Innovation, growth, and the missing pieces: a broader perspective on the 2025 Nobel Prize in Economics - Tania Treibich

The announcement of the 2025 Nobel Prize in Economics, awarded to Philippe Aghion, Peter Howitt, and Joel Mokyr is a recognition of the role of innovation in driving economic growth. Their contributions have shown that growth can’t be sustained on capital accumulation alone, and that technological change is inherently linked to entrepreneurial investments and competition dynamics. In this sense, their research aligns closely with Schumpeter's vision of capitalism as a dynamic, ever-evolving system driven by entrepreneurial innovation.

Schumpeterian growth theory and the role of competition as a determinant of innovation

Building on the Schumpeterian tradition of "creative destruction", the Schumpeterian growth theory, which has grown out of the seminal paper by Aghion and Howitt (1992), posits that the winners of the innovation game take over the market, replacing incumbent firms and reaping monopoly rents as their reward.  This view contrasts with that of Arrow (1962) as well as empirical research which argued instead that competition fosters innovation: under competitive pressure, firms are willing to invest in R&D as a way to escape from the pack. 

Later works by Aghion and colleagues integrated these two perspectives, showing that the relationship between competition and innovation is non-linear. In sectors with high competition, the “escape competition” effect dominates, encouraging firms to innovate to stay ahead. Instead in concentrated sectors, lagging firms lack the means to compete in innovation with the top-performers.  This creates a complex challenge for policymakers, who must balance incentives for innovation through mechanisms like patent rewards (which can create concentrated markets and benefit incumbents) with measures to increase competition intensity to push firms toward greater R&D investment. This framework however overlooks two important aspects: i) the role of the public sector within the innovation ecosystem and ii) the role of demand as a driver of investment and technological change. 

A Schumpeterian legacy, but only half the story

Aghion, Howitt, and Mokyr have made substantial contributions to understanding the supply side of innovation. Yet, Schumpeter himself recognized that innovation does not occur in a vacuum. The process of creative destruction is inherently tied to the broader economic environment, including the role of the public sector in creating fundamental knowledge and the role of demand in shaping market dynamics.

The interplay between innovation and demand is crucial. Innovation does not automatically translate into widespread economic benefits; its diffusion depends on the purchasing power of consumers, the distribution of income, and the institutional frameworks that shape market dynamics. Keynesian economics reminds us that demand-side constraints can stifle the very innovation that supply-side models celebrate. For instance, Mokyr’s historical analyses of technological revolutions often focus on the supply-side ingenuity of inventors and entrepreneurs. However, the Industrial Revolution was not just a story of steam engines and spinning jennies; it was also a story of rising wages, expanding markets, and the gradual empowerment of a working class that could afford the goods being produced. Similarly, Aghion and Howitt’s models of endogenous growth emphasize the role of R&D and innovation policies but often overlook how income inequality and stagnant wages can suppress the demand needed to sustain long-term growth. 

Public knowledge and demand as drivers of innovation

An important complement to these views can be found in Richard Nelson and Sidney’s Winter’s research seminal book, An Evolutionary Theory of Economic Change, which emphasizes the role of routines, firm behavior, and institutional dynamics in shaping innovation. The evolutionary perspective highlights that innovation is not just a result of abstract technological progress but is deeply embedded in the organizational, historical and institutional structures of firms and economies. It views firms as dynamic entities themselves, which learn, adapt, and evolve over time. This way, publicly funded research, which can be more radical, risk-taking and ambitious than private R&D (as shown by Mariana Mazzucato) needs to support the efforts of private firms to deliver socially desirable outcomes, such as green technologies and healthcare advancements, that might otherwise be underfunded by the private sector. Public efforts are complemented by demand-side factors, such as consumer preferences and income distribution, to shape the direction of innovation. Green technologies, for instance, are not just the result of supply-side breakthroughs but also of demand-side pressures from environmentally conscious consumers and regulatory policies. Ignoring these dynamics risks perpetuating a narrow view of innovation that is disconnected from the lived realities of economic actors.