Image: Anders Wiklund
For many years, the Nobel committee was accused of rewarding elegant theory over economic reality. This year it did the opposite. The 2025 Nobel prize in economics went to three scholars whose work reconnected economics with history and ideas. Joel Mokyr, of Northwestern University, was recognised for his lifelong effort to explain why sustained growth began in Europe in the late seventeenth century, setting off the Industrial Revolution. Philippe Aghion and Peter Howitt, both growth theorists, shared the prize for their model of “creative destruction”, the process by which innovation upends old industries and powers new ones.
Together the trio’s work is a reminder that prosperity begins with minds and institutions that allow ideas to flourish, rather than with bricks and factories.
The timing is apt. Across the world, economies are struggling to rekindle productivity growth. Governments have rediscovered industrial policy; “build, build, build” has become the slogan of the age. But although infrastructure spending can boost short-term demand, the Nobel committee’s message is that sustained growth depends on the less visible stuff: research, education, openness and the freedom to fail. It is a lesson with particular resonance for developing economies such as Nepal, where roads and hydropower plants are multiplying, but the pipeline of ideas is nowhere to be found.
Mr Mokyr’s research bridges economics and history. He argues that the Industrial Revolution began not because Britain had enough coal or colonies, but because it had a culture that valued curiosity and empirical inquiry. Craftsmen learned from scientists and scientists borrowed from tinkerers. Over time this feedback loop between “useful knowledge” (knowing why things work) and “technical know-how” (knowing how to make them work) became self-sustaining. Progress ceased to be accidental and became systematic. His insight is simple but profound: that the roots of growth lie in how societies treat knowledge.
Messrs Aghion and Howitt, by contrast, put innovation into the machinery of economic theory. Their 1992 model of creative destruction explained that growth arises from the continual replacement of old technologies by new ones. This process is messy and uncomfortable—firms collapse, workers are displaced—but it is also crucial. Protecting incumbents, be it through monopolies or political favour, eventually murders progress. Their work provided a clear justification for competition policy and for governments to support (rather than suppress) economic dynamism.
These ideas have policy implications far outside the rich world. For countries still climbing the development ladder, they challenge the notion that growth is a matter of accumulating physical capital alone. Roads, power plants, hospitals and factories are necessary, but they are not sufficient. Without the capacity to generate and apply new ideas, even well-built economies stagnate. As Mr Mokyr’s historical studies show, the difference between Britain and pre-modern China was intellectual freedom. (China had advanced technologies centuries before Europe, but centralised control eventually smothered innovation.)
In Nepal such freedom has seldom been paired with investment in knowledge. Spending on research and development (R&D) is below 0.5% of GDP; universities prioritise rote learning over curiosity; and scientific careers are poorly rewarded. The state has poured billions into infrastructure, but little into innovation. Policymakers equate growth with construction rather than creation. Yet history—and this year’s Nobel—suggests that idea-based growth is the more durable kind.
That does not mean that poor countries should emulate Silicon Valley overnight. Rather they should focus on building the institutions and habits that enable knowledge to compound. Independent research councils, patent systems that protect invention and universities linked to industry are what help trigger innovation. Countries that have built such ecosystems (South Korea, Singapore and increasingly China) moved from imitation to invention in a generation.
Another lesson is cultural. Mr Mokyr stresses that societies prosper when they embrace, rather than fear, change. Innovation inevitably disrupts existing interests. Governments that cushion workers through retraining and social protection can afford to let failing firms die, making space for new ones. The alternative—propping up inefficiency—produces stability without progress. In Nepal, where regulation tends to shield business tycoons and discourage newcomers, the insight could not be timelier.
The Nobel prize also underlines the growing importance of “intangible capital”: ideas, data, brands and organisational know-how. Such assets are harder to measure than machines, but they now account for most of the value in advanced economies. In the digital age, value creation depends less on what a country builds and more on what it knows. That means the next wave of growth will come from ideas.
There are risks, however. Innovation-led growth can widen inequality if opportunities are concentrated among a few educated elites. Intellectual property can be hoarded; creative destruction can leave the unskilled behind. Governments must therefore invest in education that equips broad segments of society to adapt. Growth sustained by knowledge must be inclusive in its benefits and plural in its origins.
The committee’s decision this year was widely applauded because it reminded economists of their own intellectual roots. The discipline began not as an exercise in algebra but as a study of human ingenuity—how societies organise themselves to produce and share prosperity. By honouring historians and theorists of innovation, the Nobel jury has reaffirmed that connection.
For Nepal and others seeking to escape the middle-income trap, the upshot is that durable growth is achieved by cultivating curiosity. Infrastructure decays; ideas compound. After all, those who invest in minds tend to stay rich once they get there. Just look at America. ■