Nobel Prize in Economics
Nobel Prize in Economics 2025:
The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to three distinguished economists whose groundbreaking research has fundamentally reshaped our understanding of how innovation drives sustained economic growth. Joel Mokyr of Northwestern University, Philippe Aghion of Collège de France and INSEAD, and Peter Howitt of Brown University received this prestigious recognition “for having explained innovation-driven economic growth”.
Understanding the Revolutionary Significance
For most of human history, economic stagnation rather than growth has been the norm. Between 1300 and 1700, living standards in countries like Sweden and the United Kingdom barely improved. However, the past two centuries have witnessed a dramatic transformation, with sustained economic growth lifting billions out of poverty and establishing the foundation for modern prosperity.
The Royal Swedish Academy of Sciences emphasized that this progress should not be taken for granted. “Economic stagnation, rather than growth, has characterized most of human history. Their research indicates that we need to recognize and address the challenges to ongoing economic expansion,” the Academy stated.
Joel Mokyr: The Historical Foundations of Technological Progress
Joel Mokyr, born in 1946 in Leiden, Netherlands, received his PhD from Yale University in 1974. He currently serves as Professor at Northwestern University in Evanston, USA, and the Eitan Berglas School of Economics at Tel Aviv University, Israel. 
Mokyr’s Groundbreaking Contributions
Mokyr’s research utilized historical insights spanning centuries to identify the essential prerequisites for sustained growth driven by technological innovation. His work explains why brilliant inventions before the modern era failed to trigger continuous development, while the Industrial Revolution succeeded in launching an era of sustained progress.
Through meticulous examination of historical sources from all of human history, Mokyr identified two critical types of knowledge required for sustained economic progress:
Propositional Knowledge: This represents scientific understanding of why things work—the theoretical foundations explaining natural phenomena. It encompasses knowledge of mechanics, metallurgy, atmospheric pressure, soil science, and other fundamental principles.
Prescriptive Knowledge: This refers to practical know-how about what works—recipes, diagrams, instructions, procedures, and techniques for implementing technologies.
Before the Industrial Revolution, societies possessed scattered practical knowledge but lacked systematic scientific explanations. This prevented innovations from becoming cumulative and self-sustaining.
Three Prerequisites for Sustained Growth
Mokyr’s research identified three critical prerequisites for escaping historical stagnation:
First, societies must develop a continual flow of useful propositional knowledge through scientific advancement. The Enlightenment period represented a major catalyst, providing scientific foundations that could systematically inform practical applications.
Second, there must be abundant practical, technical, and commercial skills to transform scientific knowledge into innovations. Britain’s economic expansion during the Industrial Revolution was enabled by its wealth of skilled craftsmen and engineers who could engage with scientific principles.
Third, societies must remain intellectually open to new ideas and willing to embrace change. Innovation inevitably challenges established interests, and resistance from entrenched groups can block technological progress. Intellectual tolerance and openness to disruption were crucial factors enabling the Industrial Revolution to flourish in Britain rather than elsewhere.
Historical Examples
Mokyr demonstrated these principles through concrete historical examples:
The steam engine’s evolution was enabled by deeper scientific insights into atmospheric pressure and vacuums. The advancement of steel production became possible through understanding how oxygen reduces carbon content in molten iron. These innovations exemplified how tighter feedback between scientific discovery and practical engineering created self-sustaining progress, driving industrialization and modern economic growth.
In contrast, China—once a technological frontrunner—failed to maintain consistent economic growth. The Chinese government ceased geographical exploration in the 1430s, isolating its populace from global advancements and demonstrating the critical importance of openness to external ideas.
Philippe Aghion and Peter Howitt: The Theory of Creative Destruction
While Mokyr’s approach was historical and conceptual, Philippe Aghion and Peter Howitt developed a rigorous mathematical framework for understanding how innovation perpetuates sustained growth through “creative destruction”.
Philippe Aghion 
Born in 1956 in Paris, France, Aghion received his PhD from Harvard University in 1987. He currently holds professorships at Collège de France and INSEAD in Paris, as well as at the London School of Economics and Political Science in the UK.
Peter Howitt 
Born in 1946 in Canada, Howitt obtained his PhD from Northwestern University in 1973. He is currently Professor at Brown University in Providence, USA.
The Creative Destruction Model
In their landmark 1992 paper “A Model of Growth Through Creative Destruction,” Aghion and Howitt formalized Joseph Schumpeter’s concept into a rigorous analytical tool. Their model explains how innovation creates a self-generating process of economic progress.
Creative destruction describes the continuous process where new innovations replace older technologies. When smartphones replaced flip phones and digital cameras made film cameras obsolete, this wasn’t merely change—it was the fundamental mechanism driving sustained growth.
