The Journey So Far
On October 13, 2025, the Royal Swedish Academy of Sciences announced its decision to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, widely known as the Nobel Prize in Economics, to Joel Mokyr, Philippe Aghion, and Peter Howitt. They were honored for their groundbreaking work “explaining innovation-driven economic growth.” Joel Mokyr will receive one half of the esteemed prize, while Philippe Aghion and Peter Howitt will share the other half.
Meet the Laureates and Their Contributions
Born in Leiden, the Netherlands, in 1946, Joel Mokyr earned his PhD from Yale University in 1974. He currently serves as a distinguished professor at Northwestern University. His prize recognizes his crucial work in “identifying the prerequisites for sustained growth through technological progress.”
Philippe Aghion, born in Paris, France, in 1956, completed his PhD at Harvard University in 1987. He is currently a professor at Collège de France and INSEAD in Paris, and at The London School of Economics and Political Science in the U.K.
Peter Howitt, born in Canada in 1946, received his PhD from Northwestern University in 1973. He holds a professorship at Brown University in the U.S.
Aghion and Howitt jointly received their half of the award “for the theory of sustained growth through creative destruction,” as noted in the official citation.
Joel Mokyr’s Insight: The Foundation of “Useful Knowledge”
The collective work of these three economists helps us understand a profound shift: the sustained global economic growth of the last two centuries, a stark contrast to previous eras of stagnation. Their research, through diverse lenses, seeks to explain the mechanisms behind this remarkable acceleration, offering frameworks for future prosperity.
Joel Mokyr, through his extensive work in economic history, highlighted “useful knowledge” as the cornerstone of sustained growth. He posited that this knowledge comprises two essential components: propositional knowledge and prescriptive knowledge. Propositional knowledge involves understanding the fundamental ‘why’ – observing the natural world and theorizing about how things operate. Prescriptive knowledge, on the other hand, consists of the practical ‘how’ – the specific instructions, designs, or methods required to make something work, akin to a detailed manual.
Mokyr observed that before the Industrial Revolution, brilliant minds often possessed strong propositional knowledge. They had insightful theories about natural phenomena. However, this theoretical understanding frequently lacked a robust foundation of prescriptive knowledge. Without practical, reproducible instructions, building upon existing ideas proved nearly impossible.
This dynamic changed dramatically in the 16th and 17th centuries. Scientists began integrating precise measurement, controlled experiments, and a strong emphasis on reproducible results into their practices. This critical development, Mokyr argued, fostered a powerful feedback loop between propositional and prescriptive knowledge.
Illustrative examples of this synergy include the continuous refinement of the steam engine, driven by new understandings of atmospheric pressure and vacuums, and advancements in steel production, spurred by a deeper comprehension of how oxygen influences molten pig iron’s carbon content.
Policy Lessons from Mokyr’s Discoveries
Mokyr’s research offers two critical policy prescriptions for fostering sustained economic growth. First, he emphasized that innovative ideas can only materialize into tangible progress if supported by an ample supply of practical, technical, and commercial knowledge. Without this crucial ecosystem, even revolutionary concepts – like Leonardo da Vinci’s visionary helicopter designs – are destined to remain mere blueprints.
He posited that Britain’s pioneering role in sustained growth stemmed from its rich pool of skilled artisans and engineers. These individuals were instrumental in transforming abstract ideas into viable, market-ready products. The clear policy message here is that governments must prioritize significant investment in skills development and vocational training to cultivate a workforce capable of driving innovation.
Secondly, Mokyr argued that sustained growth hinges on a society’s openness to change. Innovation, by its very nature, generates both beneficiaries and those who lose out as new technologies displace older ones. This dynamic often incites resistance from entrenched interest groups, underscoring the need for policies that manage transitions and encourage adaptability.
Aghion and Howitt’s “Creative Destruction” Model
Philippe Aghion and Peter Howitt built upon the concept of “creative destruction”—a process where innovation not only creates new value but also displaces existing industries and firms. They developed a sophisticated mathematical model to precisely capture this dynamic, demonstrating rigorously how continuous technological advancement fuels sustained economic growth.
Their model operates on a fundamental premise: firms actively engage in research and development (R&D) to create patented products, temporarily establishing a monopoly and a leading market position. However, this patent protection is not absolute; it cannot prevent other companies from investing in their own R&D to develop superior new products. When a truly better product emerges, it “destroys” the incumbent’s dominance, and profits shift to the new innovator.
The framework crafted by Aghion and Howitt allows for the analysis of an optimal level of R&D—and consequently, economic growth—within a free market system, absent external political intervention. Their findings revealed two contrasting forces that complicate the determination of this optimal balance.
The R&D Dilemma: To Subsidize or Not to Subsidize?
Aghion and Howitt identified a critical balancing act concerning government support for R&D. The first trend they highlighted is the enduring societal benefit from innovation, even after a technology has been surpassed. Even if the original innovating company no longer profits, the knowledge and improvements generated continue to benefit society as a whole. This suggests a strong case for R&D subsidies to prevent companies from being discouraged by the risk of future obsolescence.
Conversely, a competing trend emerges when a company introduces an innovation that, while displacing an incumbent, offers only incremental improvements over the previous technology. In such cases, the societal gain from this marginal advancement might be limited, even as the innovating company captures significant profits. This scenario suggests that, from a broader societal perspective, investment in R&D could potentially be too high, arguing against blanket subsidies.
Ultimately, the optimal level of R&D investment will depend on the specific context of each society and economy. Nevertheless, Aghion and Howitt’s powerful theoretical framework provides invaluable guidance for policymakers seeking to understand which interventions will most effectively steer their economies towards an ideal balance for sustained, innovation-driven growth.