Nobel Prize in Economics 2025: Innovation, Creative Destruction and Sustained Growth

This note covers the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025, popularly called the Nobel Prize in Economics 2025: who won it, what the official citation means, how Joel Mokyr explains the shift from stagnation to sustained growth, how Philippe Aghion and Peter Howitt modelled "creative destruction", how the discovery unfolded, why it matters for policy today, and quick facts for exams.

What was the Nobel Prize in Economics 2025 awarded for?

The official citation reads: "for having explained innovation-driven economic growth". This is the full wording used by the prize-giving body.

In plain words, the three laureates answered a single big question: why did the world, after thousands of years of almost no change in living standards, suddenly start growing richer and richer, year after year, for the last two centuries? Their combined work shows that this did not happen by accident.

It needed a continuous stream of new technology that kept replacing old products and methods, a process in which workable scientific knowledge and practical know-how reinforced each other, and a society willing to let old firms and old jobs be displaced by better ones.

The full official name of this award is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

It is awarded by the Royal Swedish Academy of Sciences, the same body that selects the physics and chemistry laureates, but it is funded separately by Sweden's central bank rather than from Alfred Nobel's original estate.

Who are the laureates?

Joel Mokyr

Joel Mokyr was born on 26 July 1946 in Leiden, the Netherlands. At the time of the award he was a professor at Northwestern University in Evanston, Illinois, USA, and also held a position at the Eitan Berglas School of Economics, Tel Aviv University, Israel. He received one half of the prize.

His citation reads: "for having identified the prerequisites for sustained growth through technological progress". Mokyr is an economic historian.

Using historical sources going back centuries, he worked out what conditions had to be in place before technological progress could turn into growth that keeps going rather than fizzling out after a few decades.

Philippe Aghion

Philippe Aghion was born on 17 August 1956 in Paris, France. At the time of the award he was affiliated with the Collège de France, Paris; INSEAD, Paris; and the London School of Economics and Political Science, London, United Kingdom. He shared one quarter of the prize.

His citation, shared with Peter Howitt, reads: "for the theory of sustained growth through creative destruction". Aghion worked with modern economic modelling to explain how firms competing to innovate can generate steady, long-run growth for an entire economy.

Peter Howitt

Peter Howitt was born on 31 May 1946 in Canada. At the time of the award he was affiliated with Brown University, Providence, Rhode Island, USA. Like Aghion, he received one quarter of the prize, for the same citation on the theory of sustained growth through creative destruction.

Aghion and Howitt built their model jointly, publishing it together in 1992. The press release describes their contribution as a mathematical model of how new, better products push out older ones, with the two always treated as a single joint achievement.

What problem does this work explain?

For almost all of recorded human history, ordinary people's living standards barely changed from one generation to the next.

The Academy's background material shows gross domestic product (GDP) per capita in England staying roughly flat from 1300 to around 1700, even though important inventions such as the printing press, the windmill and better navigation methods appeared during that period.

Occasionally, a region did experience a burst of prosperity. The sources mention Italy during the Renaissance, Sweden during its 17th-century "Great Power Era" and Holland during its Dutch Golden Age as examples of economies that grew for a while and then stopped.

None of these early bursts turned into sustained growth; they always "eventually levelled off," as the press release puts it.

Everything changed with the Industrial Revolution, usually dated from around 1760 to 1830 and beginning in Britain.

After this point, annual growth of roughly one and a half to two per cent became the normal pattern in industrialised countries and has continued, with interruptions such as the Great Depression of the 1930s, ever since.

Because a steady rate of about two per cent can double a person's income within a working life, this shift had an enormous effect on quality of life, health and poverty worldwide.

The central puzzle the laureates tackled was therefore twofold: what made growth sustained rather than temporary once it started, and what keeps that growth going today despite the constant disruption that new technology causes to existing firms and jobs?

How does Mokyr explain the move from stagnation to sustained growth?

Mokyr argues that before the Industrial Revolution, most technology worked without anyone really knowing why it worked. The press material summarises this with two categories of knowledge.

Propositional knowledge is the systematic understanding of why something works, the kind of knowledge found in science. Prescriptive knowledge is practical know-how, such as instructions, drawings or recipes, that tells people what to do without necessarily explaining why it works.

According to Mokyr, before the Industrial Revolution these two kinds of knowledge rarely connected. People could build windmills or printing presses, but because they did not understand the underlying science, they could not easily use that single invention as a stepping stone to the next one.

Some inventors even wasted effort on things that a bit of propositional knowledge would have shown were impossible, such as perpetual motion machines or turning base metal into gold through alchemy.

The 16th and 17th century Scientific Revolution, followed by the Enlightenment, changed this by introducing habits such as precise measurement, controlled experiments and reproducible results.

