OPINION | Nobel Economics 2025: Smith and Schumpeter Award

First, let us discuss Mokyr’s key contributions. Economists often cite technology and innovation as a key factor for sustained economic development. They show how industrial revolution led to innovations that pushed world growth. However, one question that has puzzled economists is that there was technological innovation even before industrial revolution such as windmills, printing press, Newton’s laws of motion etc. Then why did growth not take off before industrial revolution?

Mokyr answered this puzzle digging deep into economic history. He says what matters for sustained growth is the continuous flow of “useful knowledge” which is divided into two parts.

First, is propositional knowledge, a systematic description of regularities in the natural world that demonstrates why something works. Second, is prescriptive knowledge, such as practical instructions, drawings or recipes that describe what is necessary for something to work.

Mokyr points that prior to industrial revolution, prescriptive knowledge was present but propositional knowledge was absent. They knew things work but did not know why they worked.  What mattered for growth was not just “what worked” (prescriptive) but “why it worked” was as important.

In the 16th and 17th century, the ‘what’ began to be backed by the ‘why’. Scientists started documenting knowledge and sought feedback to improve the processes. For the steam engine to work, it need inputs about atmospheric pressure and vacuums. Knowledge of oxygen in reducing carbon content was crucial to making good steel.

Puzzle About the Geography of Industrial Revolution

Apart from just theoretical knowledge, even practical or commercial knowledge was important. The ideas have to be translated into commercial products without which even the best ideas remain on paper. One related question that has puzzled economists is that why did Industrial Revolution start in England and not in, say France.

Mokyr’s answer to the question is that England has skilled engineers and technicians who could translate the big ideas into commercial reality.

Mokyr also highlights that ‘a society open to change’ is also important for growth.

Technological change creates both winners and losers. For the society to progress, it has to create acceptance about this creative destruction and replacement of new with the old. Many societies have been unable to embrace this change and block new ideas and with it economic progress too.

Aghion and Hewitt, the Mathematicians

While Mokyr digs into history records to study the role of technology in sustained growth, Aghion and Howitt use the mathematical approach to show the same relationship. Mokyr looks more at the macro picture of growth whereas Aghion-Howitt work on the micro approach.

Aghion-Howitt argue that creative destruction where new firms replaces the old firms is at the heart of sustained economic transformation. An important aspect of their research is that creative destruction will also destroy old jobs and create new jobs. They add that we should protect workers but not old jobs.

They highlight how firms that invest in research and development (R&D) remain at the top of the ladder for a longer period of time. However, more R&D reduces the time for new innovations and the leader is replaced by a new player. This is the circle of creative destruction espoused by Schumpeter.

Should R&D be Subsidised by the State?

Aghion and Hewitt built a macroeconomic model linking the forces of creative destruction.  The model argues that financing of R&D is based on multiple factors such as household savings rate, interest rates and state of financial markets. The macroeconomic model shows there are two opposite forces, one that says R&D should be subsidized and other saying R&D should not be subsidized.

First, the force that supports R&D subsidy. The argument is that R&D leader of today will be replaced by a new player eventually which has better innovation. This does not mean R&D has less value as the new innovation builds on the old R&D. The firms may not value R&D but society gains from R&D. R&D is like this positive externality which serves the larger society and needs to be subsidized.

Second, the force that says R&D should not be subsidized. The new player that benefits from R&D ends up not just replacing the old player that pioneered R&D, but also generates high profits. The new innovation may be slightly better than old product, but the gains are significant. As profits are larger than socioeconomic gains, it should not be subsidized.

Which force dominates? Like most things in economics, there is no straight forward answer. It varies from case to case.

Their model led to more research on creative destruction of firms. It was also observed that both- few big firms that dominate markets and many small firms that do not dominate markets- are bad for innovation.

Lessons for Today

The 2025 Nobel offers valuable lessons for today as world economy is being shaped by a new innovative force of Artificial Intelligence (AI). The Nobel Committee argues that Mokyr’s ideas suggest that AI will reinforce the feedback loop between “why things work” and “what things work”. AI is generating vast amount of knowledge which could be really useful to make better and more innovative products.

The work of Aghion-Hewitt points out how the new technology will destroy jobs. We need to protect workers but not the jobs. The technology markets are also being cornered by few large firms which needs to be tackled urgently.

Their work also cautions that economic growth cannot be taken for granted. There are many countries and companies that were ahead at one time but have fallen behind today. The mechanisms of creative destruction work both ways. If addressed positively, it unleashes growth, if ignored, it leashes misery too. The developed countries of today are facing stagnation and if not addressed could be not as developed tomorrow.

Post Script: Rise of Economic History

It is interesting to note that this is the second consecutive year when the award has been given to laureates that used economic history to understand long term growth. In 2024, the award was given to Daron Acemoglu, Simon Johnson and Jim Robinson for their work on institutions. It is also interesting that this is the fourth consecutive year in which award has been given for work on economic history.

In 2022, Ben Bernanke was given the award (along with Douglas Diamond and Philip Dybvig) for pointing to the role of banks in aggravating Great Depression. In 2023, Claudia Goldin was given the award for showing long history of women in labor force participation.

Economic history is making a comeback in awards, will it make a comeback in economics pedagogy too?

(Amol Agrawal is the author of 'History of Private Banking in South Canara district (1906-69)’.)

Views are personal, and do not represent the stand of this publication.