Nobel Prize in Economics 2025

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