Nobel Prize 2025 – Innovation-Driven Economic Growth

The 2025 Sveriges Riksbank Prize in Economic Sciences was awarded to Joel Mokyr, Philippe Aghion and Peter Howitt for their pioneering work on innovation-driven economic growth. Their research sheds light on why global growth surged over the last two centuries and how innovation fuels sustained economic development.

Joel Mokyr’s Contribution – Knowledge and Growth

Joel Mokyr’s research focuses on the role of knowledge in economic progress. He distinguishes between two types of knowledge – propositional knowledge, which explains why things work, and prescriptive knowledge, which provides practical instructions to apply ideas. Mokyr argues that before the Industrial Revolution, propositional knowledge existed but was not supported by sufficient prescriptive knowledge. This gap limited the ability to build on innovations. The shift in the 16th and 17th centuries, with precise measurements and reproducible experiments, helped bridge this gap and enabled sustained growth.

Policy from Mokyr’s Work

Mokyr emphasises the importance of practical skills and openness to change. Skilled artisans and engineers were crucial in Britain’s early growth as they transformed ideas into commercial products. Governments must invest in education and vocational training to sustain growth. Mokyr also marks the need for societies to embrace innovation despite the disruption it causes. Resistance from established interests can hinder progress, so policies must support adaptability and change.

Aghion and Howitt – The Theory of Creative Destruction

Philippe Aghion and Peter Howitt developed a formal model explaining sustained growth through creative destruction. This concept describes how new innovations replace old technologies, benefiting society but often harming incumbent firms. Their model captures two opposing forces – the societal gain from obsolete technologies still providing value, which supports subsidising research and development (R&D), and the concentration of profits in leading innovators, which may discourage excessive R&D investment.

Optimal R&D Investment and Economic Implications

The model by Aghion and Howitt helps determine the optimal level of R&D investment. Subsidising R&D can promote innovation when society benefits more than individual firms. However, if firms capture most profits from small improvements, excessive R&D may be inefficient. The balance depends on each economy’s structure. Policymakers can use this framework to tailor innovation incentives and maximise growth.

Significance of the 2025 Prize

The combined work of these economists offers a comprehensive understanding of how innovation drives long-term economic growth. Their insights are valuable for shaping policies that encourage knowledge creation, skill development, and innovation-friendly environments. This knowledge is crucial as countries seek sustainable growth in a rapidly changing global economy.

Questions for UPSC:

1. Critically discuss the role of innovation and technological change in economic growth with examples from history and modern economies.
2. Examine the concept of creative destruction and analyse its impact on industrial development and labour markets in developing countries.
3. Estimate the benefits and challenges of government intervention in research and development in the context of innovation-driven growth.
4. Point out the relationship between education, skill development, and economic growth. How can policy frameworks address resistance to technological change?

Answer Hints:

1. Critically discuss the role of innovation and technological change in economic growth with examples from history and modern economies.

1. Innovation drives sustained economic growth by introducing new technologies and improving productivity.
2. Historical example – Industrial Revolution marked by technological breakthroughs and practical application of knowledge, leading to rapid growth.
3. Joel Mokyr brought into light the role of propositional and prescriptive knowledge in enabling innovation and growth.
4. Modern economies rely on continuous R&D and innovation ecosystems to maintain competitiveness and growth.
5. Technological change often disrupts existing industries but creates new markets and employment opportunities.
6. Policy support for skills, infrastructure, and openness to change is crucial for maximizing innovation’s growth impact.

2. Examine the concept of creative destruction and analyse its impact on industrial development and labour markets in developing countries.

1. Creative destruction describes how new innovations replace outdated technologies and firms, fueling economic progress.
2. Aghion and Howitt’s model formalizes this process and shows its dual effects on society and incumbents.
3. In developing countries, creative destruction can accelerate industrial upgrading but may cause job losses in obsolete sectors.
4. Labour markets may face displacement, requiring reskilling and social safety nets to manage transition challenges.
5. Resistance from established firms and workers can slow adoption of new technologies and reduce growth potential.
6. Policy interventions are needed to balance innovation benefits with protection and support for affected workers.

3. Estimate the benefits and challenges of government intervention in research and development in the context of innovation-driven growth.

1. Government R&D subsidies can encourage innovation by offsetting private sector underinvestment due to spillover benefits.
2. Aghion and Howitt’s model explains that subsidizing R&D is justified when societal gains exceed private returns.
3. Challenges include determining the optimal level of R&D investment to avoid inefficiency or crowding out private efforts.
4. Excessive R&D subsidies risk funding incremental improvements with limited societal benefit.
5. Effective government intervention requires clear policy frameworks, transparency, and alignment with economic needs.
6. Investment in education and infrastructure complements R&D subsidies to maximize innovation outcomes.

4. Point out the relationship between education, skill development, and economic growth. How can policy frameworks address resistance to technological change?

1. Education and skill development equip workers to apply and adapt to new technologies, driving productivity and growth.
2. Mokyr emphasized the role of skilled artisans and engineers in transforming ideas into commercial products during Britain’s growth.
3. Continuous vocational training and lifelong learning are essential in rapidly evolving technological environments.
4. Resistance to change arises from fear of job loss and disruption among established interest groups.
5. Policy frameworks should promote social dialogue, retraining programs, and safety nets to ease transitions.
6. Encouraging openness to innovation and flexible labor markets helps societies adapt and sustain growth.