Nobel Economics 2025: How Innovation and Creative Destruction Fuel Sustained Prosperity in Modern Economies

Why in News

The Royal Swedish Academy of Sciences has awarded the 2025 Nobel Prize in Economic Sciences to Joel Mokyr, Philippe Aghion, and Peter Howitt for their pioneering research that explains how innovation and the process of creative destruction have transformed economic stagnation into sustained growth over the past two centuries. Announced on October 13, 2025, this recognition highlights the shift from historical economic flatlines to ongoing progress, offering insights into managing technological changes amid global challenges like AI advancements and trade barriers, which are crucial for countries like India aiming for self-reliant development.

Key Points

1. The prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, carries a value of 11 million Swedish kronor (approximately Rs 10.25 crore), with half awarded to Joel Mokyr and the other half shared between Philippe Aghion and Peter Howitt.
2. Joel Mokyr, an economic historian at Northwestern University (US) and Tel Aviv University (Israel), was recognized for identifying the historical prerequisites for sustained growth through technological progress, emphasizing the role of scientific knowledge and societal openness during the Enlightenment and Industrial Revolution.
3. Philippe Aghion, a professor at Collège de France, INSEAD (France), and the London School of Economics (UK), and Peter Howitt, a professor at Brown University (US), were jointly honored for developing the theory of sustained growth through creative destruction, introduced in their 1992 mathematical model.
4. For most of human history, economic growth was stagnant despite occasional inventions, but the last 200 years have seen sustained GDP growth, lifting billions out of poverty, as seen in countries like India and China growing at over 7% for decades.
5. Mokyr's work shows how the integration of "propositional" (why things work) and "prescriptive" (how things work) knowledge during the 16th-17th centuries led to "useful knowledge," enabling innovations like improved steam engines and steel production.
6. Aghion and Howitt's model demonstrates that at the firm level, over 10% of companies in economies like the US fail annually while new ones emerge, creating job churn but leading to stable macroeconomic growth through competition, patents, and R&D incentives.
7. The research underscores that innovation creates winners and losers, requiring societies to manage conflicts to avoid blocking progress, as evidenced by historical examples like the defeat of the Luddite movement in 19th-century Britain.
8. Policy debates arising include whether governments should subsidize R&D to encourage innovation or focus on social safety nets to maintain openness to change, with warnings against barriers like tariffs that could hinder growth.
9. In the Indian context, this aligns with initiatives like Atmanirbhar Bharat, where boosting R&D spending (currently at 0.7% of GDP) and skilling programs could accelerate innovation-led growth toward a Viksit Bharat by 2047.

Explained

What is the 2025 Nobel Prize in Economic Sciences and Why Does It Matter?

Award Overview: The prize, established in 1969 by Sweden's central bank in memory of Alfred Nobel, recognizes contributions to economic understanding, though it's not one of the original Nobel categories; this year's focus on innovation highlights how economic growth, once rare, is now expected, helping explain global prosperity gaps.

Global Relevance: It addresses why some nations achieve sustained GDP growth while others stagnate, providing a framework for policymakers in developing economies like India to prioritize technology and openness amid challenges like climate change and AI disruptions.

Indian Perspective: For India, this prize underscores the need to increase R&D investment from the current low of 0.7% of GDP (compared to global averages of 2-3%) to foster homegrown innovations in sectors like renewables and semiconductors, supporting goals like becoming a $5 trillion economy.

What is Economic Growth and Why Was Stagnation the Historical Norm?

Defining Economic Growth: Economic growth refers to an increase in a country's production of goods and services, measured by GDP per capita; sustained growth means consistent rises over long periods, leading to better living standards, health, and poverty reduction.

Historical Stagnation: For thousands of years, global GDP per capita remained flat at around $1,000 (in today's terms), with occasional inventions like the wheel or agriculture not leading to ongoing progress because societies lacked systems to build on them cumulatively.

Shift in the Last 200 Years: Post-Industrial Revolution (starting around 1760 in Britain), growth became sustained, with world GDP per capita rising exponentially; countries like India have benefited, pulling over 200 million out of poverty since 1991 through reforms that embraced technology and markets.