This created better feedback between the "why" and the "how", so that useful knowledge began to build up rather than stall.

The scientific background notes two illustrations: improvements to the steam engine followed from a better understanding of atmospheric pressure and vacuums, and better steel production followed from understanding how oxygen removes carbon from molten iron.

Mokyr also stresses two further ingredients. First, mechanical competence: skilled artisans and engineers were needed to turn scientific ideas into working products, because even a brilliant design, such as Leonardo da Vinci's unbuilt helicopter sketches, is useless without people capable of constructing it.

Second, a society that is genuinely open to change. New technology always creates losers as well as winners, and Mokyr documents historical cases of resistance from threatened groups.

In Britain, he argues, institutions such as Parliament let different interest groups negotiate compromises rather than simply blocking change, removing a major barrier to growth that had persisted elsewhere.

What is creative destruction, and how does the Aghion-Howitt model work?

Aghion and Howitt approached the same underlying question from a completely different angle. Instead of using history, they built a mathematical economic model, published in 1992, to explain the sustained growth visible in modern data.

Their central idea, borrowed from the economist Joseph Schumpeter but given a rigorous mathematical form for the first time, is creative destruction: a new, better product or production method pushes an older one out of the market.

The process is "creative" because it is built on a genuine innovation, and "destructive" because the firm that previously led the market loses its advantage and its profits.

This constant churn, visible in how more than ten per cent of firms in the United States start up or close down every year, is treated as the basis of sustained economic growth rather than a sign that the economy is malfunctioning.

Draw a vertical ladder. At the top rung, place a firm with the current best product, earning extra profit from a temporary monopoly protected by a patent.

Draw an arrow from a new entrant firm, armed with research and development, climbing past it to a new top rung, while the old leader falls back into ordinary competition below.

A simplified version of how the model works can be set out as a sequence of steps:

1. A firm with the current best technology holds a temporary monopoly, often protected by a patent, and earns profit above its production cost.
2. The chance of staying on top for longer gives every firm, including rivals, an incentive to invest in research and development (R&D) to find the next improvement.
3. When a rival firm succeeds, it launches a better product or process, takes over the top position, and the old leader's special profit disappears, a process the model calls "business stealing".
4. Because households' savings fund this research through the financial system, and savings respond to interest rates which in turn depend on the growth rate, the model links firms, R&D, financial markets and households into one connected system.
5. Repeating this cycle endlessly, firm by firm, produces a steady long-run growth rate for the whole economy, even though individual firms and jobs are constantly being created and destroyed underneath.

Economists call a model in which production, R&D, savings and the growth rate are all determined together a model with general equilibrium, and the Aghion-Howitt paper was the first such model built specifically around creative destruction.

What did the laureates' models say about policy?

The Aghion-Howitt framework does more than describe growth; it can be used to ask whether a free market, left alone, produces the "right" amount of innovation. The answer, according to the Academy's background note, depends on two opposing forces that pull in different directions.

The first force pushes towards too little private R&D. When a firm is pushed off the top of the ladder by a rival, the old innovation it built does not vanish for society: later inventors still build on it.

Because firms do not capture this ongoing social value, their private incentive to innovate is smaller than the benefit to society as a whole, which is an argument for subsidising R&D.

The second force pushes the other way, towards too much R&D. When a new firm's product is only slightly better than the old one, the private profit it steals from the incumbent can be larger than the actual gain to society, since the "business stealing" portion of its profit is a transfer rather than a true improvement. This can make private incentives too strong, an argument against subsidy.

Which force wins depends on the market and the period, so the laureates' theory is most useful as a tool for working out, case by case, where R&D support helps and where it might encourage wasteful duplication.

The model has also been extended to study how too much market domination by a few giant firms, as opposed to healthy competition, can slow down the whole innovation process, and to discuss policies, sometimes called "flexicurity", that protect workers who lose jobs to creative destruction without trying to protect the jobs themselves.

How did the discovery unfold?

This timeline shows that the laureates' work did not appear overnight. Mokyr's historical account and the Aghion-Howitt mathematical model were built up over decades, drawing on earlier growth theory from economists such as Robert Solow and Paul Romer, both themselves earlier economics laureates, before the two approaches were recognised together in 2025 as complementary explanations of the same phenomenon.

Why does it matter?

The committee's own framing, as given at the ceremony, is that the laureates "have uncovered the preconditions for and the mechanisms underlying innovation-driven growth," giving society a better chance of keeping growth going and directing it usefully.

John Hassler, chair of the prize committee, said: "We must uphold the mechanisms that underly creative destruction, so that we do not fall back into stagnation."

Practically, the models help explain real policy debates. They suggest that dominant technology or pharmaceutical companies need careful regulation, because too much concentration can choke off the innovation process just as much as too little competition can.

