On October 13, 2025, the Royal Swedish Academy of Sciences announced the recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Joel Mokyr, Philippe Aghion, and Peter Howitt were honored for their groundbreaking work in explaining the role of innovation in driving economic growth. This Nobel Prize recognition celebrates the trio of economists whose research has transformed our understanding of the factors that contribute to prosperity in modern economies and shed light on the historical prevalence of stagnation.
Half of the prize was awarded to Joel Mokyr for demonstrating that long-term economic growth depends on a critical factor beyond invention. The other half was jointly awarded to Philippe Aghion and Peter Howitt for their foundational mathematical model of creative destruction.
The Great Divergence: From Stagnation to Sustained Growth
For millennia, human societies existed in what economists refer to as a Malthusian trap. Despite occasional innovations like the wheel, the printing press, and improved agricultural techniques, economic growth inevitably stagnated. Therefore, living standards remained stubbornly close to subsistence levels for the majority of humanity.
However, beginning approximately two centuries ago, a remarkable transformation occurred. For the first time in history, the world witnessed sustained economic growth, which lifted a significant portion of the population out of poverty and laid the groundwork for our present prosperity.
This transformation raises a profound question: What changed? Why did innovation suddenly become self-sustaining, leading to the compounding prosperity we now take for granted? The 2025 Nobel laureates offer complementary answers to this puzzle, combining historical analysis with mathematical rigor.
Joel Mokyr: The Knowledge Architect of the Industrial Revolution
Joel Mokyr, a 79-year-old Dutch-born economist affiliated with Northwestern University, approaches the question of innovation through the lens of economic history. Mokyr’s most significant contribution lies in his distinction between two types of useful knowledge. Propositional knowledge is a systematic description of regularities in the natural world that explain why something functions, while prescriptive knowledge comprises practical instructions, drawings, or recipes that outline the necessary steps for something to operate.
This seemingly simple distinction reveals a profound insight into historical economic development. Before the Industrial Revolution, technological innovation relied heavily on prescriptive knowledge—people knew what worked, but not why.
For instance, a blacksmith might have honed their skills through years of apprenticeship to forge superior steel, but without understanding the chemical processes involved, this knowledge remained limited to trial and error. While improvements were possible, they inevitably faced diminishing returns.
The breakthrough came with what Mokyr refers to as the “Industrial Enlightenment.” Scientists began to demand precise measurement methods, controlled experiments, and reproducible results, which improved the feedback between propositional and prescriptive knowledge. This created a self-reinforcing cycle. Scientific understanding of the reasons behind techniques led to systematic improvements and the discovery of entirely new applications. Conversely, practical innovations raised new questions that stimulated further scientific inquiry.
Typical examples include how the steam engine was enhanced by contemporary insights into atmospheric pressure and vacuums, and how advancements in steel production were achieved through the understanding of how oxygen reduces the carbon content of molten pig iron. Each progress in one field fueled the other, creating an accelerating cycle of innovation that previous societies had never witnessed.
Mokyr also shares a cautionary tale about the significance of propositional knowledge in overcoming resistance to innovation. Hungarian physician Ignaz Semmelweis discovered that maternal mortality rates plummeted when physicians washed their hands. However, if he had understood the underlying reasons and been able to demonstrate the existence of harmful bacteria eliminated by handwashing, his ideas might have had a more immediate impact. Without the scientific foundation of germ theory, his life-saving insight was disregarded for decades, resulting in countless unnecessary deaths.
The cultural and institutional conditions that facilitated this knowledge revolution were equally significant. The emergence of pan-European networks for knowledge creation and dissemination, universities that specialized in advancing intellectual development, and the printing press that lowered the costs of codifying and disseminating knowledge fostered a culture of open discussion embodied in the Republic of Letters—a truly transnational community of scientists and craftsmen.
