In a nutshell
This year’s Nobel Prize in Economic Sciences was awarded for explaining how innovation-driven entrepreneurship turns stagnation into long-term economic growth. By placing creative destruction at the centre of the story, the laureates show why new firms and new ideas replacing old ones is not a side effect of growth, but the mechanism behind it.
Entrepreneurship is not new to economic theory, nor to the Nobel Prize, but it has often only played a supporting role. This year’s laureates, however, put entrepreneurship and the process of creative destruction front and centre – using it to explain why sustained economic growth is even possible. So for the final Research Recap of the year, we decided we simply couldn’t not write about it.
To understand the winners’ contributions, we need to start by zooming out a bit. For most of human history, the economy was marked by long stretches of stagnation. Living standards barely changed from one generation to the next, even when important inventions appeared. New ideas emerged, improved life for a while, and then… stalled. Growth, as we understand it today, was just not the norm.
That changed around two hundred years ago, with the Industrial Revolution. What made this period different was not just the appearance of new technologies, but the way they started to build on each other. Improvements led to further improvements, opening up new uses, new industries, and new ways of organising work. Innovation stopped being occasional and became continuous.
This shift is what the Nobel laureates are trying to explain. Why did innovation suddenly keep going instead of running out of steam? And why did it start to translate into long-term growth rather than short-lived gains?
One part of the answer comes from economic historian Joel Mokyr. Looking back at history, he shows that sustained growth depends on how societies produce and share what he calls “useful knowledge”. Before the Industrial Revolution, people often knew how to make things work, but not why they worked. Practical know-how and scientific understanding developed separately, making it difficult to refine ideas or build on them over time. When theory and practice began to feed into each other more systematically, ideas became easier to improve, adapt, and apply. Knowledge stopped being a dead end and became something that could grow.
Publication year: 2025
Laureates: Joel Mokyr; Philippe Aghion; Peter Howitt
Institutions: Northwestern University; Collège de France; London School of Economics; Brown University
Study type: Economic history and theoretical modelling
Research focus: Innovation-driven economic growth
Methodology: Historical analysis and general equilibrium modelling of creative destruction
Main findings: Sustained economic growth depends on continuous technological innovation. Innovation requires tight feedback between scientific understanding and practical application. Creative destruction drives growth by replacing old technologies with new ones. Institutions, openness to change, and social mobility shape innovation outcomes
Citation: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025. NobelPrize.org. Nobel Prize Outreach 2025. Tue. 23 Dec 2025. Link
But ideas alone don’t drive growth. They also need to be turned into products, processes, and businesses – and that’s where the second half of this year’s Nobel Prize comes in.
Philippe Aghion and Peter Howitt essentially took Joseph Schumpeter’s idea of creative destruction and turned it into a proper explanation of long-term economic growth. Before their work, most growth models treated innovation as something that simply happened in the background. Creative destruction was a historical observation, not a mechanism you could analyse.
Aghion and Howitt changed that. They showed how creative destruction actually works inside an economy, and how it can explain long-term growth rather than short bursts of progress. In their theory, growth comes from a sequence of improvements, where each new idea replaces the one before it. As soon as a firm reaches the top, it creates incentives for others to overtake it. That constant pressure is what keeps innovation going.
In this view, growth does not come from firms steadily perfecting what already exists. It comes from new entrants repeatedly challenging and replacing existing solutions. Most innovations are incremental rather than revolutionary, but over time their cumulative effect is transformative. Growth, then, is not the result of stability, but of continual turnover.
Crucially, this process is not always comfortable or efficient in the short term. New firms fail, old firms disappear, and jobs are reshuffled along the way. But Aghion and Howitt show that this churn is not a flaw in the system – it is the system. Without the possibility of replacement, innovation slows and growth stalls.
Their work makes it clear that entrepreneurship matters not because every new venture succeeds, but because the system allows many attempts. Most firms will not last, and they are not meant to. What matters is that new ideas are able to enter, compete, and, if they are better, take the place of what came before. So, in recognising this work, the Nobel Foundation is also recognising the central role of entrepreneurship in how societies move forward – not as a side effect of growth, but as one of its main drivers.
For related insights, read What the Heck are Ecosystems Anyway and Entrepreneurial Descision Making Under Uncertainty; official background here.
