Dear All:

Well, who won?

The Nobel Prize for Economic Sciences for 2025 was announced today, October 13, 2025. It went to Joel Mokyr, Philippe Aghion, and Peter Howitt.    

Mokyr is 79 years old and was born in Leiden, Netherlands.  He obtained his  B.A. in economics from Hebrew University in Jerusalem and his Master’s and Ph.D. in economics from Yale University.  His Nobel-winning work was done while a professor at Northwestern University.  He is currently the Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and History at Northwestern University. 

Aghion is 69 years old and was born in Paris, France.  He obtained his diploma in mathematics from Ecole Normale Supérieure de Cachan, as well as a doctorate degree in mathematical economics from the University of Paris Pantheon-Sorbonne, and a Ph.D. in economics from Harvard University.  He published his Nobel-winning work while a Deputy Chief Economist at the Economic Bank for Reconstruction and Development.  He is currently a professor at College de France and INSEAD. 

Howitt is 79 years old and was born in Canada.  He obtained his B.A. in economics from the McGill University, his Master’s from the University of Western Ontario, and his Ph.D. from Northwestern University.  His Nobel-winning work was done while a professor at the University of Western Ontario.  He is currently a Professor Emeritus of Economics at Brown University. 

The prize was given to Mokyr “for having identified the prerequisites for sustained growth through technological progress.”

The prize was given to Aghion and Howitt  “for the theory of sustained growth through creative destruction.”

So what did they do to make them so Noble?

Imagine that we live on a small island named Cookie Island.  Everyone on cookie island is involved in making cookies.  And all people on cookie island need just one cookie per year to live happily.  Everyone on this small island is involved in cookie production using a piece of technology called an oven.  Even with this oven, it takes all inhabitants an 8-hour work day just to make each inhabitant one cookie per year.  All inhabitants are happy.

However, some inhabitants like to spend their evening time tinkering and inventing.  Their dream is to make a better cookie oven.  Suppose one evening, the tinkerers come up with an idea for a better oven.  In fact, it’s an oven that will produce one cookie per year for everyone but only require half of the workforce to bake cookies.  This is great, right?  This invention will mean that our society will be able to satisfy everyone’s need for cookies, yet workers will only have to work half a day.

It’s not as easy as that, because of several reasons.  Firstly, workers will protest because they may lose their job.  Secondly, the owner of the current oven will say that the new oven is bad for people and is evil, fearing the destruction of his oven (this would likely be true even if the oven was owned by the people of the island).  Thirdly, someone must take the idea and actually construct the new oven.  This is the process of creative destruction.  Better ideas can replace existing good ideas, but it doesn’t have to happen.  Even when a society would be better off from the new, better ideas, they just might not be turned into useful products or methods, but when they are, we might all be better off.

Mokyr, Aghion, and Howitt attempted to understand both historically and theoretically how the innovation process works into our society to make everyone’s life better.

Mokyr studied the history of growth and innovation attempting to understand the elements that drive growth.    He argued that historically two types of knowledge have worked together to create sustained growth.  One is propositional knowledge and the other is prescriptive knowledge.  One might think of the former as theoretical discoveries and the latter as practical application.  Thus, to have sustained growth, these must work together and there must be both types of agents in the economy, which includes skilled labor and processes to implement these ideas.  He believed that this could explain periods of sustained high growth, like the Industrial Revolution.  If these elements were lacking, great ideas might just fizzle away.

For example, during the Italian Renaissance (let’s say 1300 AD to 1700 AD), Italy was flush with amazing ideas.  Remember that guy Leonardo DaVinci and all his wonderful inventions?  It turns out that Italian growth in real income per person was just -0.08 percent per year and world growth was about 0.15 percent per year during this period.  To put that in perspective, during the Industrial Revolution (let’s say 1825 AD to the present), Italian growth in real income per person was 0.9 percent per year and world growth was 1.1 percent per year. 

With a 0.15 percent growth, it would take 462 years for the standard of living to double for people, while with a 1.1 percent growth, it would take just 63 years. 

Mokyr believed that the Italian renaissance lacked local skilled labor and mechanics to put the ideas into practice, while he documented that during the Industrial Revolution, Great Britain had a large supply of artisans and engineers to make ideas a reality.

Mokyr also discussed the resistance to change.  A society can resist innovative change on many fronts.  He believed that resistance is natural for a society, because a society must protect itself from “costly duds” without limiting itself from progress and growth.  The resistance can come from the existing companies that know that the creation might eliminate their products, from the workers that fear to be discarded (remember the Luddites in England in 1811?), and even intellectuals who cannot accept a new paradigm. 