They also suggest that displaced workers need support to move into new, more productive jobs rather than attempts to simply preserve old ones.

The sources note that sustained growth is not automatically the same as sustainable growth. Innovation can have serious side effects, for example in climate change, pollution or antibiotic resistance, and tackling these properly needs well-designed policy rather than innovation alone.

The background material also raises artificial intelligence as a case in point: it could strengthen the feedback loop between scientific and practical knowledge that Mokyr describes, possibly speeding up useful-knowledge growth further, though this depends on having the right regulatory and social environment.

Finally, the laureates' broader lesson, as stated in the popular science background, is that sustained growth "cannot be taken for granted." Stagnation, not growth, was the historical norm for most of human existence, and the mechanisms that produced two centuries of exceptional progress can be undermined by blocked competition, restricted academic freedom or resistance from groups who feel threatened by change.

How does this connect to what you study?

Students of economics meet economic growth and gross domestic product as basic measures of how an economy is doing.

This prize shows why economists distinguish simple output growth from the deeper question of what causes growth to be sustained rather than a one-off burst, a distinction that matters whenever national income or development is discussed.

The idea of creative destruction also links to everyday observations about markets: new companies and products regularly replace older ones, and this prize gives a formal, mathematical way of understanding why that constant churn, rather than being a sign of instability, is actually linked to how economies grow in the long run.

It is a useful bridge between history, how the Industrial Revolution happened, and modern mathematical economics, how growth models are built today.

Quick facts for exams

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025, commonly called the Nobel Prize in Economics 2025, was announced on 13 October 2025 by the Royal Swedish Academy of Sciences.

It went to Joel Mokyr (one half), and jointly to Philippe Aghion and Peter Howitt (one quarter each), "for having explained innovation-driven economic growth".

Mokyr, an economic historian, identified the historical prerequisites, scientific-practical feedback, skilled artisans and openness to change, needed for growth to become sustained after the Industrial Revolution.

Aghion and Howitt built a 1992 mathematical model of "creative destruction," in which new, better products replace older ones, generating steady aggregate growth despite constant churn among individual firms. The total prize amount was 11 million Swedish kronor.

Note: Source. The prize facts in this note are from the Nobel Prize's official site, nobelprize.org.

Glossary

• Sustained growth — economic growth that continues steadily over long periods rather than stopping after a short burst.
• Creative destruction — the process by which a new, better product or method pushes an existing one out of the market.
• Propositional knowledge — understanding of why something works, the kind of knowledge science provides.
• Prescriptive knowledge — practical know-how about what steps to take, without necessarily explaining why they work.
• Industrial Revolution — the period, roughly 1760 to 1830, when Britain's economy shifted from largely stagnant to steadily growing.
• GDP per capita — the value of a country's total output divided by its population, used to compare living standards over time.
• Patent — a temporary legal right letting an inventor be the only seller of a particular innovation.
• Research and development (R&D) — spending and effort aimed at creating new or improved products and processes.
• Business stealing — the loss of profit suffered by an existing firm when a rival's innovation takes over its market.
• General equilibrium — an economic model in which several connected markets, such as production, finance and savings, are all balanced together.
• Monopoly — a market situation where one firm is the sole seller of a good, often earning extra profit.
• Enlightenment — the 17th and 18th century movement in Europe that promoted reason, evidence and openness to new ideas.
• Flexicurity — a policy approach that protects displaced workers rather than trying to protect their old jobs directly.

Common errors and misconceptions

• Misconception: The Nobel Prize in Economics is one of the original Nobel Prizes set up in Alfred Nobel's will. Correct: Its full name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, and it is awarded separately from the original prizes.
• Misconception: Mokyr's and Aghion-Howitt's contributions are competing, rival theories. Correct: The committee presented them as complementary explanations of the same phenomenon, one historical and one mathematical.
• Misconception: "Creative destruction" means innovation is harmful overall. Correct: It is called creative because it is built on genuine improvement, and destructive only for the specific older product or firm it replaces.
• Misconception: Economic growth before the Industrial Revolution was zero everywhere. Correct: There were temporary growth episodes, for example in Renaissance Italy or Golden Age Holland, but these always levelled off rather than continuing.
• Misconception: The Aghion-Howitt model always recommends subsidising research. Correct: Their model shows two opposing forces, and whether subsidy helps depends on which force is stronger in a given market.
• Misconception: Sustained growth and sustainable growth mean the same thing. Correct: The background material distinguishes them, noting that sustained growth can still have harmful side effects that need separate policy attention.
• Misconception: Philippe Aghion and Peter Howitt worked on separate, unrelated papers. Correct: They are credited jointly for one shared theory, built around their 1992 paper.

