“Innovation doesn’t fill the well of economics; it digs a deeper one.” The 2025 Nobel Prize in Economics, awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt, commemorates a fact that has long shaped the arc of global prosperity: growth is not a mechanical outcome of accumulating labour and capital, but a restless process driven by ideas, experimentation, and constant innovation. These three scholars, despite their varied intellectual paths, circle back to one truth: innovation is not an exogenous spark arriving from outside the economy, but a force generated within it, shaped by incentives, institutions, and human curiosity.
Basis of the Research
Mokyr, the economic historian among the trio, reshaped our understanding of how “useful knowledge” propels economic change. His research shows that prosperity stems not merely from creating new tools, but from grasping the principles behind them, a mindset born in the Enlightenment era that continues to guide innovation today. Tracing the role of curiosity, scientific method, and social openness that encouraged breakthroughs, Mokyr reveals that growth is sustained when societies value questioning, experimentation, and the accumulation of verified knowledge. Ideas, in this view, behave like a form of capital whose returns compound over generations.
Aghion and Howitt carry this insight into the core of modern economic theory. Their seminal model of endogenous growth gives a formal structure to Joseph Schumpeter’s intuition of “creative destruction”: the dynamic through which innovative firms with superior technologies push aside entrenched incumbents. In their model, productivity doesn’t climb by smoothing the rough edges of old techniques, but by overthrowing them. This ongoing contest between incumbents and innovators creates a dynamic economy where research, development, and competitive technological ambition generate growth from within. Innovation thus becomes both a catalyst for progress and a strategic outcome.
Innovation & Economics
Together, the laureates illustrate that sustainable growth arises from the synergy between knowledge, competition, and disruptive changes. Knowledge sets the stage, competition spurs innovation, and creative destruction diffuses the efficient ideas through the economy by rewarding those who risk the new and disciplining those who cling to the inefficient. When these work in harmony, innovation sparks new job creation in emerging sectors, lifts productivity across industries, and improves global welfare by reducing costs, expanding choices, and raising living standards. While some jobs inevitably fade, the areas of growth like digital services, green tech, AI, and biotechnology often generate employment opportunities that did not exist before, proving that innovation does not shrink the economic pie but reshapes and enlarges it.
The thin line towards balance
But innovation requires more than encouragement; it demands careful balancing. Aghion’s later work highlights the paradox that too much competition can discourage innovation by eroding the temporary profits, or “innovation rents,” that reward discovery. Yet too little competition allows incumbents to become complacent, blocking entry and slowing diffusion. This tension between protecting the incentives of innovators and ensuring an open, contestable market is at the heart of modern competition policy. Economies grow fastest when they maintain this balance: enough market pressure to push firms to work harder, but enough reward to make the risks of R&D worthwhile.
Endogenous growth theory is not merely abstract. Its fingerprints are visible in policy debates worldwide, from industrial strategy and patent reform to digital competition laws and climate-tech subsidies. Countries that strengthen research institutions, support start-ups, allow competitive markets, and encourage the diffusion of ideas grow faster because they create the conditions for innovation to be self-sustaining. Growth thus becomes a loop, not a ladder.
Taking India into Perspective
For India, the framework offered by the 2025 Nobel winners is strikingly relevant. India’s rapid digital transformation, expanding STEM ecosystem, and rising entrepreneurial landscape show the power of innovation-led growth. Yet the Indian economy still grapples with barriers to entry, uneven diffusion of technology, and gaps in research investment. Mokyr’s emphasis on useful knowledge highlights the need for stronger scientific research and better linkages between universities and industry. Aghion and Howitt’s models point toward policies that encourage start-ups, strengthen intellectual property rights without stifling competition, and ensure that incumbent dominance does not prevent creative destruction in sectors like telecom, aviation, manufacturing, and digital platforms. If India can protect innovation rents while also enabling vibrant entry, its demographic advantage and technological adoption can translate into sustained productivity gains.
Conclusion
The significance of the 2025 Nobel Prize lies in its reminder that growth isn’t a gift; it’s a discipline, a process we must continuously earn. Ideas replenish themselves only in societies that dare to experiment and accept rivalry. Prosperity depends not on the size of our economy, but on how deep we are willing to dig and how boldly we allow new ideas to replace the old.
Written by- Janhavi Dubey
Edited by- Shiv Talesara
The post The Architecture of Growth: Insights from the 2025 Nobel Prize appeared first on The Economic Transcript.