How the Model Works
The Aghion-Howitt framework demonstrates how growth perpetuates itself through several interconnected mechanisms:
A company invests in research and development to create a superior product, capturing temporary monopoly profits from its innovation. These profits attract competitors who develop even better products, displacing the current market leader. This cycle repeats continuously, with each innovation building upon previous ones, creating an upward spiral of technological advancement.
The model reveals that temporary monopoly power is essential for growth. Companies invest in R&D only because they expect to temporarily dominate the market and recoup their investment. Without this incentive, innovation wouldn’t occur. However, this monopoly must remain temporary—if dominant firms successfully block new competitors, the innovation cycle breaks down and growth stalls.
The Intertemporal Relationship
A crucial insight from the Aghion-Howitt model concerns the forward-looking nature of research decisions. Equilibrium is determined by a forward-looking difference equation, where the amount of research in any period depends upon the expected amount of research in the next period.
One source of this intertemporal relationship is creative destruction itself. The prospect of intensive future research can actually discourage current research by threatening to rapidly destroy the rents created by today’s innovations. This “business-stealing” effect creates a negative externality from innovations, potentially leading to excessive innovation under laissez-faire conditions, though this is partly compensated by innovations tending to be too small under laissez-faire.
Policy Implications
The work of Aghion and Howitt reveals that innovation-driven growth creates conflicts that must be managed constructively. Otherwise, innovation will be blocked by established companies and interest groups that risk being disadvantaged.
During a telephone call at the Nobel press conference, Aghion urged Europe to draw lessons from the United States and China, which he believes have successfully integrated competition with industrial policy. “In Europe, our approach to competition policy has led to a strong aversion to any form of industrial strategy. I believe we need to progress in this area and discover ways to harmonize industrial policy in sectors such as defense, climate, artificial intelligence, and biotechnology, where we excel and have robust research capabilities,” Aghion stated.
Winners of the Last Five Years and Their Contributions
The 2025 award continues a remarkable tradition of recognizing economists whose work addresses fundamental questions about prosperity, institutions, and human welfare. Here are the winners from the previous five years:
2024: Institutions and Prosperity
Daron Acemoglu (Massachusetts Institute of Technology), Simon Johnson (Massachusetts Institute of Technology), and James A. Robinson (University of Chicago) were awarded the prize “for studies of how institutions are formed and affect prosperity”.
Their Contributions
The three economists explored how different institutional structures, particularly in countries colonized by Europeans, influenced paths to prosperity. Their research demonstrated that institutional differences, rather than geography or culture, play a decisive role in economic outcomes.
In regions where Europeans faced high mortality rates, they were less likely to settle and more likely to establish extractive institutions, which often persisted into the modern era. Conversely, where Europeans could settle safely, they built institutions—such as secure property rights—that promoted long-term economic growth.
The divided city of Nogales illustrated their findings. The US side has greater economic opportunities and political rights compared to the Mexican side, despite sharing similar geography and culture. The critical difference lies in institutions—specifically, the border between the two nations creates entirely different institutional frameworks.
Acemoglu and Johnson co-authored “Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity” (2023), while Acemoglu and Robinson wrote “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” (2012), both influential works applying their institutional theory to understand economic development.
Their research also investigated the “reversal of fortune,” showing that wealthier regions 500 years ago are relatively poorer today, and vice versa. They argued that colonizers enforced extractive institutions in more prosperous, densely populated societies, and these extractive institutions reduced subsequent industrial development.
2023: Gender Dynamics in the Labour Market
Claudia Goldin (Harvard University) received the prize “for having advanced our understanding of women’s labour market outcomes”.
Her Contributions
Goldin became only the third woman to win the economics Nobel and the first woman to win the award solo. She provided the first comprehensive account of women’s earnings and labour market participation through the centuries, revealing the causes of change and the main sources of the remaining gender gap.
Her research demonstrated that female participation in the labour market did not follow an upward trend over 200 years but instead formed a U-shaped curve. Participation of married women decreased with the transition from an agrarian to an industrial society in the early 19th century, but then increased with the growth of the service sector in the early 20th century. Goldin explained this pattern as resulting from structural change and evolving social norms regarding women’s responsibilities for home and family.
A key insight from Goldin’s research concerned “greedy jobs” versus flexible jobs. Highly paid positions requiring continuous commitment beyond normal working hours create pay inequalities when women disproportionately choose more flexible, less well-paid jobs after having children. Goldin argued that pay inequalities could be reduced by reorganizing working conditions to increase “linearity” in respect to earnings—making compensation more directly proportional to hours worked rather than penalizing temporal flexibility.
