A Nobel for Innovation-Driven Economic Growth: Aghion, Howitt, and Mokyr

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025 was awarded this morning for “for having explained innovation-driven economic growth.” The award was divided between Joel Mokyr ““for having identified the prerequisites for sustained growth through technological progress” to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction.” The winners are fully deserving. But in this case, the Nobel committee overstates their work, in the sense that “innovation-driven economic growth” is not yet fully explained. As usual, the Nobel committee provides useful background information, including a highly readable “Popular Information” overview of the work, and then a longer and more technical “Scientific Background” essay.

Here, I’ll start with a few key points on the economics of technology, drawing in places on the Nobel committee background, and also offer a little more detail about the work itself.

Innovation and technological progress are of central importance.

From the “Popular Information,” here are two figures. The first one shows GDP per person, in inflation-adjusted dollars, for the 400 years from 1300-1700. There are some substantial innovations during this time: remember, the heart of the Renaissance period in Europe runs through the 1500s and 1600s. However, income per person doesn’t rise much–less than double over 400 years.

The accompanying figure shows GDP per capita from 1800 to the present. The innovations become more numerous. But especially striking is that over this period of 200+ years is that per capital income rises by a factor of about 8-10 during this time.

Whether you love this process of innovation and change, hate it, or have mixed feelings, it’s clearly an extraordinary event in history.

Technology needs to be broadly understood.

For economists, innovation and change need to be broadly understood. It’s not just about world-historical innovations like the steam engine, the generation of electric power, or information technology and now perhaps artificial intelligence. Innovation and technology also includes every small-scale change in how a worker gets the job done, every improvement to a piece of equipment, every new design, every new material.

Technology and innovation is a never-ending treadmill of unevenly distributed change–which means winners and losers.

The Nobel citation to Aghion and Howitt uses the phrase “creative destruction,” coined by Joseph Schumpeter in his 1954 book, Capitalism, Socialism, and Democracy. Schumpeter wrote:

Capitalism, then, is a form or method of form of economic change that not only is but can never be stationary. … The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. As we have seen, the laborer’s budget from, say, 1760 to 1940, did not simply grow on unchanging lines but they underwent a process of qualitative change. Similarly, the history of the productive apparatus of a typical farm, from the beginning of the rationalization of crop rotation, plowing and fattening to the mechanized thing of today–linking up with elevators and railroads–is a history of revolutions. So is the history of the productive apparatus of the iron and steel industry from the charcoal furnace to our type of furnace, or the history of the apparatus of power production from the overshot water wheel to the modern power plant, or the history of transportation from the mailcoach to the airplane. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

Everyone wants the benefits of innovation and new technology, no one wants the costs. As Paul Romer (Nobel 2018) once memorably wrote, “Everybody wants progress; nobody wants change.”

The formula for innovation and economic growth is not yet well-understood.

The Nobel laureates have surely heloped to point to way to a deeper understanding of the path from innovation and technology to economic growth. For example, Mokyr has discussed and described in comprehensive fashion the historical process of growth, the central role of knowledge, and the importance of societies that are open to change. The “Popular Information” notes:

Through his research in economic history, Joel Mokyr has demonstrated that a continual flow of useful knowledge is necessary. This useful knowledge has two parts: the first is what Mokyr refers to as propositional knowledge, a systematic description of regularities in the natural world that demonstrate why something works; the second is prescriptive knowledge, such as practical instructions, drawings or recipes that describe what is necessary for something to work. … Another factor that Mokyr claims is necessary for sustained growth is that society is open to change. Growth based upon technological change not only creates winners, it also creates losers. New inven­tions replace old technologies and can destroy existing structures and ways of working. He also showed that this is why new technology is often met with resistance from established interest groups who feel their privileges are threatened.

For their part, Aghion and Howitt emphasized the interaction of research and development with creative destruction (in particular, the Nobel committee emphasizes their 1992 paper: P. Aghion, and P. Howitt, “A model of growth through creative destruction.” Econometrica 60(2), 323–351). They emphasize that for a firm, the payoff of research and development can come both from opening up new markets and from taking business now-obsolete products from existing firms. They also point out that society might underinvest in research and development, say f the private benefits to researchers are less than the social benefits, including the benefits of additional future innovations built on this progress. However, in certain situations could also could conceivably overinvest in R&D: say, if many firms are spending in the hope of achieving a certain innovation, but when only one firm wins, then the spending by other firms will not have achieved its goal. At the end of the dot-com boom of the 1990s, there was a dot-com bust, and the same could plausibly happen with the current AI boom.

But these fundamental insights leave a wide array of practical questions not fully addressed. For example, what is the role of various fundamental factors (in no particular order, including: a sufficient savings rate to support investment; a well-educated and high-skilled population; protecting public health; reasonable taxes; well-functioning transportation and communications infrastucture; support for the unemployed and the poor; rules to limit pollution; avoidance of inflation; support of property rights; and others. Does government have a role to play in paying for research directly, or should it focus on subsidizing research at universities and private firms? Does government have a role to play in subsidizing firms directly, or protecting domestic firms from international competition?

Even in the modern US economy, there is sometimes discussion of the “valley of death” that lies between between scientific discoveries and translating those discoveries into new products and methods of production. For economies around the the world not at or near the technological frontier, at least in certain industries, how do they move entire societies toward a functioning and applicable awareness of Mokyr’s propositional and prescriptive knowledge? What set of policies, subject to political constraints, should high-income countries undertake if they wish to increase their annual rate of growth by even 0.5% per year on average? History and economic theory offer hints about such questions of innovation and economic growth. But looking around the world, it is self-evidently true that such hints are often and in many places insufficient.

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