TheMarketForIdeas

The 2025 Nobel Prize in Economics celebrates the fruitful dialogue between the history of economic ideas and the modern theory of sustainable growth. The Nobel Committee awarded half of the prize (11 million Swedish kronor, approximately 1.2 million US dollars) to Joel Mokyr, and the other half to Philippe Aghion and Peter Howitt, in equal shares.

Established in 1968, the Nobel Prize in Economics is awarded by a committee of the Royal Swedish Academy of Sciences according to the same criteria as the others, but is funded by the central bank of Sweden (Sveriges Riksbank). It was first awarded in 1969 to the Norwegian economist Ragnar Frisch and the Dutch economist Jan Tinbergen “for their construction and use of dynamic models in the analysis of economic processes”.

Joel Mokyr is Professor of the History of Economic Facts and Ideas at Northwestern University (Illinois). In his works, he shows that technological changes are fragile and cumulative processes, the development of which is determined both by ideas and by the institutions that produce and disseminate scientific knowledge. In his book, The Lever of Riches, he emphasizes the importance of inventions (the steam engine, the printing press, the power plant, etc.), which produced and supported economic progress. However, he also insists on the political and intellectual diversity of European civilization and on the cultural role of the Enlightenment.

In another work, The Gifts of Athena, Mokyr defines two fundamental notions: “propositional knowledge” and “useful knowledge”. The first is theoretical and has as its object the laws of nature; the second includes the set of techniques, means and procedures by which man acts on nature. The interaction of these two forms of knowledge, carried out within the institutions that create and transmit scientific knowledge, determines the production and cumulative acceleration of technical progress. Thus, in Europe, starting from the 18th century, the acquisition of scientific knowledge became a collective activity, organized within universities, learned societies and academies and oriented mainly towards practical application. The driving force of progress is not only knowledge, but also the cooperation of institutions and culture, which allows a greater number of people to access existing knowledge.

In the book A Culture of Growth, Mokyr argues that, in the period before the industrial revolution, Europe experienced an exceptional situation: the cultural unity of intellectual elites, the formation of a transnational community of scholars within which ideas circulated freely, and the political fragmentation of the continent between competing states. This configuration created the freedom necessary for the act of creation: no authority could permanently suppress an innovation or subversive idea, because European scholars could move to another, more tolerant country. Competition between European states, combined with a pan-European culture of rationalism, prevented the imposition of a rigid conception and encouraged continuous experimentation. In contrast, in other regions of the world, politically and culturally fragmented, such as India, there was no common culture of progress, and in a large unified empire, such as imperial China, a conservative elite imposed a rigid culture.

Philippe Aghion is a professor at the Collège de France and INSEAD (Institut européen d’administration des affaires) and a visiting professor at the London School of Economics, and Peter Howitt is a professor at Brown University (Rhode Island). They developed the theory of economic growth by highlighting the role of innovation resulting from the process of “creative destruction”, studied in his time by J. Schumpeter.

The problem of economic growth has been widely debated by economists and not only by them, but it was only in the 20th century, especially through the works of the Austrian economist Joseph Schumpeter (1883-1950) and the American economist Robert Solow (1924-2023), that the process was explained by the emergence of innovations. The former created the aforementioned concept of “creative destruction”, which designates the process by which innovations abolish previous economic structures and replace them with new ones. The latter built a model of economic growth through which he demonstrated that sustainable growth is produced mainly by technical progress.

The two brilliant economists were faced with the same problem, namely how innovation itself appears. Their answer was implacable: it falls from the sky! The explanation was considered too easy, however, by Aghion and Howitt, who, by deepening the Schumpeterian concept of “creative destruction”, highlighted the endogenous dimension of innovations. According to their demonstration, this endogenous side resides, essentially, in the decisions that companies adopt in a given context.

In the paper “A Model of Growth through Creative Destruction”, they reformulate the theory of economic growth based on two ideas. The first is that technological obsolescence is intrinsic to the act of innovation: any major progress makes previous technologies obsolete. The second idea is that the process of economic growth is discontinuous and marked by leaps, which occur in a more or less random and unpredictable manner.

In this framework, technological improvements do not “fall from the sky”, but constitute endogenous factors of economic growth, originating from research and development efforts, which consume scarce resources. Therefore, innovations aimed at reducing production costs and increasing productivity are protected by law. Intellectual property plays a key role here: patents grant authors temporary monopolies and, therefore, rents, but these advantages are limited by competition and, above all, by the potential entry of another innovator.

Aghion and Howitt’s contribution therefore consists in demonstrating the claim that long-term economic growth is determined by major innovations, which create a dual economic dynamic. On the one hand, this dynamic is positive, because new technologies reduce production costs and increase productivity. On the other hand, industrial change is negative, because it reduces producers’ profits and eliminates existing jobs. These contradictory effects constitute the main cause of economic tensions.

The work of the 2025 Nobel laureates sheds new light on current debates on economic policy and the way in which goods and services markets and the labour market are organized. By understanding the mechanisms by which well-regulated competition stimulates innovation, this research provides a valuable scientific framework for designing appropriate combinations of private incentives, knowledge dissemination channels across the entire economic system, and ways to achieve social cohesion. This contribution is welcomed by many economists, as it is important for guiding policies to harmonize technological acceleration, ecological transition, and social inclusion.

The main common idea that emerges from this research is the possibility of transforming science into a factor of economic growth. The Nobel Prize in Economics 2025 honours the results obtained by studying a fundamental aspect of the main economic problem of the current era: the way in which society produces, organizes, and disseminates scientific knowledge, with the aim of achieving economic growth and, more importantly, increasing economic well-being, prolonging healthy and safe lives, increasing leisure time and material comfort, and reducing mortality, morbidity, pain, and suffering.

Mokyr highlighted the role of culture, institutions and academic communities. Aghion and Howitt showed how, once these conditions are met, the process of innovation, supported by appropriate incentives and carried out in a competitive, judiciously regulated framework, generates, in successive stages, sustainable economic growth.

Technological progress and economic growth are therefore not simple happy events or gifts of providence; these processes are fragile social phenomena, requiring open institutions and markets capable of rewarding entrepreneurial courage and allowing a certain rent.

Photo source: PxHere.com.