Economic historians have won or shared the Nobel Memorial Prize in Economic Sciences for four consecutive years, from 2022 to 2025, highlighting the importance of historical context in understanding modern economic phenomena. This year’s laurates were awarded “for having explained innovation driven economic growth” or in simpler terms their work proves that technological innovation has been the key driver of continuous economic growth and prosperity, particularly over the last two centuries. The conclusion seems hardly surprising as it is fairly self-evident. However, what distinguishes the Nobel-winning work of these three scholars is not that observation, but the underlying mechanisms.
The 2025 Nobel Prize in Economic Sciences was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt. One half of the award was given to Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress” and the other half jointly to Peter Howitt and Philippe Aghion “for the theory of sustained growth through creative destruction”. Their work helps us understand why the world is wealthier than it has ever been before and the possible risks of our progress from this point forward.
Part I: Sustained growth through technological progress (Joel Mokyr)
Up until the Industrial Revolution, the world did not experience sustained economic growth. Living standards remained consistently stagnant. Mokyr proved that before the Industrial Revolution, innovations were merely the product of simple trial and error instead of scientific understanding. As he articulated so clearly, “a world of engineering without mechanics, iron-making without metallurgy, farming without soil science, mining without geology, water-power without hydraulics, dye-making without organic chemistry, and medical practice without microbiology and immunology.” Even though important discoveries and inventions were taking place, which sometimes improved income levels and living conditions, there wasn’t sufficient understanding around these technological changes to ensure continuous economic growth. Knowledge without understanding also made it difficult to invest in new ideas. What, then, made the Industrial Revolution a pivotal moment?
Various explanations highlight innovations such as the steam engine, the telephone, and the electric light bulb. Mokyr challenged these arguments and proposed societal development to the be catalyst behind this development. The Age of Enlightenment across Europe enabled interactions between sophisticated thinkers proficient in theoretical knowledge with workers who had practical expertise. To illustrate briefly, scientists and craftsmen began working together. This kind of interaction which had little opportunity to take place before this era was made possible by strong apprenticeship institutions, challenging universities, active scientific societies, and a culture that encouraged the publication and exchange of ideas. Collectively, this gave way to the harmonious fusion of theoretical knowledge and practical competencies which allowed Europe to experience sustained economic growth.
Mokyr’s research emphasizes that economic growth can only be sustained if new technologies are not only invented but also understood, improved and passed on. The latter characteristics were often lacking prior to the Industrial Revolution. In addition, he also highlights the importance of allowing new inventions to replace older ones and disrupt the status quo. Having said that, as consistently observed, these new technologies face resistance from powerful existing players who do not wish to relinquish their privileges making it crucial for us to take heed of such and other factors that have the potential to impede economic progress.
Part II: Sustained growth through creative destruction (Peter Howitt and Philippe Aghion)
While Mokyr’s work provided the historical backing for the vitality of technological innovations, Howitt and Aghion dove deeper to uncover the mechanisms through which these innovations can induce economic growth. They created a mathematical model for an old idea by Joseph Schumpeter; capitalism is shaped by creative destruction (a paradoxical term used to describe the introduction of new innovations that make existing technologies, business models, and even entire industries obsolete). This destruction frees up resources for use in new, more productive ways, ultimately raising the general standard of living and fostering greater productivity over the long term.
According to their model, growth isn’t linear and spontaneous. Instead, it is characterized by the endless pursuit of to innovate. This process generates value not only for innovators but also for society more broadly. Entrepreneurs therefore invest in research and development because successful innovations can yield substantial, albeit temporary, monopoly profits. These wider social benefits help explain the rationale for research and development subsidies. This creates a feedback loop. Innovation raises productivity and living standards, yet simultaneously has the potential to weaken existing firms, displace workers, and forces periods of adjustment. Taken together, growth therefore is inherently disruptive.
When competition is too intense, returns to innovation are quickly deteriorate, when it is too weak, dominant firms face little pressure to invest in new technologies. Patent protection can support research and development, yet overly strong protection risks safeguarding monopolies and slowing technological progress. As such, sustaining innovation-led economic growth requires a careful balance of policies, openness and targeted interventions amongst other appropriate measures to manage the disruptions of creative destruction.
A similar pattern can be seen across today’s major economic challenges. In the context of the global energy transition, Aghion’s integration of creative destruction with climate modelling supports subsidising green innovation until clean technologies can compete with carbon-intensive alternatives. At the same time, the ongoing, resource-intensive race in artificial intelligence, led by a small number of firms competing closely with one another, illustrate the view that innovation is strongest when markets avoid both monopoly power and excessive fragmentation.
What are some lessons for Sri Lanka?
Long-term growth and prosperity hinge not on short-term stabilization alone, but by pursuing an innovation-driven growth model amongst other cohesive economic frameworks. While the intuition behind this statement may appear straightforward, these laurates rigorously demonstrated what would otherwise remain conjecture.
For Sri Lanka, this could mean safeguarding price stability and central-bank credibility to enable long-horizon investment. Redirecting fiscal resources away from populist subsidies toward education, research and development and productivity-enhancing infrastructure. The Nobel insights also highlight the importance of competition bring strong enough to spur innovation but regulated enough to prevent monopolistic hegemony. Innovation incentives should encourage productivity gains rather than wasteful duplication while patent and regulatory authorities must reward new entrants instead of creating barriers.
This Nobel prize reminds Sri Lanka that growth is not linear, neither is it spontaneous. It must be nurtured through societal development where new technologies are not only invented/adopted but also understood, improved and passed on while remaining open to new ideas along with comfort in knowing that though creative destruction is not painless, if the underlying mechanisms are upheld, long-term economic growth can be sustained.