Goldin’s longitudinal research demonstrated that the gender pay gap increases with age, traced to women shifting into lower-paying positions or leaving the labor force when they have children. She showed that the number of hours worked and time since receiving advanced degrees explains much of this gap.
2022: Banks and Financial Crises
Ben S. Bernanke (Brookings Institution), Douglas W. Diamond (University of Chicago), and Philip H. Dybvig (Washington University in St. Louis) were awarded the prize “for research on banks and financial crises”.
Their Contributions
The laureates significantly improved understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research was why avoiding bank collapses is vital.
Ben Bernanke analyzed the Great Depression of the 1930s, demonstrating through statistical analysis how failing banks played a decisive role in the global depression. He showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged, helping us understand the importance of well-functioning bank regulation.
As head of the US Federal Reserve during the 2008 financial crisis, Bernanke was able to “put knowledge from research into policy,” applying historical lessons to prevent a depression-level catastrophe.
Douglas Diamond and Philip Dybvig developed theoretical models explaining why banks exist and how their role in society makes them vulnerable to rumors about their impending collapse—the phenomenon of bank runs. Their Diamond-Dybvig model became foundational to understanding banking instability.
Diamond’s model explained how banks reduce the cost of credit intermediation—transferring savings to productive investments. When many banks fail simultaneously, this cost increases dramatically, causing much of the economy to stop functioning. The knowledge required for monitoring borrowers dissipates when banks fail and takes time to recreate, making the consequences of bank failures both extremely negative and long-term.
Their work laid the foundation for modern bank regulation and deposit insurance schemes, providing crucial insights for preventing widespread bank collapses.
2021: Natural Experiments in Labour Economics
David Card (University of California, Berkeley) received half the prize “for his empirical contributions to labour economics,” while Joshua D. Angrist (Massachusetts Institute of Technology) and Guido W. Imbens (Stanford University) shared the other half “for their methodological contributions to the analysis of causal relationships”.
Their Contributions
The three laureates demonstrated that natural experiments—situations arising in real life that resemble randomized experiments—can be used to answer central questions for society, such as how minimum wages and immigration affect the labour market.
David Card analyzed core questions in labour economics using natural experiments. His pioneering work from the early 1990s challenged conventional wisdom on multiple fronts:
His research with the late Alan Krueger, using restaurants in New Jersey and eastern Pennsylvania, found that increasing the minimum wage did not reduce employment—contradicting the conventional belief that higher minimum wages lead to less hiring.
Card’s work also challenged the commonly held idea that immigrants depress wages for native-born workers. He found that incomes of native-born workers can benefit from new immigration, while earlier immigrants may be at risk of being negatively affected.
Joshua Angrist and Guido Imbens made fundamental methodological contributions in the mid-1990s that clarified what conclusions about causation can be drawn from natural experiments where people cannot be forced to participate in programs being studied.
Their framework established the Local Average Treatment Effect (LATE), demonstrating exactly what causal conclusions can be drawn when treatment is not randomly assigned but influenced by an instrumental variable. This innovation solved a critical problem: in natural experiments, individuals may choose whether to participate, making interpretation much more difficult than in controlled clinical trials.
The Angrist-Imbens framework clarified the assumptions necessary to establish causal relationships, increasing the transparency and credibility of empirical research. Their methodological insights have been widely adopted by researchers working with observational data across many fields.
2020: Auction Theory and New Auction Formats
Paul R. Milgrom (Stanford University) and Robert B. Wilson (Stanford University) were awarded the prize “for improvements to auction theory and inventions of new auction formats”.
Their Contributions
The laureates studied how auctions work and used their insights to design new auction formats for goods and services difficult to sell traditionally, such as radio frequencies. Their discoveries have benefitted sellers, buyers, and taxpayers around the world.
Robert Wilson developed theory for auctions of objects with common value—a value uncertain beforehand but ultimately the same for everyone. Examples include the future value of radio frequencies or mineral volumes in particular areas. Wilson showed why rational bidders tend to place bids below their own best estimate of common value due to the “winner’s curse”—the fear of paying too much and losing out.
Paul Milgrom formulated a more general theory allowing not only common values but also private values varying from bidder to bidder. He analyzed bidding strategies in various auction formats, demonstrating that certain formats give sellers higher expected revenue when bidders learn more about each other’s estimated values during bidding.
Together, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously. In 1994, the US Federal Communications Commission first used one of their auction formats to sell radio frequencies to telecom operators, revolutionizing spectrum allocation. Since then, many countries have followed suit, generating billions of dollars in sales through more efficient resource allocation.
Their work demonstrated how fundamental theory could be applied to practical applications spreading globally, with discoveries of great benefit to society.