The 2025 Nobel Prize in Economic Sciences has been awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their pioneering work explaining innovation-driven economic growth. 

• Their work bridges history and mathematical theory to explain how innovation transformed global economic stagnation into sustained growth over the past two centuries.

The Laureates and Their Contributions

Joel Mokyr’s Contribution: Knowledge as the Basis of Growth

• Core Idea:  Mokyr identified useful knowledge as the engine of modern economic growth. He divided it into two components:
  • Propositional Knowledge: Understanding why natural phenomena occur.
  • Prescriptive Knowledge: Knowing how to apply this understanding in practice.
• Historical Transition:
  • Before the Industrial Revolution, innovation lacked practical application due to weak linkages between theory and engineering.
  • The Scientific Revolution (16th–17th centuries) changed this through measurement, experimentation, and reproducibility, enabling feedback between theoretical and applied knowledge.
• Examples: 
• • The steam engine’s evolution is driven by the understanding of atmospheric pressure.
  • Steel production improvements via chemical understanding of oxygen-carbon interaction.

Policy Implication

• Sustained growth requires technically skilled workers who can translate ideas into products.
• Governments must invest in skilling, R&D, and openness to innovation, while managing resistance from groups threatened by technological change.

Aghion–Howitt Model: Creative Destruction and Growth

• Concept: Built a mathematical model around Joseph Schumpeter’s theory of creative destruction, showing how innovation drives growth through replacement of outdated technologies.
• Mechanism:
  • Firms invest in R&D to develop innovations and gain temporary monopoly power.
  • New innovations replace old ones, redistributing profits but raising productivity at the societal level.
• Policy Challenge:
  • Balancing R&D incentives—should governments subsidise innovation?
  • Two opposing trends:
    • Support R&D: Society benefits even from obsolete technologies.
    • Restrain Excess R&D: New innovations may only bring marginal gains while concentrating profits.
  • Together, their insights underline that long-term prosperity depends not only on innovation but also on institutions that enable competition, learning, and equitable diffusion of technology.
• Outcome: Their model helps determine optimal R&D levels and informs policies on innovation subsidies, patent laws, and competition regulation.

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