Technology-driven growth — the topic that won three economists the 2025 Nobel Prize — is a big deal! Throughout the vast majority of human history, living standards and per capita income were relatively unchanged, even despite breakthrough inventions and discoveries like fire, agriculture, and the printing press. Only in the late 1700s and early 1800s did sustained economic growth begin to occur, and economists have shown that most of this sustained growth happens purely because of increases in productivity.

As was recently announced by the Nobel committee, economists Joel Mokyr, Philippe Aghion, and Peter Howitt won the 2025 Nobel Prize in Economics for their contributions in uncovering how technology-driven growth occurs. In this article, we’ll dive deeper into the specific research that won these luminaries the Prize, and what it means for the field.

The Nobel laureates’ research asked and began to answer a very important question: what’s the secret behind such unprecedented, sustained, and world-changing economic growth?

Let’s find out!

Joel Mokyr
Economic historian Joel Mokyr described how continual economic growth has its foundations in knowledge as well as the ability to make use of that knowledge. Specifically, he defined two different types of knowledge — propositional knowledge (which reflects advancements in theory) and prescriptive knowledge (which includes practical formulas, recipes, or etc. for use in industry or everyday life), and stated that sustained economic growth results when entrepreneurs, inventors, and other businesspeople are able to make use of them to produce new goods and services.

By Mokyr’s theory, for most of human history these two kinds of knowledge seldom interacted. Artisans and builders knew how to make things, but didn’t always understand why the fundamental properties of their crafts worked. Meanwhile, scientists and philosophers deepened our understanding of the natural world, but were seldom able to connect their discoveries to practical, everyday uses.

But scientists during the Enlightenment began to emphasize the importance of controlled experiments and repetition in the scientific process, which helped to bring their discoveries closer to the everyday working world. Further, Mokyr noted that Britain had a strong system of apprenticeship and commerce at the time, which resulted in a large class of workers with the “mechanical competence” to make use of new knowledge.

Learning why things worked, and showing how natural relationships could be exploited or repeated, enabled these profit-minded entrepreneurs to turn scientific insights into practical innovations that resulted in new products and industries. Shortly thereafter, the Industrial Revolution exploded onto the scene in Britain, and sustained economic growth began to take off around the world.

Yet another of Mokyr’s key observations was that only having the advancement of so-called “useful knowledge” wasn’t enough for sustained economic growth. Society additionally needed to be receptive to new ideas and innovations, and allow them to flourish, even at the expense of existing industries — because innovations tend to create both “winners” and “losers”. In fact, this point is related to other research by past Nobel prize winners (including 2024 Nobel Prize in Economics winners Daron Acemoglu and James A. Robinson) about how society’s institutions strongly influence its economic trajectory. If society is willing to accept the sometimes uncomfortable process of change, it is better able to harness technology-driven economic growth.

In this sense, Mokyr identified a combination of factors needed for sustained economic growth: a feedback channel between theoretical and practical knowledge, a certain mechanical competence to continue the development and production of an innovative idea, and finally an openness in a society’s institutions that reduce resistance to change and so enable innovation to flourish and growth to occur, even if it causes initial disruption and discomfort.

Philippe Aghion & Peter Howitt
Aghion and Howitt contributed to the discussion by creating a model of the economy where firms can patent their innovations. Patents allow firms to legally form temporary monopolies if they invent something useful, and thereby extract profit from an otherwise competitive market.

Aghion and Howitt’s model showed how this monopoly profit motive spurs innovation: firms are incentivized to fund research and development (R&D) so that they can acquire a patent and create monopoly profit conditions for themselves. But if one firm succeeds in this endeavor, other firms are then incentivized to innovate such that they can unseat the quasi-monopolist, steal their market share, and become the market leader themselves.

Clearly, this very process spurs technological development that increasingly builds off of earlier innovations and increases overall productivity. This is also a good summary of the process that economists call creative destruction (a term that is attributed to Joseph Schumpeter). This creative destruction process in Aghion and Howitt’s model creates a sort of R&D “arms race”: companies that spend more on R&D will tend to remain in a profit-making position longer, and thus the entire field of competitors is incentivized to spend more on R&D than they would have in the absence of competition.

Because Aghion and Howitt’s model is a general equilibrium model (i.e., it linked together major economic variables such as firm profits, household savings, economy-wide production, R&D, etc.) they were able to answer questions like “what is the optimal amount of R&D for society?”.

As it turns out, market competition isn’t enough to guarantee the optimal amount of R&D for society, for two reasons. First, firms’ incentives to unseat and “steal” the market from one another can push R&D expenses too high relative to what’s optimal. Thus, it’s possible for firms to overspend on R&D.

Second, individual firms’ incentives only take into account their future profits, but innovations have benefits for the whole of society and future innovators as well. In other words, research has positive externalities; therefore, it’s also possible for firms to underspend on R&D. Aghion and Howitt studied these forces in a range of markets and model parameters, and as their 1992 general equilibrium model was the first of its kind to be published, they inspired many more papers and much further discussion.

The most important question in macroeconomics
These economists’ work on the most important question in macroeconomics — “what are the causes of sustained economic growth” — earned them the 2025 Nobel Prize, and for good reason. Today, economic growth and the various factors that affect it, both for rich and for poor nations, is a constant topic of study for macroeconomists around the world. And, a sizeable portion of it builds off of the work of these three economists.

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