighted, as they tend to crowd out resources from more productive sectors of the economy.
Studying history helps us understand past human behavior and provides human behavioral data from environments that cannot be replicated today. When opportunities for productive activity are already limited, institutions that further reward unproductive—or even destructive—entrepreneurship make societies more fragile. Europe’s ongoing deindustrialization should therefore be a source of concern, especially in an era of rising geopolitical risk. If operating a factory is less profitable than real estate speculation, who will choose to become an entrepreneur? If incentive structures discourage productive activity and creative destruction, Europe will struggle to cultivate and retain its own productive entrepreneurs.
Europe’s deep sensitivity to exploitation and human rights violations is fully understandable given its history. But this does not imply that production itself must be abandoned. On the contrary, this brings us to the next question: why re-learning the industrialization experiences of late-developing economies is crucial for Europe today.
3. Relearning from Late-Industrializing Economies: Growth as a Social Project
A hard reality is that Europe has fallen behind the United States and China in production and technological innovation. This erosion of productive capacity has also weakened Europe’s institutional appeal and the persuasiveness of its values. More than once, I have heard non-EU friends express skepticism toward Europe’s environmental ideals. A friend from Taiwan and another from Serbia were both impressed by Germany’s clean air and natural beauty—but also recalled the pollution in their home countries. In their view, Europe’s environmental success partly reflects the outsourcing of chemical production and manufacturing beyond EU borders.
This perception undermines precisely what Europe seeks to promote: a green transition and the diffusion of inclusive institutions. If advanced European firms attempt to evade environmental and human-rights standards by relocating abroad, it becomes implausible to expect firms elsewhere to internalize those norms. Achieving Europe’s political and moral objectives therefore requires rebuilding strong productive and innovative capabilities at home. In Power and Progress, Daron Acemoglu emphasizes that societies can—and must—shape the direction of technological change, not merely its pace.
From this perspective, deindustrialized Europe has once again become a latecomer—this time relative to the United States and China. Unlike past late-industrializing economies, Europe’s comparative advantage lies in its human capital and high-standard institutional framework. To reindustrialize, Europe must relearn lessons from successful late developers. These experiences also help explain China’s growth trajectory. Compared with the United States, Europe benefits from higher public acceptance of government intervention; compared with China, it retains a more open and inclusive social order.
Both The Invention of Enterprise and Philippe Aghion’s The Power of Creative Destruction discuss successful late industrializers such as Prussia, France, and South Korea. From the perspective of entrepreneurship and creative destruction, state intervention and regulation do not necessarily hinder development. The administrative capacity of European welfare states could be redirected toward supporting innovation and productive growth.
The experiences of Britain and early Prussia, discussed in The Invention of Enterprise, will sound familiar to German readers. Britain’s industrialization—driven by large-scale infrastructure projects such as canals and railways combined with intense capitalist competition—closely resembles China’s post-2001 development after joining the WTO. Both involved massive investment in transport infrastructure, fierce market competition, and long working hours. They show how classical capitalism works and its power. The key difference was Britain’s democratic institutions, even if they were highly exclusionary in the Victorian era. Supported by its colonial empire, British entrepreneurs engaged in sustained creative destruction until the second industrial revolution shifted leadership to the United States and Germany.
Chapter 10 of The Invention of Enterprise details Prussia’s early industrialization. In 1821, Prussia introduced the Preußische Gewerbeförderung, a policy that promoted the import of machinery—sometimes through smuggling and industrial espionage. Skilled workers then reverse-engineered British machine tools. By the 1870s, Germany faced overcapacity, and export dumping became a means of maintaining domestic stability while creating entrepreneurial opportunities. Protectionism and limited domestic markets pushed innovation toward cost reduction, yielding significant productivity gains. This trajectory closely resembles China’s industrial upgrading process. Prussia’s engineering culture—still visible among Chinese STEM graduates, who's training has great affinity with reverse engineering (starting from the GaoKao training)—offers useful parallels, though the differences between China and Prussia must not be overlooked.
Aghion also highlights the role of South Korea’s industrial policy in its modernization. Had Korea followed classical comparative advantage, it would likely have remained a relatively prosperous agricultural economy. Although chaebols later constrained creative destruction, their role in industrialization was decisive. A similar argument applies to Japan, where pre-war (before WWII) Zaibatsu played a crucial role—an issue examined in Chapter 17 of The Invention of Enterprise. Meiji Japan’s modernization left a deep imprint on East Asian intellectual history, especially in China. I would claim that most of Chinese liberal intellectuals believe that the ideal future for a democratic China is a country like Japan.
These late-industrialization paths were often accompanied by destruction and humanitarian costs, explaining why many Western left wing intellectuals remain critical of them. Yet if Europe wishes to preserve social dynamism, innovation, and the ability to promote what it considers good values, it must maintain productive capacity—both material and intellectual. Deindustrialization risks undermining what Joel Mokyr emphasized in his 2025 Nobel Prize Lecture: the positive feedback loop between propositional knowledge (theoretical understanding) and prescriptive knowledge (practical know-how). Practical knowledge decays without use. Europe’s deindustrialization and aging population may weaken this feedback loop.
