Europe’s last call: guns, butter, and the cost of standing still

The Wheeler Institute for Business and Development opened its new series on Public Policy in the Age of Innovation with appropriate intellectual firepower with, Guns and Butter – Public Policy in the Age of Innovation and a conversation with Philippe Aghion, the 2025 Nobel Laureate of Economics and a veteran of MIT, Harvard, Collège de France and the EBRD. LBS Dean Sergei Guriev set the tone, and Professor Paolo Surico, in full command of the terrain, chaired a conversation that moved briskly from growth theory to defence R&D and back again.

For the uninitiated, “Guns and butter” is shorthand for the trade-off governments face when resources are scarce: money spent on defence (“guns”) cannot simultaneously be spent on civilian goods and social investment (“butter”). What followed was an argument for why that framing, while tidy, is now dangerously incomplete for Europe.

Aghion’s life’s work is the economics of creative destruction, the idea that long-run growth comes not from piling up capital but from catalysing ideas that overturn old ones. Innovation creates rents, rents create incumbents, and incumbents then try very hard to stop the next wave. Public policy, he argued, exists to manage this tension without killing the goose that lays the golden eggs.

Surico pressed him on the role of the state, especially in defence. The answer was neither laissez-faire nor old-school statism. Education, competition policy, ‘flexicurity’ (or flexible security, or perhaps ‘protected mobility’), and long-term research funding are the unglamorous but essential horizontal policies that keep innovation alive and socially tolerable. Without them, creative destruction curdles into stagnation and populism (the latter is waiting in the wings in both France and the UK).

Attention then turned to the vertical dimension of innovation policy. The United States did not stumble into the internet, GPS or mRNA vaccines by accident. It built DARPA and its cousins: mission-driven, scientist-led, tolerant of failure, and cleverly designed to crowd in private capital rather than freeze it out. Europe, Aghion noted, has excellent science and admirable values, but remains a “regulatory giant and budgetary dwarf,” stuck in mid-tech incrementalism and allergic to risk.

Here, the guns-and-butter dilemma flips. Defence spending, done badly, really does crowd out the rest. But done well, through DARPA-style institutions that favour entry, competition and co-investment, it becomes a lever for growth, not a drain on it. Surico’s authority on defence R&D anchored the point: most defence budgets are people and kit, not ideas. If Europe simply writes bigger cheques to incumbents, it will buy inflation, not security.

The mood darkened, deliberately. Europe, Aghion warned, only reforms under duress. COVID worked. Russia’s invasion might yet work. A fragmented single market, thin venture capital, and a doctrine that treats investment like day-to-day spending have left the continent exposed. Without inclusive growth, the political backlash will finish the job.

And then, as a coda, Aghion told a story. He once failed an oral exam for Harvard’s Society of Fellows. Bob Solow, 1987 Nobel Memorial Prize in Economic Sciences, told him he had not understood the question. He did not get in. Instead, he landed at MIT, met Peter Howitt, and together they built the creative destruction model that would define a generation of growth economics. “Imagine the drama,” he smiled, “if I had been accepted.”

Failure, allowed and absorbed, turned out to be highly productive.

That, in miniature, was the evening’s message. Europe’s problem is not choosing guns over butter. It refuses to design institutions that let it have security and innovation, ambition and cohesion. Time is very much up, but failure, if used wisely, may still be an option worth funding.