The Idea That Won the Nobel Prize in Economics 2025

This past month, the Royal Swedish Academy decided to award the Nobel Prize in Economics to Joel Mokyr, Philippe Aghion and Peter Howitt for “for having explained innovation-driven economic growth” . The comitte anounced that half of the prize goes to Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress.” and the other half jointly to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction”. Their work demonstrated how technological advancements drive sustained growth by replacing the old with the new ones.

The term creative distruction was first introduced by a German economist Werner Sombart. Sombart used the phrase “schöpferische Zerstörung” (means “creative destruction”) to explain how capitalism is a constantly changing, self-transforming system that renews itself by destroying the old and creating the new in economic, cultural, moral, and social phenomenon.

Later, the Austrian economist and politician Joseph Schumpeter popularized and gave the modern meaning of creative destruction in his influential book Capitalism, Socialism and Democracy (1942). In his book, Schumpeter stated “The process of industrial mutation that incessantly revolutionizes the economic structure from within, destroying the old one and creating a new one.” He described that capitalism advances through innovation where new technologies, products, and business models replace old ones. This process destroys old firms, industries, and jobs, but simultaneously creates new wealth, new opportunities, and higher productivity.

In the late 19th century, the entire U.S. economy depended on horses for transportation and agriculture. The mass production of automobiles by Ford made it affordable for millions of ordinary Americans. By 1927, Ford had sold over 15 million Model Ts. In 1900, there were around 21 million horses in the U.S but by 1930, the number fell to below 14 million.

Initially, a large share of jobs, businesses, and city infrastructure was organized around the care, feeding, and use of horses that millions of acres of farmland grew hay and oats for them, cities employed stable workers, and carriage builders. But as cars, trucks, and tractors spread the industries that depended on horses collapsed. Yet, while many of old jobs disappeared, far more new ones were created. Automobile factories employed hundreds of thousands, Oil refineries expanded rapidly to provide gasoline and Road construction became one of the largest public projects. This is what creative destruction is in action, in which new innovations replace old technologies, industries, or ways of doing things.

Creative destruction has implications for the modern world in a sense When new technologies or business models replace outdated ones, the economy becomes more efficient, living of standards rise, new industries and job created, and more value is created with fewer resources.

The work of those three economists demonstrated that the destruction of the old ones with the new technological advancements is the basis for sustained economic growth.