Nobel Prize: Technology Drives Growth

The enduring question of economic growth, famously articulated by economist Robert Lucas, continues to captivate the minds of Nobel laureates. For the second consecutive year, the Royal Swedish Academy has honored groundbreaking research focused on understanding and driving sustained economic expansion.

This year’s recipients of the Sveriges Riksbank Prize in Economic Sciences were singled out for their seminal contributions. Joel Mokyr was recognized for having identified the prerequisites for sustained growth through technological progress, while Philippe Aghion and Peter Howitt were lauded for the theory of sustained growth through creative destruction. Their collective work offers profound insights into why some nations achieve and maintain economic prosperity while others falter, with a central theme revolving around technology and the ever-expanding pool of knowledge.

Endogenous Growth: The Power of Technology

The understanding of economic growth underwent a significant shift with the development of endogenous growth theories. Earlier models, like Robert Solow’s, treated technological progress as an external factor. In contrast, endogenous growth models, pioneered by figures such as Paul Romer, explore how innovation and knowledge generation arise from within the economic system itself, driving growth from inside. This year’s Nobel laureates built upon this foundational legacy, delving deeper into the mechanisms of innovation-driven prosperity.

Lessons from the Industrial Revolution

Economic historian Joel Mokyr’s research offers a compelling historical perspective on the genesis of sustained economic growth, drawing heavily on the transformative period of the Industrial Revolution. For millennia, living standards remained largely stagnant. However, beginning in the late 18th and early 19th centuries, a phase of sustained growth and rising living standards emerged, driven by dramatic advancements in labor productivity fueled by technological innovation.

Mokyr’s analysis highlights that for economic growth to be sustained, new technologies must not only be invented but also effectively adopted and maintained. He argues that existing elites often resist innovation, so for new ideas to flourish, they must take root quickly. The development and widespread adoption of the steam engine, a hallmark of the Industrial Revolution, exemplifies this. It required not only the initial invention but also the practical application, manufacturing, operation, and maintenance by a skilled workforce.

💡 Europe, particularly England in the early 19th century, proved uniquely capable of fostering this environment. It possessed a critical mass of artisans and engineers, what Mokyr terms Upper Tail Human Capital. This group was distinct from the unengaged social elites and the largely illiterate common workers. Instead, they comprised individuals educated enough to understand and spread new technologies and open to innovation. England’s robust apprenticeship systems, world-class universities, scientific societies, and a culture of publishing and idea exchange created a fertile ground for scientists and craftsmen to collaborate and translate concepts into commercial products.

Mokyr’s key contribution lies in demonstrating that technological progress, the engine of economic growth, hinges on the generation of new ideas and the preservation and dissemination of knowledge. Prior to the Industrial Revolution, many technologies were used without a deep understanding of their underlying principles. Furthermore, new inventions inevitably disrupt existing practices and face resistance from those whose interests Lare threatened. Therefore, sustained growth necessitates societies that are receptive to new ideas, encourage intellectual exchange, and cultivate both scientific and engineering expertise.

The Engine of Creative Destruction

While Mokyr’s work provides a historical context for the importance of ideas, Philippe Aghion and Peter Howitt’s research delves into the precise economic mechanisms through which innovation drives growth. Their influential 1992 paper formalized Joseph Schumpeter’s concept of capitalism evolving through constant disruption.

In their model, economic growth is not a smooth, continuous process but rather the result of a relentless drive to innovate. Entrepreneurs and firms invest in research and development, motivated by the prospect of significant rewards, including temporary monopoly profits, before competitors catch up. This dynamic innovation process leads to creative destruction, where successful new technologies render their predecessors obsolete. Unlike models focused solely on the creation of new product varieties, Aghion and Howitt’s work emphasizes quality-improving innovations that build upon existing knowledge to replace older technologies.

⚡ This cycle of innovation and disruption is both the driving force and the challenge of progress. It boosts productivity and living standards but also leads to the decline of established firms, job displacement, and periods of economic adjustment. Growth, therefore, is inherently intertwined with turbulence and can be a challenging, though ultimately rewarding, process.

📍 The policy implications of creative destruction are intricate. In highly competitive markets, the rapid erosion of innovation advantages can make R&D investments less profitable. Conversely, weak competition can stifle innovation as dominant firms face less pressure to improve. While stronger patent rights can incentivize innovation, overly broad protection may entrench monopolies and slow progress. Effectively managing this dynamic requires a careful balance of competition, openness, strategic subsidies, and social safety nets to ensure the continued functioning of the innovation engine.

📊 Aghion’s later work has extended these ideas to contemporary challenges, notably combining creative destruction with climate modeling to illustrate the benefits of subsidizing green technology research. This approach can accelerate the transition to clean energy by making it competitive with fossil fuels. The current gold rush in Artificial Intelligence among leading tech companies, characterized by intense competition rather than monopolistic control or extreme fragmentation, serves as a real-world example of this Schumpeterian principle in action.

Championing Science, Technology, and Growth

The research recognized by this year’s Nobel laureates serves as a vital reminder that sustained economic growth is not a given. For the vast majority of human history, economic stagnation was the norm. Their work cautions against factors that can hinder or dismantle this progress, such as excessive monopoly power, restrictions on knowledge expansion, and misguided economic policies.

This award follows closely on the heels of the 2024 Nobel Prize, which honored research by Daron Acemoglu, David Robinson, and Simon Johnson, highlighting the critical role of robust institutions—those that protect property rights, constrain elite power, and ensure predictable, rule-based policies—in fostering and sustaining economic prosperity. The consecutive focus on growth-related research by the Nobel committee appears to be a deliberate message to a world increasingly skeptical of science and technology, and perhaps too open to notions of degrowth.

✅ The lessons for Europe are particularly pertinent. A century ago, Europe was a global leader in innovation, boasting top-tier companies, universities, and capital markets. Yet, the continent that ignited the Industrial Revolution is now often viewed as a growth laggard, a cautionary tale of technological progress being squandered. To reclaim its status as an economic powerhouse, Europe must prioritize innovation and competitiveness through increased R&D investment and streamlined regulations that foster business dynamism. This may necessitate embracing some level of disruption, a perspective that strongly aligns with the conclusions of recent influential reports.