A 2025 assessment of academic freedom by the Volkswagen Foundation finds that EU countries score higher in academic freedom than both the United States and China. Yet new technologies are increasingly invented and manufactured in China and the U.S. Whether Germany’s “hidden champions” can survive the decline of the automotive sector remains uncertain. This growing gap between theoretical knowledge and industrial practice may itself reflect a breakdown of Mokyr’s two-knowledge feedback loop.
A final lesson from late developers is the role of planned protectionism. Asian economies benefited from it, and China has paid close attention. As Friedrich Hayek acknowledged in The Road to Serfdom, and as Aghion discusses in The Power of Creative Destruction, inviting some countries in global trade has never been unconditional. Aghion acknacknowledged that while facing dumping, tariffs and protectionism should be used. Capital and labor differ radically in mobility; only undocumented migrants and economics PhD graduates approximate textbook mobility assumptions. Political systems and social structures also vary widely. It is naïve to assume other societies resemble the EU in these respects.
Finally, entrepreneurship has not historically been driven by profit alone. The idea that firms exist solely to maximize shareholder value is a cultural construct that gained prominence only since the 1980s. Many transformative entrepreneurs—such as Steve Jobs or Elon Musk—pursued goals beyond profit, though Musk’s political ambitions raise serious anti-social concerns. Mokyr notes that inventors during Britain’s Industrial Revolution often earned returns no higher than those of merchants. I suspect that neoliberal value systems have further accelerated the erosion of productive entrepreneurship—a claim that is, in principle, empirically testable.
Europe must therefore rebuild institutional and cultural support for growth and production. This also involves redefining what is considered “cool.” Nationalism once played that role in the nineteenth and early twentieth centuries; given its destructive legacy, Europe must instead cultivate an entrepreneurial culture grounded in universal values and human rights. Current political turbulence and declining rights protections in the United States present an opportunity for Europe—but only if it can attract and retain entrepreneurial talent. Retaining scientists does not guarantee that the commercialization of their propositional knowledge will occur in Europe. Excessive internationalism, paradoxically, may also weaken Europe’s innovative capacity.
4. Balancing the Costs of Creative Destruction: Why the European Path Matters
In this final section, I return to the initial concern with the destructive side of creative destruction—a concern that is particularly salient in Germany. As argued above, well-designed institutions can channel entrepreneurial energy toward productive innovation. The Power of Creative Destruction devotes substantial attention to managing the social costs of disruption. In a 2025 column for Project Syndicate, Philippe Aghion argues that Danish-style social safety nets better enable societies to navigate crises. In this regard, Europe holds an advantage over both the United States and China.
However, challenges remain. Chapter 8 of The Power of Creative Destruction considers whether economies can skip industrialization and rely primarily on the third sector, citing India as an example. Under current geopolitical conditions, this strategy is problematic. India’s material living standards and urban sanitation remain low: improvements that ultimately depend on physical production. GDP growth alone does not capture lived welfare, especially in developing contexts where material goods matter more than services. Part of the Chinese government’s legitimacy rests on its success in raising material living standards.
If Europe’s reindustrialization remains service-led, it may fail to restore the two-knowledge feedback loop. China’s major cities now offer a material abundance unmatched anywhere in Europe, especially from the perspective of urban workers and the middle class. Enhancing Europe’s attractiveness and competitiveness therefore requires a development strategy that combines industrialization with effective control of externalities—precisely where entrepreneurship is most needed.
Aghion’s proposals for retraining displaced workers face an additional constraint: Europe’s aging workforce. As learning capacity declines with age, retraining may not restore prior income levels even under ideal conditions. In democratic societies, this creates political resistance to creative destruction, as illustrated by the U.S. Rust Belt and eastern Germany.
At the same time, AI is reducing demand for entry-level jobs, worsening prospects for Europe’s already limited young workforce. Excessive regulation and protection will further suppress entrepreneurship and hiring. In this context, the role of civil society—emphasized in Chapter 15 of The Power of Creative Destruction—becomes crucial. Some risks created by deregulation may be better addressed through civic engagement and democratic processes rather than bureaucratic control. Divisions between insiders and outsiders in the labor market can fracture society and undermine labor protection systems, as seen in Argentina’s dual labor union system. Similar tensions exist in Germany between long-term tenants and mobile younger workers.
Some on the left argue that entrepreneurship is inherently tied to labor exploitation—a correlation often observed historically. Yes, of course, because the unemployed never complain about the exploitations by their employers. Europe has already made global progress in reducing exploitation and protecting rights. The task now is to support entrepreneurship that creates jobs and sustains innovation. This approach is fiscally more sustainable than universal basic income. Historically, labor protections emerged from worker organization and constitutional bargaining, not from top-down bureaucracy. As argued in The Power of Creative Destruction, constitutional frameworks can regulate labor-capital conflict while limiting state interference in innovation.
In sum, Europe—and Germany in particular—needs more entrepreneurship to address its current challenges. Degrowth and deindustrialization are not viable solutions. While economists often focus on allocation and redistribution, Adam Smith reminded us that the original purpose of political economy (Volkswirtschaftwissenschaft) was to expand the division of labor and create wealth. The 2025 Nobel Prize in Economics has returned attention to entrepreneurial innovation—an activity difficult to formalize mathematically. If Europeans wish to defend their values and way of life, they must strengthen their capacity for creative and productive entrepreneurship.
