2025 Economics Nobel Prize Shows Why Innovation Alone Won't Secure Growth

The 2025 Nobel Prize in Economic Sciences, awarded to Philippe Aghion, Peter Howitt and Joel Mokyr, arrives at a crucial juncture, when the geopolitical and economic scenario for the world, particularly emerging markets, seems unsure of where the future path of growth lies.

Economies are seeking to expand in breadth and scope, yet macro-productivity remains sluggish. Technology advances daily to make production processes more capital intensive, yet jobs and incomes feel precarious for the working class.

This year laureates’ work helps decode this paradox. By reimagining innovation as a restless, often ruthless process of renewal, they remind us that progress has always depended on the tension between creation and destruction, warranting a constant push for nations towards innovation.

Modern economic thought portrayed growth as smooth and predictable: capital accumulated, output increased and technology appeared as an unexplained miracle. Aghion and Howitt changed that narrative.

Their method and mathematical model placed innovation at the centre of the story, showing that progress emerges from rivalry, risk and reinvention. In their “quality ladder” framework, firms constantly strive to improve, knowing that each breakthrough topples yesterday’s leader. Growth, then, is not a gentle climb but a series of jolts, each one unsettling and, at the same time, indispensable.

Mokyr’s historical work deepens this view, showing how societies that prize curiosity and dissent are more likely to generate transformative ideas. He called this the “culture of growth,” a mindset that values the freedom to question and experiment. It is an insight that feels even more relevant in an age when algorithms shape behaviour and conformity often passes for efficiency.

Intellectual freedom may now be the ultimate driver of material progress.

It is this spirit of creative disruption, born from intellectual freedom, that now shapes the global economy in ways that are both exhilarating and disquieting. Artificial intelligence is rewriting the terms of competition.

According to a 2024 IMF report, nearly 40% of jobs worldwide face exposure to automation. What distinguishes this wave from earlier ones is its reach. It threatens not only manufacturing but also the cognitive and service work that once defined upward mobility in emerging economies.

The danger is that automation could hollow out the very foundation of middle class growth in countries still struggling to formalise their labour markets. With over 80% of India’s workforce in informal employment and millions entering the job market each year, the challenge is not just technological, it is deeply social. Creative destruction, without new creation, risks turning into simple displacement.

The external environment offers little reassurance. The global value chains that powered decades of export-led industrialisation are being reorganised.

Also read: Why India Can’t Innovate

Production is shifting closer to consumer markets, pushed by geopolitical tension and the desire for resilient supply networks. Trade patterns once anchored by cheap labour are giving way to those shaped by technological sophistication and strategic alignment. For developing economies, this means the old formula of low-cost assembly and scale may no longer suffice. To stay relevant, nations must innovate not only in what they produce but in how they compete.

This is where the laureates’ ideas matter most for policymakers. Innovation cannot thrive in the shadow of monopolies or under the weight of protectionism. Their research shows that dynamic economies are those where new entrants can challenge incumbents, where the fear of being replaced becomes the engine of progress.

For emerging economies, this calls for moving beyond the old industrial policy playbook of import substitution and state-backed champions. Those strategies often bred inefficiency and complacency. A modern approach must be open, competitive and enabling. Governments should expand access to credit, invest in education and research and build regulatory systems that reward experimentation rather than entrench privilege.

Aghion’s concept of “distance to the technological frontier” captures this logic clearly. The closer a country is to that frontier, the more it should focus on innovation at the edge. The farther it is, the more it must prioritise adaptation and diffusion, learning from and improving upon existing technologies. In both cases, the state’s role is catalytic, not commanding. It must create the conditions for innovation to emerge, not dictate its direction.

Yet innovation, left to its own momentum, can widen inequality. The laureates never romanticised creative destruction; they understood its social costs.

Without strong institutions to cushion its effects, economic dynamism can breed political backlash. That warning feels acute today, as frustration with globalisation fuels nationalist and protectionist sentiment in many countries.

A forward-looking industrial strategy must therefore rest on a renewed social contract. The aim is to protect workers, not the particular jobs they occupy. As industries evolve, people should be able to move between sectors without losing security or dignity.

Northern Europe’s experience with “flexicurity” offers one way forward. Flexible labour markets coexist with universal safety nets that make transition less punishing. For developing economies, digital infrastructure could serve a similar role. India’s Aadhaar-linked welfare system and UPI-based financial ecosystem allow benefits and credit to reach millions directly, reducing leakage and friction.

Also read: How to Handle a Plateauing Global Economy

This makes economic adaptation faster and fairer. But infrastructure alone is not enough. The half-life of a skill has shrunk dramatically, and education systems built for a single lifetime of employment can no longer cope. McKinsey estimates that over 400 million workers globally will need to shift occupations by 2030 because of automation. Lifelong learning, once a slogan, must now become an economic necessity.

This urgency gives the Nobel Committee’s decision a deeper meaning. It is less a tribute to past theories than a reflection on what the future demands. We are entering a world where innovation accelerates even as inclusion falters, where societies crave stability but depend on disruption to progress.

The work honoured this year offers a guide to navigating that tension. It reminds us that growth is not an outcome of technology alone. It is shaped by policy, culture and courage. It depends on our ability to encourage experimentation while managing its consequences.

For emerging economies, the lesson is clear: they must build institutions that can unleash creative energy and still protect those who bear its costs. They must see resilience not as resistance to change but as the foundation that allows change to happen.

Innovation, after all, is not destiny. It happens by design with careful exercises in mapping analysis of existing endowments of factors of production with prevailing worker skill sets. Progress endures only when societies choose to reinvent rather than retreat. The tools are already within reach. What matters now is whether we have the will to use them wisely. This Nobel is a crucial pillar in emphasising this.

Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, and Director, Centre for New Economics Studies. He is a Visiting Professor at London School of Economics and an Academic Visiting Fellow to AMES, University of Oxford.

Ankur Singh is a Research Analyst with Centre for New Economics Studies.

The Wire is now on WhatsApp. Follow our channel for sharp analysis and opinions on the latest developments.