Institutional Redesign for Economic Change

Dec 20 , 2025
By Diane Coyle

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As AI advances rapidly, the clean-energy transition accelerates, and the multilateral system weakens, institutional questions are resurfacing by necessity rather than choice, argued Diane Coyle, professor of Public Policy at the University of Cambridge, in this commentary provided by Project Syndicate (PS).

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The Nobel Prize in economics was awarded to both this year and last year to scholars who, in different ways, emphasised the importance of institutions for economic growth.

Joel Mokyr, a 2025 laureate, used historical sources to demonstrate that societies prosper when they allow new ideas to be put into practice. Phillipe Aghion and Peter Howitt, his co-laureates, identified the role of creative destruction, and the institutions that enable new entrants to replace incumbent companies and technologies, in driving sustained growth. For the 2024 laureates, Daron Acemoglu, Simon Johnson and James A. Robinson, the key to economic prosperity lies in the rule of law and enabling institutions.

Economics has broadly recognised these realities, especially now that emerging technologies are transforming the structure of production. But there is an odd disconnect between this consensus and the current economic-policy debate, which focuses mainly on narrow issues like investment in AI infrastructure and corporate taxes. When questions of institutional design emerge, they tend to be restricted to specific bodies, such as central banks.

Rarely do policymakers think about what kind of institutional climate enables innovation and experimentation.

There are no standard institutional definitions or metrics. Economy-wide studies tend to fall back on indirect measures that many economists regard with scepticism, such as surveys of "trust in institutions" or indices of institutional quality. Likewise, the measurement of intangibles such as research and development or data assets, essential for economies and firms alike, is far less developed than other economic statistics.

Taking a broader view raises new questions. Who are the modern-day equivalents of the mechanics tinkering with new technologies identified by Mokyr as key agents of innovation during the Industrial Revolution? What is preventing less productive incumbent firms from exiting the market, which Aghion and Howitt found is crucial for economic dynamism? What are today's versions of the corporations (such as universities and guilds) that, as Mokyr and his co-authors explain in "Two Paths to Prosperity: Culture & Institutions in Europe and China, 1000-2000", facilitated European progress?

One way for policymakers to answer such questions would be to place renewed emphasis on competition policy, the importance of which has been underscored by the "development miracles" of South and East Asia in the second half of the 20th Century. These economies built manufacturing bases by relying on domestic or export competition to enforce discipline in their leading industries.

Despite a growing recognition within academia that antitrust laws have been under-enforced in OECD economies since the 1980s, not much has changed. More active enforcement would require political courage to challenge powerful incumbents, and that seems in short supply.

In the United States (US), the increased antitrust scrutiny under Lina Khan, former President Joe Biden's Federal Trade Commissioner, ground to a halt when Donald Trump returned to the White House. The European Union (EU), for its part, has been hesitant to use the full force of its digital regulations because of the Trump Administration's trade threats and strong pushback from US tech firms. The United Kingdom (UK) has pinned its growth hopes on securing inward investment from large multinationals, even going so far as to weaken the UK Competition & Markets Authority.

In every case, the focus remains on the specifics of the current framework, to the detriment of more expansive thinking about an economy's institutional architecture. In many countries, the institutions that comprise innovation systems, which determine the ease with which companies can be formed and dissolved, and permit experimentation with new products and services, have become semi-fossilised.

To take one example, it is too costly for many European companies to fail. New research suggests that high restructuring costs limit R&D and make investment in tech and biotech startups unprofitable. But implementing "flexicurity" reforms, which combine labour-market flexibility with strong social protections, is not a silver bullet. The rate at which startups form and thrive is a matter of political economy, depending on their location's general environment, the business ecosystem, the partnership between private and public sectors, and the political commitment to growth.

Fortunately, big-picture discussions are starting to take place. Former European Central Bank President and former Prime Minister of Italy, Mario Draghi's report on the future of European competitiveness was an important milestone for the EU, as it acknowledged the need for a broad policy refresh.

With the multilateral system all but defunct, the clean-energy transition well underway, and AI advancing at a breakneck pace, we need to fling the Overton window wide open and create space for new policy ideas across multiple domains. As people in advanced economies grow increasingly disillusioned with the economic establishment, the institutions underpinning it will inevitably change. But how they change will depend on what policymakers do next.

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PUBLISHED ON Dec 20,2025 [ VOL 26 , NO 1338]

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