Mokyr’s research goes beyond merely explaining the past. He demonstrates that artificial intelligence has the potential to enhance the feedback loop between propositional and prescriptive knowledge, thereby accelerating the accumulation of valuable knowledge. However, he acknowledges that sustained growth does not necessarily equate to sustainable growth. Nevertheless, he contends that negative consequences can sometimes trigger processes that reveal solutions, making technological development potentially self-correcting.
Aghion and Howitt: The Mathematics of Creative Destruction
While Mokyr delved into the historical foundations of innovation-driven growth, Philippe Aghion and Peter Howitt meticulously constructed the mathematical framework to understand its underlying mechanisms. Their collaboration stands as one of the most influential partnerships in the realm of modern economics.
Aghion, a professor at the Collège de France, INSEAD, and the London School of Economics, and Howitt, Professor Emeritus of Economics at Brown University, are two economists who, despite working across continents, made a landmark contribution to growth theory.
Their groundbreaking 1992 paper, titled “A Model of Growth Through Creative Destruction,” published in Econometrica, revolutionized the way economists perceive sustained economic expansion. This pivotal paper marked a paradigm shift in the growth literature, showcasing a harmonious blend of micro and macro observations. It demonstrated the practical application of the theory in addressing normative policy questions.
The concept of “creative destruction,” originally articulated by the renowned Austrian economist Joseph Schumpeter, tells us that capitalism’s dynamism stems from continuous innovation that simultaneously generates and eliminates value. Aghion and Howitt’s groundbreaking contribution lies in transforming this intuitive yet imprecise notion into a mathematically rigorous framework, enabling its application to address questions of long-term growth.
A model of endogenous growth was developed, where vertical innovations, driven by a competitive research sector, serve as the fundamental source of growth. The model establishes equilibrium through a forward-looking difference equation, where the amount of research conducted in any given period depends on the anticipated research output in the subsequent period.
At the core of their model lies a fundamental tension that propels the entire growth process. The immediate reward for research during this period is the potential for monopoly rents in the subsequent period. However, these rents are transient, lasting only until the next innovation occurs. At that point, the knowledge that underpins these rents becomes obsolete, leading to a negative impact on the expected present value of the rents. This phenomenon is known as creative destruction. Each innovation generates value for its creator but simultaneously poses a threat to the value of previous innovations.
This framework has significant implications for understanding growth dynamics.
Both the average growth rate and the variance of the growth rate are increasing functions of the size of innovations, the size of the skilled labor force, and the productivity of research, while decreasing functions of the rate of time preference.
Perhaps most significantly for policy, the model demonstrates that free markets don’t inherently produce optimal levels of innovation. Under laissez-faire conditions, the economy’s growth rate might deviate from the optimal level because private research firms fail to internalize the rent-destroying impact of their innovations, resulting in a business-stealing effect. Additionally, innovations may tend to be too modest in scale.
The Aghion-Howitt framework revolutionized the way economists approach growth by prioritizing firm-level heterogeneity and competitive dynamics. Their approach hinges on the diversity and competitive interactions among firms, enabling us to test theories of aggregate growth and quantify their mechanisms by analyzing microeconomic, firm-level data. Additionally, it allows us to explicitly evaluate counterfactual policy experiments, such as alterations in patent protection or competition policies.
Empirical evidence corroborates their theoretical predictions. In the United States, 10 percent of firms either enter or exit the market annually, highlighting the significant scale of creative destruction occurring beneath aggregate stability. This constant churn—while painful for displaced firms and workers—benefits overall productivity and serves as the driving force behind sustained growth.
Aghion’s work has transcended the realm of pure theory and has had a significant impact on practical policy. He played a pivotal role in shaping French President Emmanuel Macron’s economic program during his 2017 election campaign. More recently, he co-chaired the Artificial Intelligence Commission, which submitted a comprehensive report to Macron. This report outlined 25 recommendations aimed at positioning France as a global leader in the field of artificial intelligence.
