Today, the Nobel Prize in Economics was awarded to Joel Mokyr (Northwestern University), Philippe Aghion (London School of Economics), and Peter Howitt (Brown University) “for their work explaining economic growth through innovation.” This follows the committee’s recent trend of awarding economics with a focus on economic growth, following Acemoglu, Johnson and Robinson in 2024 and Kramer, Duflo and Banerjee in 2019. Time and space do not allow me to go into detail about the thinking behind each award, but they are all extremely important to understanding economics.
One of the great mysteries of human history is the so-called “hockey stick of prosperity.” It’s the fact that for most of human history, living standards have remained virtually unchanged. There was little to separate the Roman people of 1 AD from the English people of 1700. But after the 1700s, living standards skyrocketed.
From 1 AD to 1700, little changed. Transport by sail and animals was the norm, medicine was not very advanced, and machines were unknown. Change began between 1700 and 1800 with the introduction of mechanical engines and the beginning of the Industrial Revolution. Between 1800 and 1900, the world transitioned from horses and buggies to steam engines. From 1900 to 1960, humans went from cars to airplanes to landing on the moon. Diseases have been eradicated and life has improved. True poverty has fallen from about 90% of the world’s population to less than 10%. Nothing like this had ever happened before and it kept happening. Even the most optimistic economists of the time had a hard time explaining it.
Mokil, Aghion, and Howit appear. Taken together, their research helped explain why this growth occurred, why it happened where it grew, and how it is sustainable.
Mokyr argues that the Industrial Revolution and its benefits were not an accident of history, but rather the result of institutions. Economic growth stems from two types of knowledge: propositional knowledge (how and why things work) and normative knowledge (practical knowledge about what is needed to make things work, such as institutions and recipes). These two forms of knowledge work together and build on each other to generate economic growth. For example, economic science (propositional knowledge) tells us where prices come from, how people adjust their behavior, and so on. That understanding then helps us think about what institutions (normative knowledge) are needed to foster those tendencies.
Furthermore, Europe’s divided state led to the rise of the Industrial Revolution. Since different states compete with each other for political advantage, and none is particularly large, people can move (or flee) if ideas are suppressed. In large unified states like China and India (which had roughly the same technological level as pre-industrial Europe), ideas were suppressed and people had few options for leaving. The fragmentation of Europe led to improvements in technological capabilities, as the suppression of new ideas was broken. This trend can sometimes be observed even within states such as the British Empire. Scotland was a remote place, largely ignored by the ruling elite of post-Union London, where the Industrial Revolution began.
Mokyr called this a “culture of growth” (also the name of his excellent book published in 2016). Innovation is not random, but rather requires a culture and a marketplace of ideas that fosters innovation.
Aghion and Howitt contribute in other ways. Their landmark paper, “A Model of Growth through Creative Destruction” (Econometrica, 60(2)), builds a mathematical model of Joseph Schumpeter’s language model of creative destruction. Companies face both carrots and sticks for innovation. The carrot is the rent you get for innovation. Through a creative process, they make old technologies obsolete, eliminate old technologies, and gain market share (or rent). Crisis is born from the constant threat that others will do the same. In order to prevent loss of rent, each company needs to devise ways to prevent the loss of rent.
But Aghion and Howitt also identified limitations. If rents become very high, they can create barriers to entry for established companies. This reduces stickiness due to competition. Furthermore, once rents (carrots) are secured, firms have less incentive to innovate. Differences in corporate, market, and legal structures help explain why some industries are highly innovative and others remain stagnant.
All three winners describe economic growth driven by technology and culture (broadly defined). My brief overview is not intended to present the entirety of their work. An overview of the Nobel Committee’s contributions is highly recommended.
Congratulations to Joel Mokyr, Philippe Aghion and Peter Howitt on their well-deserved awards.
[1] Don’t let anyone say, “There is no Nobel Prize in Economics. It’s the National Bank of Economic Sciences in Memory of Alfred Nobel.” we all know.
[2] As a side note, I think the entire space program is great. A lot of scientists go to guys like Chuck Yeager and say, “We’ve got an idea. We’re going to take out a missile, take off the warhead, bolt on some seats, and fly it to the moon,” and the pilots say, “Sounds interesting! Sign us up.”
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