The Nobel Prize in Economic Sciences for 2025 shines a spotlight on the remarkable journey of economic growth over the past two centuries. It's a story of how technological innovation has transformed our world, but it's not without its complexities and controversies.
The Rise of Sustained Growth: A Revolutionary Shift
For most of human history, economic growth was a rare occurrence, with living standards remaining largely stagnant from one generation to the next. However, the Industrial Revolution, which began over 200 years ago, changed this paradigm. It sparked a never-ending cycle of innovation and progress, leading to sustained growth that has become the new normal.
This year's Nobel laureates in economic sciences delve into the reasons behind this sustained growth and what it takes to maintain it. Their work offers valuable insights into the mechanisms that drive economic progress.
The Role of Technological Innovation: A Double-Edged Sword
Economic historian Joel Mokyr explains how scientific breakthroughs and practical applications can enhance each other, creating a self-generating process that fuels economic growth. However, he also highlights the importance of an open society that embraces change, as technological advancements can disrupt existing structures and create winners and losers.
Mokyr's research demonstrates that sustained growth requires a continuous flow of useful knowledge. This knowledge has two key components: propositional knowledge, which explains why something works, and prescriptive knowledge, which provides practical instructions for making it work. The interplay between these two types of knowledge has been crucial in driving technological advancements.
The Creative Destruction Model: A Balancing Act
Economists Philippe Aghion and Peter Howitt, through their joint publication in 1992, constructed a mathematical model that illustrates how growth arises through creative destruction. This process, while creative in its building upon innovation, is also destructive as older products become obsolete. Their model shows how companies invest in improved production processes and new, better-quality products, leading to a dynamic where the best products are constantly being outcompeted.
Aghion and Howitt's model also highlights the importance of finding the right balance between innovation and market dominance. Their research suggests that concentrations that are either too high or too low can hinder the innovation process. It raises the question: How can we ensure that innovation creates a net positive impact on society as a whole?
The Impact of Useful Knowledge: From Theory to Practice
Mokyr's work emphasizes the significance of practical knowledge in realizing new ideas. It's not enough to have brilliant theories; they must be transformed into commercial products. This transformation requires skilled artisans and engineers, as seen in the case of Britain, where sustained growth first took hold.
Furthermore, Mokyr's research shows how propositional knowledge can reduce resistance to new ideas. For instance, if Ignaz Semmelweis, a 19th-century Hungarian physician, had understood the reason behind the drastic drop in maternal mortality rates when doctors washed their hands, his ideas might have gained acceptance sooner.
The Future of Sustained Growth: Navigating Challenges
The laureates' work provides a framework for understanding contemporary trends and addressing important problems. Mokyr's research, for example, suggests that AI could enhance the feedback loop between propositional and prescriptive knowledge, accelerating the accumulation of useful knowledge. However, it also highlights the need for well-designed policies to address the negative side effects of innovation, such as climate change, pollution, and inequality.
In conclusion, the work of Joel Mokyr, Philippe Aghion, and Peter Howitt teaches us that sustained growth is not a given. Economic stagnation has been the historical norm, and we must remain vigilant in counteracting threats to continued growth. Their insights provide valuable tools for future societies to navigate the complexities of economic development.
The Royal Swedish Academy of Sciences has awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025 to these esteemed individuals for their contributions to our understanding of innovation-driven economic growth.