Key Driver - Technological Progress: Innovations didn't just happen; they required a foundation of knowledge and societal acceptance, preventing reversion to stagnation seen in ancient empires like Rome or Ming Dynasty China, where resistance to change halted advancement.

Who Are the Laureates and What Are Their Key Contributions?

Joel Mokyr's Background and Work: Born in 1946 in the Netherlands, Mokyr is an economic historian with a PhD from Yale; his research uses historical data to show how the Enlightenment's Scientific Revolution (16th-17th centuries) created "useful knowledge" by combining "propositional" (scientific theories explaining why phenomena occur) and "prescriptive" (practical instructions on how to apply them) elements.

Examples from Mokyr: Improvements in the steam engine came from understanding atmospheric pressure, and steel production advanced via knowledge of oxygen's role in reducing carbon; without this, inventions like Leonardo da Vinci's helicopter designs remained theoretical.

Philippe Aghion and Peter Howitt's Background: Aghion (born 1956 in France, PhD from Harvard) and Howitt (born 1946 in Canada, PhD from Northwestern) are modern economists focusing on mathematical modeling; their 1992 paper introduced a model of "endogenous growth," where growth arises from within the economy through internal decisions rather than external factors.

Their Model Explained: It links production, R&D, financial markets, and household savings in a "general equilibrium" where all parts balance; patents create temporary monopolies and profits, incentivizing competition, but new innovations displace old ones, ensuring continuous progress.

What is Creative Destruction and How Does It Lead to Sustained Growth?

Concept of Creative Destruction: Coined by Joseph Schumpeter in 1942 and modeled by Aghion and Howitt, it describes how new technologies create value (creative) but destroy existing ones (destructive), like smartphones replacing landlines, leading to firm failures but overall economic advancement.

Firm-Level Dynamics: In the US, about 10% of companies close yearly, with similar numbers starting, causing job churn (millions created/lost annually); this upheaval at the micro level results in stable growth at the macro level through incentives like patents and R&D funded by savings and interest rates.

Benefits and Challenges: It improves prosperity by raising living standards and health globally, but creates conflicts as losers (e.g., displaced workers) resist; societies must manage this through education and policies to maintain openness.

Indian Example: India's IT boom displaced traditional jobs but created millions in tech, contributing 8% to GDP; however, resistance in sectors like agriculture shows the need for skilling to embrace change.

What Are the Prerequisites for Innovation to Drive Growth?

Knowledge Integration: Mokyr emphasizes combining scientific experiments (reproducible results, measurements) with practical applications, as seen in Britain's artisan-engineer culture during the Industrial Revolution, which turned ideas into commercial products.

Societal Openness: Growth requires accepting winners and losers; historical successes include Britain's Parliament limiting aristocratic privileges and suppressing Luddites (workers smashing machines in 1811-1816); failures like China's Ming Dynasty banning exploration led to decline.

Role of Institutions: Strong institutions like patents protect innovators, while education and idea exchange foster progress; in India, institutions like the Patent Office (under the 1970 Act) and schemes like Startup India promote this.

What Are the Policy Implications for Sustained Growth?

Subsidizing R&D: Aghion and Howitt's model debates optimal R&D levels; subsidies may be needed since outdated tech still benefits society, but over-investment in minor improvements could waste resources; India's R&D tax incentives under Section 35(2AB) of the Income Tax Act exemplify this.

Social Safety Nets: To counter resistance from losers, governments should provide welfare like unemployment benefits or retraining; in India, programs like PMKVY (Pradhan Mantri Kaushal Vikas Yojana) help workers adapt to tech changes.

Avoiding Barriers: Warnings against tariffs and de-globalization, as seen in US-China trade wars, which reduce market size and innovation; for India, balancing protectionism with openness in FTAs is key to sectors like EVs and AI.

Challenges for Developing Countries: India faces import dependence on tech (e.g., 80% of solar panels from China); policies like PLI schemes aim to build local innovation, but low skilling (only 5% workforce formally trained) must improve to avoid stagnation.

Broader Strategic Benefits: Innovation secures energy independence and defense; globally, it counters climate degradation, with India's renewable targets (500 GW by 2030) relying on such progress.

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