The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
2025 Nobel Prize in Economics: Philippe Aghion, Peter Howitt and Joel Mokyr for “having explained innovation-driven economic growth” On October 13th, the Nobel prize in economics went to three academics, with one half being awarded to Joel Mokyr, professor of economics and history at Northwestern University, "for having identified the prerequisites for sustained growth through technological progress" and the other half being jointly awarded to Philippe Aghion (Collège de France, INSEAD, London School of Economics) and Peter Howitt (Brown University) "for the theory of sustained growth through creative destruction". In 1987 Robert Solow received the same prize for his seminal model on economic growth. Developed in the 1950s, the model proposed a framework of great elegance that illustrated how various factors can contribute to sustained economic growth. In particular, Solow argued that two key elements determined per capita income levels. On the one hand was the accumulation of physical capital which, because of the law of diminishing returns, was bounded. Capital accumulation would hence eventually come to a halt. On the other, exogenous technological innovations raised the productivity of new capital and this would tend to increase its productivity, offsetting diminishing returns and resulting in unbounded growth. This framework fitted well the post-war economies that were accumulating capital at a fast pace in the wake of destruction and in which new technological know-how seemed to have appeared from nowhere – a nowhere that was largely the result of massive but little publicised public expenditures in technologies as varied as the mass production of penicillin or early computers to break the Enigma code. Yet critics of Solow’s work argued that he saw productivity growth as "manna from heaven", suggesting that technological progress was treated as an exogenous, unexplained gift rather than being a result of specific actions like research and development, and by the 1970s an array of empirical facts seemed not to fit the framework. Notably, investments by individuals and firms in order to create novel technologies where visible everywhere, everywhere except in growth models. Although institutively simple, introducing intentional innovation into a growth model presented a major challenge. If a production function using capital and labour exhibits constant returns to scale and assuming perfect competition so that factors are paid their marginal product, the payments to these factors would exhaust all output and nothing would be left to reward innovative effort. The work of this year’s laurates moves away from this paradigm to examine the environment and economic conditions in which innovation can occur. Joel Mokyr’s work has identified three important requisites for growth: useful knowledge, mechanical competence and institutions conducive to technological progress. His analysis of Western European economies in the 18th and 19th centuries has sought to identify which institutions foster growth and points at how an innovation-supportive environment can emerge through mechanisms like property rights, intellectual property, education, and a "market for ideas". In such a context, scientific breakthroughs and practical applications enhance each other and create a self-generating process, leading to sustained economic growth. Crucially, this is a process that challenges existing interests and rents, making openness to new ideas and to change essential for growth. The importance of challenging existing economic power is the cornerstone of the growth framework developed by Philippe Aghion and Peter Howitt. Using tools developed in the literature of industrial organisation, their framework simultaneously allows for competition (in trying to be the first to innovate) and monopoly (once a firm has innovated). This process of creative destruction, first described in the 1940s by the Austrian economist Joseph Schumpeter, sees technological change as a permanent conflict between the creation of new technologies (or goods or varieties of a good) and the destruction of existing ones. Each time a product is replaced by a better version, a monopolist appears and one disappears. The rents from innovation remain, but the firm to which they accrue changes as technologies emerge and per capita incomes grow. Together, these two approaches have endogenized innovation, making it a function of the institutional context and the incentive system that results from both preferences and policies. They not only explain how sustained growth occurs, but also allow us to assess when growth is lacking or when it is excessive and which kinds of policy interventions can help. The wealth of predictions – ranging from the education system, to intellectual property rights legislation, and the taxation of top incomes – have made this approach a powerful tool to address the growth prospects of both mature and emerging economies. This year’s prize comes in the wake of the 2024 award to Daron Acemoglu, Simon Johnson, and James A. Robinson and the 2023 award to Claudia Goldin. All three have in common that looking at economic history can provide theoretical insights on questions that are relevant today such as what determines female labour force participation, which institutions foster growth, and how to promote innovation. Yet over the past three decades, the teaching of economic history has fallen through the cracks in most economic departments. Cambridge University, known for its adherence to tradition, removed economic history as a compulsory course in the economic tripos (i.e. its undergraduate degree) in 1990s and it is rare to find today an economics graduate that has even the most basic knowledge of the subject. The three consecutive prizes force us to rethink the importance of looking back in time and tell us that dusting off old volumes is as valid a way of testing current economic theories as any other. Cecilia García Peñalosa, Marseille, October 14 2025
