Understanding sustained growth: the 2025 Nobel Prize and why it matters for Europe

20 October 2025

by Conny Olovsson and Alexander Popov

Last Monday, the Royal Swedish Academy awarded the Sveriges Riksbank Prize in Economic Sciences to three laureates. The committee singled out Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress”, and Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction”. The winning research is highly relevant for the euro area economy. Just recently, for example, Philippe Aghion took part in a discussion at the ECB Forum on Central Banking on how to tap Europe’s growth potential. He also co-authored an earlier ECB Blog post on Europe’s prospects of becoming a green technology leader.

While differing somewhat in both method and scope, in their overall body of work the three laureates take on some of the biggest questions an economist can ask: why do some countries grow faster than others? How can countries not only achieve economic prosperity, but also maintain it?

Their answer to these trillion-dollar questions can be summed up in one word: technology, emerging from an ever-expanding pool of ideas and knowledge. When first proposed in the 1960s, this notion represented a quantum leap. Earlier models of economic growth, such as the canonical one by Robert Solow (himself a Nobel Prize winner in 1987), took technological progress as given. Economists, known for their love of Greek words, call this process “exogenous”, or “from outside”. In contrast, the ever-growing strand of research that formalized the genesis and rise of new technologies (including the 2018 Nobel Prize winner Paul Romer’s pioneering model of R&D-driven growth) looks at “endogenous” growth, or growth generated “from inside”. Standing on the shoulders of giants, this year’s laureates have built on that legacy.

The lessons of the Industrial Revolution

The economic historian Joel Mokyr has studied the question of how growth came about and took hold through the lens of the Industrial Revolution,^[1] arguably one of the most interesting economic episodes in human history. For millennia, standards of living remained consistently flat. Economic growth was limited and temporary (i.e. it was not “sustained”). However, at some point in the late 18^th and early 19^th centuries, the world entered a phase of sustained growth and rising living standards (see Chart 1).^[2] It was obvious that the striking growth in income ushered in by this event was spurred by dramatic technology-driven improvements to labour productivity. And yet, back when Mokyr was embarking on his academic career, it was far from clear why the Industrial Revolution happened when it did. Even more puzzling was why it happened in Europe and not in China or India, each of which accounted for a larger share of global GDP in the mid-18^th century.

Chart 1

Global average GDP per capita over the long run

Mokyr came up with an answer that can be summarised as follows: for sustained economic growth, new technologies must not only be invented, but also taken up and maintained. Because existing elites often push back against technological innovation, new ideas must take root quickly. Otherwise, they can fade away. Take the steam engine, often seen as the paradigmatic invention of the Industrial Revolution. First of all, someone had to come up with the idea of a new apparatus able to transform heat energy into mechanical work. Second, and crucially, the device had to be both practical and profitable. To this end, new equipment had to be built, installed, operated, maintained and repaired. This had to be done by expert craftsmen. In an age in which machinery was custom-made, all of this depended on a trained and experienced workforce.

And it is here that Europe – and England in particular – excelled in the early 19^th century. It could draw on a critical mass of artisans and engineers. Mokyr calls the members of this class “Upper Tail Human Capital”. These were not the social elites, who were educated but uninterested in technological progress, nor the common workers, who were largely illiterate, but rather those who were open to new ideas and educated enough to understand new technologies and spread the word. Thanks to its apprenticeship structures, its world-class universities, its numerous scientific societies and its penchant for publishing and exchanging ideas, England had built up a critical mass of scientists and craftsmen who not only talked among themselves and worked together, but who also transformed these ideas into commercial products. This gave rise to the knowledge and skills that were the chief source of technical human capital in this age. Between 1750 and 1825, English industry became a hotbed of innovation. And it emerging as an unrivalled market for applying and improving on new ideas.

Mokyr’s major contribution is thus that economic growth through technological innovation depends on generating new ideas and on maintaining knowledge that can then be passed on. In contrast, before the Industrial Revolution, many useful technologies were deployed without any real understanding of how or why they worked. Mokyr also points out that new inventions often replace old technologies and can thus disrupt existing ways of working. New technologies tend to face resistance from entrenched groups who see their privileges under threat. For sustained growth to take hold, societies must therefore be open to new ideas, allow intellectual exchange and support the incremental build-up of both scientific and engineering expertise.

