Introduction

The 2025 Sveriges Riksbank Prize in Economic Sciences was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for “explaining innovation-driven economic growth.” Their research collectively answers one of the most fundamental economic puzzles — how nations sustain growth over centuries, not decades.

Why in the News

The Nobel Committee’s decision is significant because it celebrates innovation as the engine of sustained prosperity at a time when economies face stagnation despite technological abundance. It also marks a historical synthesis, combining Mokyr’s economic history with Aghion and Howitt’s modern growth models, to offer a unified vision of why the last two centuries broke free from millennia of stagnation. This award underscores that knowledge creation and openness to change are as critical to a nation’s future as natural resources or fiscal policy.

Understanding the Foundations of Innovation-Driven Growth

What did Joel Mokyr’s research reveal about sustained growth?

1. Useful Knowledge: Mokyr argued that long-term growth depends on a constant flow of useful knowledge, divided into propositional (theoretical understanding) and prescriptive (practical implementation) forms.
2. Before Industrial Revolution: Innovators understood why things worked (propositional) but lacked the technical ability to make them work (prescriptive).
3. Scientific Revolution Impact: The 16th–17th centuries brought controlled experiments and reproducibility — transforming knowledge from abstract to applicable.
4. Policy Implication: Nations must ensure technical education and skill development, as ideas alone cannot yield growth without implementation.

How did Mokyr link innovation to social openness?

1. Openness to Change: Innovation often disrupts existing systems and creates losers; societies resistant to change stifle progress.
2. Historical Example: Britain’s sustained growth stemmed from skilled artisans and engineers who translated scientific ideas into industrial applications.
3. Policy Lesson: Governments must create inclusive ecosystems that accept change, retrain workers, and redistribute gains from innovation.

What is the Theory of Creative Destruction?

1. Conceptual Core: Originally introduced by Schumpeter, “creative destruction” describes how innovation replaces older technologies and firms, creating both winners and losers.
2. Aghion & Howitt’s Contribution: They formalized this process mathematically, showing how technological progress leads to sustained long-term growth.
3. Dynamic Equilibrium: Innovation raises productivity but simultaneously displaces outdated industries — a perpetual cycle that fuels development.

How much should a country invest in Research and Development (R&D)?

1. Balancing Act: Aghion and Howitt’s model shows two opposing trends:
   1. Trend 1 — Underinvestment: Since society benefits from outdated technologies even after firms lose profits, R&D should be subsidized to ensure social spillovers.
   2. Trend 2 — Overinvestment: When incremental innovations capture disproportionate profits, R&D may be excessive and distort competition.
2. Optimal Level: There is no universal ideal investment, but the model provides tools to identify an economy-specific optimum that maximizes welfare without creating monopolistic inefficiencies.

Why does this Nobel matter for developing economies like India?

1. Knowledge Ecosystem: The laureates’ findings emphasise that growth requires not just innovation, but translation — turning ideas into scalable realities through skills, entrepreneurship, and openness.
2. India’s Imperative: Investments in R&D (currently ~0.7% of GDP), vocational skilling, and ease of doing business are crucial to realize the demographic dividend.
3. Policy Relevance: The Economic Survey and NITI Aayog’s “Innovation Index” already underline similar principles — this Nobel reinforces India’s need to build a “knowledge economy.”

Conclusion

The 2025 Nobel Prize in Economic Sciences reaffirms that innovation, knowledge, and societal openness are the real engines of prosperity. Economic success is no longer a product of mere capital or labor, but of the synergy between imagination and execution. For India and other developing nations, the message is clear: sustained growth depends on nurturing human capital, research ecosystems, and tolerance for disruption. As Mokyr’s and Aghion–Howitt’s work shows, societies that embrace change, skill their people, and invest in ideas will lead the next chapter of human progress.

PYQ Relevance

[UPSC 2015] What are the areas of prohibitive labour that can be sustainably managed by robots? Discuss the initiatives that can propel the research in premier research institutes for substantive and gainful innovation.

Linkage: This PYQ aligns with the 2025 Nobel Prize in Economic Sciences as both emphasize how technological innovation transforms labour structures—echoing Aghion and Howitt’s theory of creative destruction, where automation replaces old forms of work while driving new productivity.

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