The 2025 Nobel Prize in Economics has been partly awarded to Joel Mokyr for “having identified the prerequisites for sustained growth through technological progress,” and to Philippe Aghion and Peter Howitt for their “theory of sustained growth through creative destruction” introduced in a 1992 paper. Their combined research reveals the historical and theoretical conditions needed to fuel sustained growth.
Here is a quick overview of their contributions.
1. Mokyr’s Conditions for Growth
Consensus among historical economists throughout the 20th century primarily attributed Great Britain’s earlier and more pronounced industrial takeoff, relative to its neighbors, to differences in exogenous economic fundamentals such as monetary institutions, property rights, investment and exports. Scientific breakthroughs and innovation were viewed as secondary to this first episode of sustained growth. After all, science and invention had already been present for centuries without previously causing any meaningful or lasting economic growth.
Mokyr determined that while major macro-inventions did occasionally pop up in the period before Britain’s Industrial Revolution (the windmill, the printing press, the mechanical clock), the lack of scientific understanding of their underlying mechanisms prevented any cumulative stream of incremental micro-inventions. He argued that the absence of a self-reinforcing feedback loop between these macro- and micro-inventions was a central reason why earlier waves of technological progress failed to translate into sustained economic growth. This led him to identify a number of prerequisites cumulatively necessary for growth to persist:
- Joint evolution of science and technology: For Mokyr, propositional knowledge, understanding natural phenomena, and prescriptive knowledge, knowing how things work in practice, must communicate with and reinforce one another. What he calls the Industrial Enlightenment is the period during which barriers between scientists and artisans were reduced. The accumulation of useful knowledge induced by this collaboration allowed for self-sustained technological progress fueling growth. (Ancient Greece and Rome, despite their advances in philosophy, geometry or architecture, largely failed to translate them into practical products and techniques.)
- Mechanical competence: For innovation to generate growth, prescriptive knowledge has to be applied through skilled execution. Highly capable individuals and implementers are needed to bridge the gap between understanding and inventing technology on one hand, and installing it, scaling it up and putting it to economic use on the other. (The Renaissance gave birth to many how-to books and manuals, among which Leonardo da Vinci’s sketched inventions but lacked skilled implementers to realize them.)
- A society open to change: The fragile disruptive forces of creative destruction can only be unleashed if society does not resist technological change. Mokyr points out that such resistance has been prevalent throughout history, often from those whose assets or skills were threatened by invention (for instance, the Luddite riots of 1811-1816 against mechanized weaving or the drowning of the inventor of the ribbon loom in 1579), but also from intellectual conservatism. The Enlightenment allowed this resistance to weaken and paved the way for new institutions flexible enough to encourage competition between interest groups and allow the winners to compensate the losers. (China, a major focus of Mokyr’s studies, led technological development over Europe until the 14th century. He states that its failure to experience an industrial revolution was due to government control and management of the technological process, leading to retrogression and a halt of creativity.)
Mokyr observed that all previous discrete episodes of growth lacked at least one of these three conditions. Great Britain, on the other hand, combined them all: It drew on the propositional knowledge generated by the French Enlightenment, benefited from a well-trained supply of skilled engineers capable of implementing a steady stream of micro-inventions, and possessed a flexible political structure—a working parliament where interest groups could meet, negotiate and compete.
Joel Mokyr’s work demonstrates that technological innovation is not a by-product of economic growth but its very fuel. Through decades of historical analyses, he showed that societies failing to foster innovation along the three guidelines he identified had been unable to sustain growth. The late 18th century marked the first historical moment when these conditions converged, allowing knowledge, skills and institutions to reinforce one another in a self-sustaining process.
2. Aghion-Howitt model for sustainable growth through creative destruction
While Mokyr traced the historical emergence of sustained growth, Phillippe Aghion and Peter Howitt approached the question from a theoretical perspective, seeking to understand the paradoxical link between the inherently disruptive mechanism of creative destruction and the macro stability of aggregate growth in advanced economies. They transformed Joseph Schumpeter’s creative destruction metaphor into an equilibrium-based growth model linking innovation incentives, firm dynamics and macroeconomic performance. Following are some key points of interest:
- The threat of creative destruction discount rate: A firm’s value equals the sum of the future expected profits it will earn by selling a product of a certain quality (q). These expected profits need to be discounted by the risk probability (z*) that a competitor will steal the firm’s rent by coming up with a product of better quality (q.γ), γ > 1 representing the step size of innovation. In a free entry market, this z* probability can never be 0, meaning a monopolist firm is always on borrowed time to profit from a product before it becomes obsolete. Even under patent protection, the expected duration of monopoly rents is limited by z*, the creative destruction rate.
- Knowledge spillover : A competitor needs to innovate in order to steal the rent an incumbent firm sits on. Hence, it needs to invest in R&D, which on one hand is more and more difficult to do as products move farther away from their simplest form. On the other hand, innovators can build on knowledge spillover : accumulated knowledge used to build the previous product. This is the standing on the shoulders of giants effect.
- Free entry equilibrium: If expected returns from innovating exceed the cost of R&D, more firms enter the race. Entry rises, innovation becomes more frequent and the probability of success per entrant falls until profits are competed away. If expected returns are too low, innovators exit, fewer innovations occur, z* drops, incumbents’ rents rise, and the incentive to innovate is restored.
- General equilibrium: Aghion and Howitt scaled these ideas and came up with a general equilibrium model where the growth rate of the economy (g*) is determined as a function of the “creative destruction rate” z*: g* = 1+z*(γ-1). Growth equals the frequency of innovation times the average size of every innovation. (The base model is a bit more complex, but its main point is clearly made by this simple equation.)
- Incentive to block entry: Incumbent firms, once innovators themselves, have a major incentive to prevent present innovators from increasing z*. Temptation is then strong to lobby for policies blocking entry or regulation slowing down R&D. It can be noted that incumbents, in the original Aghion-Howitt model, cannot, mathematically, profitably invest their rent in R&D themselves to lower z* because they would reap their benefits from the small γ-1 progress they invested in to displace the previous champion : the Arrow replacement effect. Subsequent extensions of the model settings, in which incumbents can invest part of their rents in R&D, generate incentives for continuous internal innovation.
- Policy implications: For Howitt and Aghion, fostering creative destruction implies certain policy choices. First, clear and efficient antitrust regulation is needed to prevent incumbent firms from blocking entry, yet without taking away the incentive of profit for victorious innovations. Second, labor market policies should remain highly flexible to allow frictionless entries and exits. This flexibility should be paired with strong flexicurity : generous social insurance for unemployment. The authors also insist on the importance of education to foster a highly skilled, technologically up-to-date workforce.
After a lifetime spent proving the tangible effects and necessity of creative destruction, these award winners could find a tad cynical the inevitable question they’ve been asked the last couple of days: “And what about AI? People are worried. Will it be the same?” For his part, Phillippe Aghion calmly repeats that artificial intelligence will, just like past innovations, destroy many jobs but create more. In the end, Mokyr’s openness to change criteria is probably just the toughest guideline for us to stick to.
For a more complete presentation, see Brian Albrecht’s piece And the 2025 Economics Nobel Goes To…, complemented by a video discussion with David Beckworth.
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