The role of “creative destruction”

While Mokyr’s work makes a historical case for the primacy of ideas and knowledge in enabling technological progress, Aghion and Howitt take this further. They drill into the precise mechanisms whereby innovation generates economic growth.

The core ideas for which they were honoured by the Nobel committee can be found in their landmark 1992 paper.^[3] Here, they took an old idea from Joseph Schumpeter – that capitalism advances through constant disruption – and used it to build a rigorous economic model.

In their framework, growth does not happen smoothly or automatically. Rather, it is driven by a never-ending race to innovate. Entrepreneurs and firms invest in research and development because the rewards are big: a successful innovation temporarily brings extraordinary rewards – so-called monopoly profits – until everyone else catches up. But every successful new technology also wipes out the value of its predecessors – “creative destruction” in the world of Aghion and Howitt. In contrast to Romer’s model, where growth comes from the creation of new product varieties, in their model growth arises from a continual process of quality-improving innovations whereby old technologies are replaced by new ones, which build and expand on prior knowledge. So it is that innovation creates economic value not only for the innovators, but also for society as a whole. And this motivates subsidies to R&D.

This churn is both the engine and the cost of progress. Innovation raises productivity and living standards. At the same time, it destroys existing firms, displaces workers and leads to periods of adjustment. Growth, in other words, is not painless, and progress goes hand in hand with turbulence.

The policy implications are complex. For example, in a highly competitive environment the pay-off from investing in innovation soon disappears, making innovation unprofitable. Weak competition, meanwhile, also deters innovation because monopolists do not feel threatened enough to innovate. Stronger patent rights can spur innovation, but too much protection can entrench monopolies and slow the pace of change. A careful combination of competition, openness, subsidies and social insurance is therefore needed to keep the engine of creative destruction running.

These ideas have a wide range of real-world applications. For example, in his later work^[4] Aghion combined the idea of “creative destruction” with climate modelling. Here, he showed the benefit of subsidising research on green technologies until clean energy can outcompete dirty energy, demonstrating how his theories can be applied to the “green transition”.^[5] Today, the ongoing resource-intensive “gold rush” in Artificial Intelligence among a few very innovative companies running neck-and-neck with each other bears out the Schumpeterian notion that innovation – regardless of how useful it ultimately turns out to be – is at its best when a market is neither monopolistic nor overly competitive.

In defence of science, technology and growth

This year’s Nobel laureates teach us an important lesson: sustained growth cannot and should not be taken for granted. Indeed, for most of human history economic stagnation was the norm. Overall, their work warns us to take heed of the factors that can impede or even destroy economic growth. These include monopoly power, restrictions to expanding knowledge and bad economic policy.

This year’s award also comes on the heels of the 2024 Nobel Prize awarded to Daron Acemoglu, David Robinson and Simon Johnson. Their work underscored the key role played by competent and independent institutions – for instance, by protecting property rights, placing constraints on the power of elites and ensuring credible, predictable, and rule-based policy – in generating and maintaining growth and prosperity. It is rare to see two consecutive awards for research on such similar topics. It is almost as if the Nobel committee is sending out a warning to a world that has seemingly grown sceptical of science and weary of technology and is all too willing to entertain the idea of degrowth.

The lessons for us Europeans could not be clearer. A mere century ago, Europe was home to some of the world’s most innovative companies, its top universities and its deepest capital markets. But the continent that gave rise to the Industrial Revolution is today seen as a growth laggard and an example of how technological progress can be squandered. To regain Europe’s reputation for economic excellence, we need to boost innovation and competitiveness through increased R&D investment and streamlined regulation that supports business dynamism. And we need to do so even at the cost of some disruption. All of which, incidentally, very much chimes with the conclusions from last year’s Draghi report.^[6] This year’s Nobel Prize winners would no doubt agree.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the Riksbank, the European Central Bank or the Eurosystem.

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