Sometimes you have to break something to fix it.
On Monday, the Royal Swedish Academy of Sciences announced the 2025 Nobel Memorial Prize in Economics was awarded to Joel Mokyr from Northwestern University, Philippe Aghion from the Collège de France and the London School of Economics, and Peter Howitt from Brown University. Their research offers a new perspective on how innovation and the process of creative destruction promote prosperity, challenging longstanding political beliefs regarding growth, trade, and regulation.
Their findings shed light on why some nations experience economic advancement while others lag behind. Interestingly, they indicate that while a fragmented political landscape and diverse regulations may be crucial for stimulating innovation, certain types of global trade might actually be detrimental to overall well-being, which is a clear shift from previous economic doctrines.
Historically, economic growth has been fleeting. Societies might thrive following a groundbreaking discovery, yet growth would eventually plateau. However, the awardees explain why, notably over the last two centuries, some societies have managed to attain continuous growth.
“Economic growth is not a guarantee,” remarked John Hassler, chairman of the Nobel Prize Committee. “We must safeguard the mechanisms of creative destruction to avoid sliding back into stagnation.”
Fragmentation as a growth engine
Mokyr, at 79, presented historical data to clarify why the Industrial Revolution took root in Europe rather than in other advanced civilizations, such as China. In his book, Culture of Growth, he posits that Europe’s competitive state system created fertile ground for innovators to express themselves freely, without oppressive constraints.
“In China, the imperial bureaucracy stifles innovation uniformly,” Mokyr explained. “In Europe, if one ruler dismisses your idea, there’s the possibility to seek refuge in a neighboring state.”
This political fragmentation, paired with a common intellectual culture fostered through Latin, created what Mokyr describes as a “marketplace of ideas.” The blend of sovereignty and intellectual freedom cultivated a system that encouraged discovery and embraced dissent. He warns that the EU’s push for regulatory coherence and a pan-European identity might unintentionally jeopardize the conditions that positioned Europe as a global leader in innovation.
Furthermore, Mokyr identified distinct types of knowledge that explain why some innovations drive prolonged progress, while others fade. He refers to these as “propositional knowledge” (understanding that something functions) and “normative knowledge” (grasping why it functions).
Prior to the Industrial Revolution, societies could produce significant discoveries, yet without comprehension of the underlying scientific principles, these innovations remained isolated, leading to eventual stagnation in progress.
During the Enlightenment, Mokyr argues, thinkers in Europe began to prioritize scientific explanations for technology. This cultural shift allowed each generation to build upon earlier discoveries, rather than merely rediscovering them. A blacksmith who understood the principles behind heat treatment could develop new alloys systematically instead of just relying on a practical tip.
Focusing on understanding cause and effect transformed sporadic innovations into the cumulative technological advancements that characterize modern economic growth.
Creative destruction – but not transferable overseas
Aghion (68) and Howitt (78) are primarily known for defining the term creative destruction, which describes how new technologies replace old ones and stimulate continual growth.
Their 1992 model examined how Schumpeter’s idea of “creative destruction” fosters ongoing growth. In this framework, entrepreneurs invest in innovations, rendering existing products obsolete and creating a cycle that leads to further advancements.
While new entrants may render older technologies outdated, the outcome is a rise in productivity and living standards. They also highlighted an “inverted U” relationship between competition and innovation—too little competition can lead to complacency, whereas too much can inhibit risk-taking and investment.
However, subsequent research led by Aghion and colleagues, including 2015 Nobel Laureate Angus Deaton, revealed a critical nuance. They found that the nature of job displacement matters immensely. Their 2015 study determined that while job turnover from domestic innovation generally boosts well-being, job losses from offshoring tend to produce the opposite effect. When local economies lose businesses to overseas competition, life satisfaction plummets, even when considering unemployment and social safety nets.
“The effects of job turnover are not equal,” the researchers noted. “Displaced workers can often secure employment with more productive firms after domestic innovations, but this process falters when offshoring occurs.”
This distinction raises questions about the assumption that all trade liberalization is beneficial and implies that policymakers should differentiate between innovations that enhance productivity and those driven by offshoring.
Altogether, the laureates’ findings imply that economic growth relies on diversity and competition, rather than uniformity and blind globalization. While Mokyr’s insights advocate for competitive federalism and regulatory variety, Aghion and Howitt emphasize the need for trade policies that differentiate between beneficial and harmful forms of creative destruction.
The Nobel Prize total is 11 million Swedish krona (approximately $1 million), with half going to Mokyr and the other half shared between Aghion and Howitt.
