Three prominent economists have been awarded the 2025 Nobel Memorial Prize in Economic Sciences for their groundbreaking work on innovation-driven economic growth. The prize, valued at 11 million Swedish kronor (approximately A$1.8 million), was split between Joel Mokyr, an economic historian at Northwestern University, and a joint award for Philippe Aghion of Collège de France and INSEAD, along with Peter Howitt from Brown University. Their collective research emphasizes the vital role of innovation in fostering sustainable economic growth, illustrating how dynamic economies undergo continual cycles of creation and destruction.
Understanding Innovation and Economic Growth
The Royal Swedish Academy of Sciences highlighted that economic growth has significantly reduced poverty for billions over the past two centuries. While this progress is often taken for granted, it is a relatively recent phenomenon in human history. Prior to approximately 1800, sustained economic growth was virtually unheard of. The Academy cautioned that poor policy decisions could lead to stagnation, drawing attention to the lack of improvement in living standards in regions such as Sweden and the United Kingdom during the four centuries from 1300 to 1700.
Mokyr’s research reveals that before the Industrial Revolution, innovations were largely driven by trial and error rather than scientific understanding. He posits that meaningful economic growth relies on a synergy of various disciplines, arguing that one cannot have effective engineering without mechanics, or medical practice without microbiology. He cited the historical reluctance of surgeons to adopt sterilisation techniques despite early advocacy for them, only becoming commonplace after the contributions of scientists like Louis Pasteur and Joseph Lister in the 1860s.
The Impact of Creative Destruction
Aghion and Howitt’s work further examines the duality of innovation, which creates both winners and losers within the market. In the United States, approximately 10% of firms enter and exit the market annually. Their 1992 research, which expanded on the concept of endogenous growth, argues that growth is generated by internal factors rather than external forces. This idea was foundational in earning Paul Romer a Nobel Prize in 2018. Their work also draws from Joseph Schumpeter’s theory of “creative destruction,” emphasizing that governments must carefully design subsidies to promote innovation without discouraging investment.
Aghion and Howitt advocate for government involvement in supporting and retraining displaced workers who lose their jobs to more innovative competitors. By doing so, they suggest that political support for pro-growth policies can be sustained, fostering an environment conducive to innovation.
Future Challenges and the Role of Policy
While the laureates support the pursuit of economic growth, they acknowledge emerging concerns regarding the sustainability of endless growth in light of environmental challenges. In a post-award interview, Aghion emphasized the necessity of implementing carbon pricing strategies to align economic growth with greenhouse gas emission reductions. He also warned of potential economic setbacks posed by rising tariffs and trade barriers, advocating for a marketplace that nurtures rather than stifles innovation.
The Nobel Prize in Economic Sciences, officially named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was not part of the original prizes established in 1895. First awarded in 1969, this year’s recognition of Mokyr, Aghion, and Howitt continues a trend of awarding economists primarily affiliated with U.S. institutions. It also highlights the underrepresentation of women in the field, with only three out of 99 past laureates being female. Some argue that Rachel Griffith, an economics professor who has collaborated with Aghion and Howitt, could have been a deserving co-recipient this year.
This latest Nobel Prize serves not only as a recognition of individual achievement but also as a call to action for policymakers to harness innovation for sustainable economic growth while navigating the complexities of modern challenges.