The Innovation Trilogy: Synthesizing Historical Depth and Mathematical Precision
What makes this Nobel Prize particularly gratifying is the harmonious synergy between the laureates’ contributions. Mokyr offers the profound historical context. His research sheds light on why certain societies at specific times become hotbeds of innovation, while others, despite possessing similar resources, fail to achieve sustained technological progress. Aghion and Howitt, on the other hand, provide the mathematical tools to understand the mechanisms through which innovation drives growth once these conditions are met.
The laureates’ work underscores crucial policy considerations. Economic growth is not a given. As John Hassler, Chair of the Committee for the prize in economic sciences, emphasized, “The laureates’ work shows that economic growth cannot be taken for granted. We must uphold the mechanisms that underly creative destruction, so that we do not fall back into stagnation”.
This warning holds particular significance in our current era. Societies must uphold institutions that foster knowledge accumulation and dissemination while remaining receptive to the inevitable disruptions that innovation brings. Patent systems must be meticulously calibrated—strong enough to incentivize innovation but not so rigid that they hinder it. Competition policy must permit temporary monopolies that reward innovators while preventing incumbent firms from obstructing new entrants. Education systems must equip workers not only with specific skills but also with the capacity to adapt to technological advancements.
Contemporary Relevance: From AI to Climate Change
The insights of the laureates are profoundly relevant to today’s challenges. Artificial intelligence stands as perhaps the most transformative general-purpose technology since electricity, with the potential to revolutionize the interplay between propositional and prescriptive knowledge, as Mokyr highlighted as crucial for sustained growth. Machine learning systems are already accelerating scientific discovery while simultaneously automating practical applications—exactly the kind of synergy that fuels innovation-driven growth.
Climate change presents a contrasting perspective. Sustained growth doesn’t necessarily equate to sustainable growth, and innovations can have substantial negative consequences. However, the laureates’ framework offers a glimmer of cautious optimism. The very mechanisms that fuel innovation can be harnessed to address the problems that growth creates. Clean energy technologies, carbon capture, and sustainable materials exemplify the kind of creative destruction that could sustain prosperity while tackling environmental challenges.
Mokyr, Aghion, and Howitt illuminate the intricate interplay between knowledge, creativity, and institutional design, offering not only an explanation for past prosperity but also a roadmap for its sustainable preservation amidst the challenges posed by climate change, demographic shifts, and digital disruption.
Beyond their technical contributions, the laureates exemplify the collaborative nature of knowledge creation that their work describes. Aghion and Howitt’s decades-long partnership illustrates how sustained intellectual collaboration can yield insights that neither scholar could have achieved independently. Mokyr’s immersion in historical sources and his role in building academic networks demonstrate how the integration of different domains of knowledge—in his case, history and economics—generates novel understanding.
When asked about investing his prize money, Aghion expressed his intention to allocate it to his research laboratory, emphasizing the principle that knowledge accumulation necessitates sustained investment. Mokyr, who will be turning 80 next summer, revealed that he has no intention of retiring, stating, “this is the type of job that I dreamed about my entire life.”
Ideas That Shape the Future
The 2025 Nobel Prize in Economics honors groundbreaking research: the emergence of sustained economic growth that has lifted billions out of poverty. Their collective work has fundamentally reshaped the understanding of the relationship between technological advancement and economic prosperity, demonstrating that innovation is not a random occurrence but rather a response to incentives, institutions, and cultural factors.
As we navigate the challenges and opportunities of the 21st century—ranging from artificial intelligence and climate change to inequality and demographic transition—the insights of Mokyr, Aghion, and Howitt remain invaluable. They serve as a reminder that progress is not a given; it demands specific institutional frameworks and cultural values.
The Nobel Prize not only celebrates past achievements but also provides a framework for contemplating our economic future. By honoring these three economists, we can better understand our past, present, and, most importantly, the path we must take to sustain the innovation-driven growth that has revolutionized human possibilities.
