By Ekmel Çilingir
Chairperson, EMBank
With a background deeply rooted in understanding economic and financial systems, I found the 2025 Nobel Prize in Economic Sciences both illuminating and timely. It reminds us of the power of patient scholarship—of taking the long view to assess not just how economies grow, but why growth endures across generations.
At a time when economic sentiment is pulled in cycles of quarterly earnings, inflation anxieties, and electoral timelines, the prize returns our focus to deeper fundamentals: what drives sustainable prosperity, and how can we ensure it continues? With the global economy standing at the edge of a technological transformation—powered by artificial intelligence, green innovation, and demographic shifts—this year’s laureates offer vital insights.
They answer the two foundational questions of economics: Is growth meant to last? And if so, how?
The answers come from two powerful lenses:
- Joel Mokyr, who reveals the conditions under which innovation leads to enduring progress.
- Philippe Aghion and Peter Howitt, who provide a robust mathematical model explaining how innovation-driven competition at the firm level produces stable macroeconomic growth.
Mokyr: Why Innovation Didn’t Always Translate to Growth
The starting point of Mokyr’s idea is that innovation and technological change are the key drivers of sustained economic growth, as opposed to capital. Robert Solow (1986 economics laureate), whose growth accounting method (Solow, 1957) forcefully made the point that growth is not primarily driven by physical or human capital accumulation.
Mokyr’s work demonstrates that while invention has occurred throughout history, sustained economic growth is a recent phenomenon. For millennia, civilisations experienced bursts of brilliance—engineering in Rome, astronomy in China—but lacked the systemic mechanisms to turn these into continuous productivity gains.
His key insight: Growth only becomes self-sustaining when scientific knowledge and practical know-how reinforce each other. This “Industrial Enlightenment” wasn’t just about discovering new things; it was about understanding why they worked, enabling adaptation and replication. Mokyr shows that it was the unique blend of open science, mechanical competence, and a societal tolerance for creative destruction that allowed Britain to lead the Industrial Revolution.
There was a formula to the sustained growth following the Industrial Revolution, enlightened by Mokyr, in how it evolved:
- A joint evolution of science and technology
- High thinkers mingling with doers that had mechanical competence in a culture of social acceptance for creative destruction
- New institutions that are flexible enough to encourage competition between interest groups and allow the winners to compensate the losers
In other words, innovation thrived when thinkers and tinkerers met, and when the institutions around them embraced change rather than resisted it.
Aghion & Howitt: The Mathematics of Innovation and Growth
Where Mokyr explains why the take-off happened when it did, Aghion and Howitt explain how it continues. Their contribution is a formal model of “growth through creative destruction,” originally developed in 1992. This framework connects the churning of firms and technologies at the micro level to steady economic expansion at the macro level—a breakthrough in growth theory.
Here’s the crux: Innovations are not mere enhancements. They replace older technologies, displacing incumbents. Each successful innovation “steals business” from outdated firms, creating winners and losers. Despite this disruption, the overall economy continues to grow in a balanced, stable way.
This may sound paradoxical, but their model resolves it persuasively. In it, each firm’s investment in innovation increases the likelihood that it will become the next monopolist, albeit temporarily. But innovation also invites competition. Entrants invest in R&D not only to make profits but to displace existing leaders. These dynamic drives a continuous cycle of entry and exit.
The model includes:
- Heterogeneous firms competing on innovation, not just price.
- A link between R&D investment decisions and expected rents.
- A mechanism showing how aggregate growth is proportional to the rate of innovation, itself driven by micro-level incentives and competition intensity.
Previous models, such as Romer’s, treated innovations as complements to existing goods and services. Aghion and Howitt offered a more realistic case: New products and services are better and make old ones obsolete.
Using firm-level data, Aghion & Hewitt showed that:
- High entry and exit rates, and job reallocation are essential for productivity growth.
- Declining business dynamism (observed post-2000) is linked to slower productivity growth.
- Creative destruction is measurable and policy-sensitive: too little churn leads to stagnation; too much, and the social costs outweigh the gains.
This makes the model a powerful tool for policy evaluation, from patent law to R&D subsidies to antitrust enforcement.
Growth Is Not a Tide That Lifts All Boats
A central strength of Aghion and Howitt’s model is its normative clarity. It doesn’t just describe how growth happens; it helps us evaluate whether it’s happening optimally.
In fact, their framework reveals that decentralised growth may not always be efficient. Firms tend to underinvest in R&D due to the risk of their own innovations being quickly outcompeted. At the same time, some may overinvest due to “business-stealing” incentives. Hence, R&D subsidies need to be tailored, not uniform.
Equally important, creative destruction hurts people, especially labour. Job churn is real. Regions with high innovation often experience higher unemployment and job displacement. The model therefore implies that social insurance, reskilling, and a safety net are not just humane, they’re economically necessary to maintain support for a dynamic economy.
A Framework for the Future
This part is directly from the Nobel Prize Committee’s report for the Prize in Economic Sciences:
“Productivity growth rates in advanced economies remained remarkably stable over time for most of the post-WW2 period. However, since the 2000s, OECD countries have witnessed a significant slowdown in productivity growth. The same period was characterised by a fall in labour’s share of total income, and additional evidence points to rising markups. Without a mechanism of creative destruction, it was typically not possible to square these observations. Over recent years, many of the advanced economies also saw falling firm entry and exit rates and declining job reallocation rates, which is corroborating evidence that the productivity slowdown was indeed accompanied by a reduction in creative destruction. Recent quantitative work investigates the reasons behind the productivity growth slowdown through the lens of an innovation-led growth model in the spirit of Aghion and Howitt.”
The laureates’ work offers not just a retrospective, but a roadmap. In my view, the biggest lesson is this: innovation-led growth is not automatic. It is the product of policy choices, cultural openness, and institutional readiness.
If we want to replicate the virtuous cycle of the Industrial Revolution today, we must:
- Invest in STEM education and mechanical skills to widen the talent pool.
- Design social policies that protect, not paralyse, workers in transition.
- Encourage competition and experimentation, especially among SMEs.
- Rethink innovation policy to promote both entry and scaling.
In this age of AI, we stand on the cusp of another massive transformation. Whether this becomes a new era of sustained growth or a story of missed opportunity will depend on how well we apply these insights.
The Industrial Revolution was not an accident. Nor was the growth that followed it. The path ahead is one we can shape, if we choose to understand it.
