Nobel Prize in Economics 2025

Brief Context

Context The 2025 Economics Nobel prize was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their groundbreaking work on innovation and economic growth. Historical Roots of Modern Economic Growth The research explored why sustained economic growth emerged only in the last two centuries despite technological progress throughout history. It argued that before the Industrial Revolution, technological knowledge was largely “prescriptive” i.e.

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Syllabus: GS3/ Economy

Context

• The 2025 Economics Nobel prize was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their groundbreaking work on innovation and economic growth.

Historical Roots of Modern Economic Growth

• The research explored why sustained economic growth emerged only in the last two centuries despite technological progress throughout history.
• It argued that before the Industrial Revolution, technological knowledge was largely “prescriptive” i.e. people knew how to make things work but not why they worked.
• The Scientific Revolution during the 16th–17th centuries transformed this into “propositional” knowledge i.e. linking empirical understanding with scientific reasoning.
• This fusion of science and technology created the foundation for “useful knowledge,” enabling systematic innovation.

Economics of Creative Destruction

• Their 1992 model mathematically formalised how creative destruction, where new technologies replace old ones, drives long-term macroeconomic growth.
• In this framework:
  • Firms invest in R&D to create superior products or processes.
  • Successful innovators earn temporary monopoly profits.
  • Over time, they are replaced by new innovators — a cycle of creative destruction.
• This process explains how aggregate GDP grows steadily, even as individual firms rise and fall.
• Their general-equilibrium model links all markets (goods, labor, and capital), showing how micro-level innovations translate into macroeconomic stability.
• They also demonstrated that R&D has positive social spillovers, justifying public investment in research and education.

Significance for India and other developing economies

• Invest in Science and Human Capital: Expand R&D funding, foster innovation hubs, and improve technology transfer between research institutions and industries.
• Balance Adoption and Innovation: While India can benefit from technology imports and FDI, long-term growth demands indigenous innovation capacity supported by start-up ecosystems and simplified regulations.
• Strengthen Competition: Prevent excessive market dominance in sectors like telecom and technology to maintain a level playing field for new entrants.
• Resilient Labor Market Policies: Embrace “flexicurity”i.e.  protect workers through training and social insurance rather than rigid job protection.
• Promote Inclusive Innovation: Align technology policy with national priorities like renewable energy, digital inclusion, and sustainable manufacturing.

Source: IE