Innovation and the dynamics of growth: a Nobel Prize for Joel Mokyr, Phillipe Aghion and Peter Howitt - Mark Sanders

I guess that one of the perks of getting older is that you come to the point where you can say that you have actually met and spoken to this year’s nobel laureates in economics in person. I met Joel Mokyr on the campus of Tilburg University where he taught a fascinating class on the industrial revolution in my first ever NAKE-workshop, back in the late 1990s. Phillipe Aghion I met not much later when he delivered an early Schumpeter lecture in Cordoba, Argentina, at my first ever international conference. Peter Howitt served as committee member at my PhD-defense and was a most gracious host when I visited him and Oded Galor for three months at Brown University in 2004. 

Even back then it was clear to me that these men were brilliant and their work would, someday, be recognized. But the thing that stood out most for me was that they shared a passion for research and scholarship that they were eager to share with an academic nobody such as myself.   

Joel Mokyr, Philippe Aghion, and Peter Howitt have each made foundational contributions to our understanding of long-run economic growth, emphasizing the central role of innovation, knowledge diffusion, and its institutional context. Their approaches vary quite dramatically from historical and institutional to theoretical and mathematical. Still they converge on a vision of economic growth as an inherently dynamic and innovation-driven process. Where Mokyr emphasizes the importance of institutional and cultural environments that safeguard the open exchange of knowledge and ideas, Aghion and Howitt show us how progress is the result of better ideas replacing good ones and modeled this process as the result of entrepreneurs investing in R&D to come up with such better ideas in anticipation of the inherently temporary monopoly profits they would bring.

Of course, their work stands on the shoulders of giants before them. And I would argue their work builds a bridge between mainstream, neoclassical economics on the one hand, and more heterodox, institutional and evolutionary approaches on the other. In that sense, I feel this years’ Nobel prize in economics is an explicit recognition for what I would call the Schumpeterian tradition. 

For Aghion and Howitt, this link is very explicit as they referred to “creative destruction” as the process that links innovation to competition and is at the heart of their growth model. This type of endogenous growth models is now known in the literature as (neo) Schumpeterian for a reason. The link to Mokyr’s work is perhaps more implicit. But Joseph Schumpeter was himself an economic historian at heart. And Mokyr’s description of how, in the politically fragmented Europe, people with unconventional ideas, would always find a safe place to challenge the status quo and flourish (or falter) in open competition, is very reminiscent of Schumpeter’s process of “creative destruction” or e.g. Karl Popper’s concept of the Open Society. Taken together, their work has helped move the field beyond static models of equilibrium and accumulation, toward a richer, dynamic understanding of capitalism as an evolving, innovation-driven process that is influenced by policy, shaped by institutions, and powered by better ideas replacing good ones.

But as all good science, their work also points us to new questions. First, like Schumpeter before them, Mokyr, Aghion and Howitt do not go into where the new ideas come from. Evolutionary processes deliver progress when there is natural selection among variations. In biology these variations are random genetic mutations. In economics and politics these “mutations” spring from the minds of people. In Mokyr they come from renaissance artists and scientists under the patronage of wealthy and powerful individuals and states. In Aghion and Howitt it is “entrepreneurs” who invest resources into creating new technology to enter existing markets and capture monopoly rents. Both Mokyr and Aghion and Howitt emphasize in their work the process of competition and selection that follow, but spend little time on the origins of new ideas. Much like Schumpeter, who also assumed them to be “in the air”, ready for entrepreneurs to be turned into profitable ventures.

More evolutionarily inspired economists like Richard Nelson and Sid Winter or our own Bart Verspagen and Luc Soete, would probably point out that innovation can never be a predictable routine and there is no recipe for growth. We can set up a selection environment that  is open to new ideas and selects among them on economic fitness. But the ideas come from people. And people are boundedly rational, face institutional barriers and behavioral biases and work inside technological paradigms that create path dependency. This makes innovation an institutionally embedded but inherently complex, non-linear and perhaps chaotic process. 

With many co-authors and colleagues at the Max Planck Institute, then Utrecht and now Maastricht University, this year’s nobel laureates inspired us to zoom in on the agents of change. These entrepreneurs, in addition to coming up with challenges to the status quo, need to navigate their institutional environment to build their ideas into a competitive and profitable venture, facing deep and fundamental uncertainty while doing so. I am pretty sure that that work will ever deserve the honor that is now rightfully conferred upon Joel Mokyr, Phillipe Aghion and Peter Howitt. But I am certainly thankful that we can stand on their shoulders, that they each inspired us to reach for the stars and always be passionate about doing academic research.