Lessons in Growth: What We Can Learn from This Year’s Winners of the Nobel Prize in Economics

Image - Nejc Soklic

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‘Economic growth’ is a term that everyone, from professional economists to the everyday consumer, has heard of. Government officials promise to deliver it, voters expect it, and there are countless theoretical models on what brings about economic growth, yet few people stop to think about what that actually entails. This year’s Nobel laureates in Economics shed light on the forces behind long-term prosperity, offering valuable lessons for policymakers today.

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This year, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to economic historian, Joel Mokyr, alongside economists Philippe Aghion and Peter Howitt for their explanation of innovation-driven economic growth .Specifically, Mokyr was recognised for identifying the prerequisites necessary for technological progress to allow for sustained growth, and Aghion and Howitt were awarded for their joint work for identifying the role of creative destruction in driving sustained long-run growth. To understand the specific policy implications of their findings, we should try to understand the key insights each laureate contributed to the economics of growth.

Mokyr’s research highlights the importance of knowledge production as a catalyst for change. He found that the Industrial Revolution, which began in Britain and then progressed to other countries, was the first time where the conditions for constant innovation occurred simultaneously. He identified three main pillars that reinforced each other to generate sustained progress – useful knowledge (an understanding/systematic description of how the physical world works), mechanical competence (the ability to transform those ideas into working technologies), and supportive institutions (legal and governance structures that allow innovation to take place). The combination of practical knowledge and scientific breakthroughs, supported by strong institutions, spur continuous improvements that allow for sustained growth.

Aghion and Howitt’s research is underpinned by the theory of creative destruction. When entrepreneurs create new ideas and use them to introduce better products and (production) processes into markets, their innovation drives out old technologies – this process is considered ‘destructive’ as older products become obsolete, however the “value of the old innovation does not disappear, because the new one builds upon the old knowledge”. While each contribution is approached from a slightly different angle, the underlying theory remains the same -  technological innovation is deemed the foundation of long-run economic growth.

Together, the laureates’ work illustrates that sustained growth is dependent on governments creating and maintaining the conditions for continuous discovery and development. This is especially important in the current age of rapidly improving technologies, shaped by the ongoing digitisation and automation of work. Mokyr’s analysis of historical patterns highlights the importance of strong institutions that enable the open exchange of ideas to aid the application of knowledge. Likewise, Aghion and Howitt’s analysis demonstrate the importance of fostering a dynamic, competitive economic environment that encourages research and development while managing the disruption caused by innovation. Such disruption could include an increase in unemployment from older firms becoming less competitive The way in which governments should structure policy implementation should be tailored to the country’s specific context, for example, the stage of development they are at.

For developed countries who may be close to the innovation frontier, policy focus should be on renewal – an emphasis on keeping innovation fresh and alive, while providing a safety net for those disrupted by change. A labour market strategy that is hailed by Aghion himself is Denmark’s ‘flexicurity’ model, developed to combat job loss that arose from creative destruction - here, the emphasis is on protecting the employees themselves and not the jobs. Firms can hire and fire workers more freely but workers who pay a subscription fee to an unemployment insurance fund receive unemployment benefits as well as access to education and retraining programs. By enhancing occupational mobility, the Danish government ensures that employee welfare is safeguarded while accommodating markets experiencing new and expanding firms and/or industries. This type of institutional design helps make labour transitions smoother rather than resisting change. Of course, the model may not be directly transferable, but the key idea is having a system that balances innovation with inclusion.

For developing countries, policy focus should instead be on building strong roots so that technological innovation can truly take off. In this case, Mokyr’s findings are especially relevant. He shows that “progress endures only when societies institutionalise curiosity and experimentation”. Supply-side policies such as education and training, investing in infrastructure development, and strengthening foundational institutions in areas such as property rights and access to credit are vital. All of these examples support human capital development, help in the spread of knowledge, and support gradual technological improvement, which in turn boosts fiscal resilience and the structural transformation of the economy (for example, moving from the lower value primary sector to higher value industries).

In conclusion, the key takeaway from Mokyr, Aghion, and Howitt’s work is that long-run prosperity depends on societies’ ability to keep generating new ideas and adapt to the technological advancements that come with that. This requires well-designed policies by these societies to preserve the conditions necessary for sustained economic growth. As highlighted in their work, “economic stagnation, not growth, has been the norm in human history, and the role of science, innovation, and creative destruction cannot be overstated”.