Suppressing Innovation Undermines Long-Run Prosperity

New WU study shows that not all forms of political extraction affect economic development in the same way. The most damaging are those that stifle innovation—and their consequences can last for generations.

Why do some economies achieve sustained prosperity while others with similar initial conditions fall behind? A new study by Klaus Prettner (WU Vienna University of Economics and Business) and Martin Stojanovikj (University of Deusto) offers a historical perspective on this question. Economists have long recognized the role of extractive institutions—political and economic arrangements that allow a ruling elite to extract economic resources for its own benefit—as a key explanation for differences in economic development. The new study goes one step further by showing that it also matters which resources are extracted.

While the extraction of output primarily delays the onset of industrialization and, with it, economic development, the extraction of resources intended for research and innovation has much more persistent consequences: it permanently slows economic growth. The findings add an important institutional dimension to existing theories of long-run economic development.

"Our study shows that different forms of political extraction do not have the same economic consequences," explains Klaus Prettner from WU's Department of Economics. "The most harmful case occurs when political elites deliberately impede innovation. This not only slows economic development in the short run but also reduces an economy's long-run growth potential."

Two Ways to Slow Economic Development

At the heart of the study is the distinction between two forms of extractive institutions.

• First, political decision-makers may extract part of an economy's output or income. As a result, fewer resources remain available for investment and entrepreneurial activity. The consequence is a delayed transition from a stagnant economy to industrialization and weaker growth during the early phase of industrial development.

• Second—and far more damaging—is the extraction of resources devoted to the innovation process itself. When resources intended for research, development, and technological improvement are diverted, the process of creative destruction, described by Joseph Schumpeter, is weakened. Creative destruction is the mechanism through which new ideas, products, and firms replace existing technologies, thereby driving long-run economic progress.

"Innovation is the engine of long-run economic growth," says Prettner. "When innovation is suppressed, an economy loses precisely the dynamic force that creates lasting prosperity."

A Temporary Burden or a Permanent Drag on Growth?

The study is the first to demonstrate systematically that these two forms of extraction have fundamentally different economic consequences.

• The extraction of output mainly affects the industrialization process. Once the economy has completed the transition to industrialization, this form of extraction no longer has a substantial impact on the long-run growth rate.

• The picture is very different when innovation is affected. If research and development are systematically constrained or resources for innovation are extracted, economic growth slows not only during industrialization but also along the economy's long-run balanced growth path. As a result, losses in prosperity can accumulate across generations.

"Our findings show that institutional quality matters far beyond the short-term effects of economic policy," Prettner concludes. "Whether institutions allow innovation to flourish—or suppress it for political reasons—plays a decisive role in determining an economy's long-run development."

Political Elites Often Prefer the Less Visible Form of Extraction

The researchers further argue that political elites often have incentives to target the innovation process rather than directly extracting income. While the direct extraction of income affects broad segments of the population and is therefore more likely to provoke political resistance, interventions in research and development are far less visible to the public. At the same time, they can slow the economic transformations brought about by innovation—transformations that often threaten existing power structures.

Historical examples range from the suppression of scientific research in the Soviet Union to the delayed adoption of the printing press in the Ottoman Empire. Such policies generally triggered less immediate resistance than direct economic extraction but imposed substantial long-term costs on innovation capacity and productivity.

Implications for Economic and Innovation Policy

The findings underscore the critical role of high-quality institutions in fostering long-run prosperity. Political and economic institutions that support research and innovation are among the most important determinants of an economy's long-run growth potential and overall prosperity.

"Economic progress depends on more than just capital and labor," Prettner emphasizes. "Institutions that enable innovation rather than restrict it for political reasons are equally essential for sustaining long-run economic growth."

Methodology

The study develops a theoretical macroeconomic model that jointly analyzes economic development, industrialization, long-run growth, and political institutions. Building on an established Schumpeterian growth model, the researchers distinguish between two types of innovation:

• horizontal innovation, which creates new products and enables the entry of new firms into the market; and

• vertical innovation, which improves the quality of existing products.

For the first time, the model allows a ruling elite to choose between two distinct forms of extraction: it can extract output or divert resources that would otherwise be invested in research and development (R&D).

The model is then calibrated to long-run data for the U.S. economy covering the period from 1650 to 2022. Simulations illustrate how different institutional settings affect the timing of the industrial takeoff, the subsequent path of economic growth, and long-run prosperity.

FURTHER INFORMATION

Paper

• Prettner, K., & Stojanovikj, M. (2026). Extractive Institutions and the Takeoff to Long-Run Growth: A Schumpeterian Perspective. European Economic Review, 187, 105347.

Authors

• Klaus Prettner, WU Vienna University of Economics and Business

• Martin Stojanovikj, University of Deusto