Exam-style questions with model answers

Q1. In which year was the 2025 Nobel Prize in Economics announced? [1 mark]

1. It was announced on 13 October 2025 by the Royal Swedish Academy of Sciences.

Q2. State the share of the prize each laureate received. [2 marks]

1. Joel Mokyr received one half of the prize.
2. Philippe Aghion and Peter Howitt jointly received the other half, one quarter each.

Q3. What is meant by "creative destruction"? [3 marks]

1. Creative destruction describes how a new, better product or production method enters a market and causes firms selling the older version to lose out.
2. It is "creative" because it rests on a genuine innovation, and "destructive" because the previous market leader's profit and position are destroyed.
3. Aghion and Howitt turned this idea into a mathematical model in 1992, showing it produces steady long-run growth at the level of the whole economy, even though individual firms rise and fall constantly.

Q4. Distinguish between propositional knowledge and prescriptive knowledge, using Mokyr's work. [4 marks]

1. Propositional knowledge is understanding why something works, the kind of knowledge associated with science.
2. Prescriptive knowledge is practical know-how about what to do, such as instructions or recipes, without necessarily explaining why it works.
3. Mokyr argued that before the Industrial Revolution these two kinds of knowledge were largely disconnected, so technology could not easily build on itself.
4. The Scientific Revolution and Enlightenment improved the feedback between the two, allowing useful knowledge to accumulate and sustaining growth after the Industrial Revolution began.

Q5. Explain why Mokyr considered a society open to change necessary for sustained growth. [4 marks]

1. New technology does not only create winners; it also creates losers among people and firms whose old skills, products or privileges are threatened.
2. Mokyr documented historical cases where such threatened groups resisted new inventions, sometimes successfully blocking them for long periods.
3. In Britain, institutions such as Parliament allowed different interest groups to negotiate and compromise rather than simply preventing change.
4. This reduced resistance removed a barrier that, in earlier historical episodes of growth elsewhere, had eventually stopped progress from continuing.

Q6. Describe the Aghion-Howitt model of growth through creative destruction and discuss its policy relevance. [6 marks]

1. In the 1992 model, a firm holding the best current technology enjoys a temporary monopoly, often protected by a patent, earning profit above its production cost.
2. This profit opportunity gives rival firms an incentive to invest in research and development, hoping to invent something even better.
3. When a rival succeeds, it takes over the top position and the old leader's special profit disappears, a process called business stealing.
4. Because household savings fund this research through financial markets, and savings depend on the growth rate, the model links firms, research, finance and households into one connected, general-equilibrium system.
5. Repeating this cycle produces a steady aggregate growth rate even though individual firms are constantly created and destroyed.
6. For policy, the model shows two opposing forces: private firms under-invest in research because they capture less value than society gains from later innovations building on theirs, but they can also over-invest because business-stealing profits can exceed the true social gain, so optimal R&D support varies by market and period.

Key takeaways

• The 2025 prize was awarded for explaining innovation-driven economic growth, shared between Joel Mokyr and the duo of Philippe Aghion and Peter Howitt.
• Mokyr showed that sustained growth needed a feedback loop between scientific knowledge and practical know-how, plus skilled workers and an open society.
• Aghion and Howitt built the first general-equilibrium mathematical model of growth through creative destruction in 1992.
• Before the Industrial Revolution, periods of growth always eventually stopped; after it, roughly 1.5 to 2 per cent annual growth became normal.
• The model shows two opposing forces on private research incentives, meaning the right level of R&D subsidy depends on the specific market.
• Sustained growth is not the same as sustainable growth; policies are still needed to handle side effects such as pollution.
• Both approaches, Mokyr's history and Aghion-Howitt's mathematics, are seen as complementary rather than competing explanations.

Test yourself

What was the full official citation for the 2025 Nobel Prize in Economics?

"For having explained innovation-driven economic growth," awarded jointly to Joel Mokyr, Philippe Aghion and Peter Howitt.

Who received one half of the 2025 prize, and for what?

Joel Mokyr, for identifying the prerequisites for sustained growth through technological progress.

What two types of knowledge does Mokyr distinguish?

Propositional knowledge, understanding why something works, and prescriptive knowledge, practical know-how about what to do.

In which year did Aghion and Howitt publish their creative destruction model?

1992.

Name one force that can make private firms under-invest in research, according to the model.

Firms do not capture the full social value of their innovation, since later firms build on it after taking over the market.

What does the term "business stealing" mean in the Aghion-Howitt model?

It describes how a successful new firm's profit comes partly at the expense of destroying the profit of the firm it replaces.

What rate of annual growth became the norm after the Industrial Revolution?

Roughly one and a half to two per cent per year in many industrialised countries.