Sometimes resistance can come because the propositional knowledge and prescriptive knowledge are not working together.  For example, it is now common knowledge that doctors should sterilize surgical instruments, but it was initially rejected by doctors, perhaps because there was no explanation of why it mattered until that explanation came many years later.

In summary, Mokyr emphasized the importance of the existence of idea creators and idea implementers in the process of sustained growth.

Aghion and Hewitt took a different approach and attempted to build a general equilibrium model to explain the cycle of creative destruction.  That is, by 1992, there had been some giant leaps in understanding the growth of nations.  Bob Solow had explained to us that a majority of growth in real income per person was from technology.  Paul Romer and Bob Lucas explained to us that growth could potentially be unlimited.  However, no one had built a model to explain how technology continues to grow.  This was the model that Aghion and Hewitt created.  They built a model whereby firms decide to expand resources in research and development to find a better product and reap the profits from their patent on the product, until a new invention comes along.  Thus, their model created a system whereby innovators innovate in order to take over the production and eliminate the existing firm.  That is, firms invest in research and development just enough to reap the future profits of having the new product until the next innovator comes along, with some probability, and knocks them out.  This model was made to reflect the process of continual innovation and destruction or what people like to call creative destruction.  In any given year, 10 percent of all firms die and another new 10 percent are born.  It’s just the capitalistic way.  It has also been shown that labor productivity is higher in industries where there is a greater entry and exit.

They also compare their model to an all-knowing planner.  The model points out inefficiencies in the market system versus a system run by the all-knowing planner.  The market may not internalize the benefits of the inventions to the whole society and charge too much thus leading to less innovation, although the market also ignores the negative impact of destruction and therefore may innovate too much. 

So what about the Nobel choice?

Most graduate students of macroeconomics know of the Aghion and Hewitt model of creative destruction.  Although, it  not clear whether those graduate students thought that they might win the Nobel prize in economics.  I personally did not know of the work of Mokyr, who is an economic historian.  Having said that, it was interesting to learn about his work.  

This prize, in some senses, is a continuation of last year’s prize in economics, which was also given for macroeconomic or economic growth.  

In the last few years we have been confronted with both a financial innovation and a technological innovation.  Of course, the former is cryptocurrency and the latter is artificial intelligence.  Just like previous innovations, there will be creative destruction.  And we will not be sure for several years whether these are truly growth enhancing or not.

And just like other innovations, there are is a strong level of resistance.  For crypto, it  is everywhere, including academic elites who still tell me it’s a scam to institutions that argue that it is vastly inferior to paper money.  For artificial intelligence (AI), there is fear and skepticism.  While some fear it could take over the world, others feel it can hardly do anything.  In some way or another, the AI innovation will probably result in some change and it will likely displace workers.  If AI is to improve our standard of living, we must start the process to train ourselves as the skilled artisans to help make its conversion to economic growth for all of us.  This will also require an adjustment period, where we have to help people re-tool for that alternative production process.

So is that it?

Olivier Blanchard, the Robert M. Solow Professor Emeritus at MIT, said ” The 1992 paper, integrating Schumpeter to Solow, shows how a good theoretical model can have tremendous effects…”

One of the reasons, I believe, growth has been so successful in the US is because of the freedom to attempt new things and a culture that developed in Northern California.   The father of venture capital, Tom Perkins, literally brought the prescriptive knowledge people together with the propositional knowledge people so that innovation could be applied faster … this was Genentec.  

A successful system needs all components to work together.  When Kremer wrote about his O-Ring theory of economic development, he modelled how fragile a system can become when components aren’t working together.  Thus, even the talented manager needs a talented secretary.  For innovation to have a long lasting impact, we need skilled artisans to make the idea a reality.  Thus, as we approach the next ten years, rather than be skeptical of AI, let’s ask what AI could help us do better and how can we all work to improve ourselves to become the innovators, the tinkerers, or the skilled and unskilled artisans that make everyone have a cookie with less work.

For more information on the winners:

https://www.nobelprize.org/prizes/economic-sciences/2025/press-release/

https://www.nobelprize.org/uploads/2025/10/popular-economicsciences2025-3.pdf 

From College de France:  https://www.college-de-france.fr/en/news/philippe-aghion-nobel-prize-in-economics-2025

From Brown University:  https://www.brown.edu/news/2025-10-13/howitt-nobel

From Northwestern:  https://news.northwestern.edu/stories/2025/10/joel-mokyr-wins-nobel-prize-in-economics

Congratulations to Mokyr, Aghion, and Hewitt for their fruitful pursuit of knowledge, and the other armies of researchers who walked with them!

Happy Columbus Day!

Ludwig

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October 13, 2025