The 2025 Nobel Prize in Economics and New Horizons in Innovation Economics

learn about innovation theory and the impact of creative destruction on the modern economy from 2025 Nobel Laureates in Economics Joel Mokier, Philippe Agyon and Peter Howitt

how innovation drives the economy

on October 13, 2025, the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economics to three economists. What they have in common is their discovery of how innovation drives economic growth. Simply accumulating capital or increasing the labor force is not enough to achieve sustained economic development. The key to true growth lies in innovation, which inevitably creates new things while destroying old ones.

the AI revolution we are witnessing today, the transition to electric vehicles, and how smartphones have replaced traditional cell phones are all living proof of this theory. the Nobel Committee emphasized that "economic growth is not something to be taken for granted," and warned that we must maintain the institutions and culture that enable innovation to avoid reverting to stagnation.

nobel Prize in Economics 2025 winners

this year, the Nobel Prize in Economics was awarded to three economists. the prize of 11 million Swedish kronor (about 1.7 billion won) was awarded half to Joel Mokier and half jointly to Philippe Agyon and Peter Howitt.

joel Mokier is a 79-year-old economic historian born in 1946 in Leiden, the Netherlands. he is currently the Robert H. Strozs Distinguished Professor at Northwestern University in the U.S. He was honored "for his work in identifying the preconditions for sustainable growth through technological progress." His seminal work, The Culture of Growth, made waves in the academic world when it explained why Europe achieved the Industrial Revolution before China.

philippe Agyon is a 69-year-old economist born in 1956 in Paris, France, who is currently a professor at the Collège de France. peter Howitt is a 79-year-old economist born in 1946 in Guelph, Ontario, Canada, who is professor emeritus at Brown University. The two scholars worked together for more than 30 years and were jointly honored for developing the theory of sustainable growth through creative destruction.

joel Mokir's Great Divergence Theory: Why did Europe develop first?

one of the great mysteries of history is this: Until around 1000, China boasted an economy and technology far more advanced than Europe. gunpowder, printing, and the compass were all invented in China. But by 1850, Europe had perfected the Industrial Revolution, and China was stagnant. Why did this reversal happen?

mokier points to three key factors. first, political fragmentation. europe was divided into countries that competed with each other. if innovators were suppressed in one country, they could flee to a neighboring country. China was a unified empire, so if the emperor stopped innovation, that was the end of it. In fact, China stopped geographical exploration after 1430, and it only took an emperor's order to do so.

second, it's a republic of scholars. from 1500 to 1700, intellectuals across Europe formed networks through letters. They shared knowledge across borders and religions. Scientists, philosophers, and mathematicians validated and advanced each other's discoveries. This is similar to today's internet communities and open source culture.

third, the difference in social organization. europe developed organizations like guilds, universities, monasteries, and self-governing cities. They were united by common purpose, not blood ties, and were open to strangers. China was clan-based, and family loyalty came first. european organizations were scalable and open to new ideas.

mokier also emphasizes the role of the Enlightenment. the Enlightenment of the 17th and 18th centuries spread a belief in progress, a confidence that nature could be understood and controlled, and the value of practical knowledge. francis Bacon said, "The true aim of science is to enrich human life with new discoveries and resources." This cultural shift laid the groundwork for the Industrial Revolution.

mokier distinguishes between two types of knowledge. propositional knowledge is knowing why things are the way they are - scientific principles. prescriptive knowledge is about knowing how to do things: techniques and methods. before the Industrial Revolution, the two developed separately. craftsmen knew only techniques, not principles, and academics studied theory, ignoring practicality. Around 1750 in England, the two began to influence each other: scientific understanding improved techniques, and experimentation led to new scientific discoveries. This was the secret to sustained economic growth for the first time in human history.

creative destruction: the revolutionary model of Agon and Howitt

in 1942, Austrian economist Joseph Schumpeter defined the essence of capitalism as "creative destruction." As new technologies emerge, old ones disappear. this process is what drives economic development, but Schumpeter only described it descriptively, not mathematically modeled it.

in 1992, Agyon and Howitt published a groundbreaking paper in Economometrica, the premier journal of economics, "A Model of Growth Through Creative Destruction," which translated Schumpeter's intuition into a rigorous mathematical formula. It has been cited more than 17,000 times.

at the core of their model is a quality ladder: each product has a level of quality. if a company is successful in R&D, the quality increases by, say, 1.3 times. the better product completely replaces the outdated product in the market. companies consider three things when deciding whether to invest in innovation. the monopoly profits if successful, the cost of R&D, and the risk that another company will innovate first and replace them.

here's an important insight: a firm's current value is inversely proportional to the probability that another firm will destroy it in the future: the greater the threat of creative destruction, the lower the firm's value. this is why firms try to prevent new entrants.

agyon and Howitt's model differs from existing theories. in Paul Romer's model, new products coexist with existing products. but in the Agyon-Howitt model, the new product completely replaces the old product. there are clear winners and losers. this better describes the real economy.

empirical data backs this up. in the United States, more than 10 percent of companies disappear or enter the market every year. job creation and destruction rates are also in the 15-20 percent range. industries with high rates of firm entry and exit have higher productivity growth: about 25 percent of total factor productivity growth comes from firm entry and exit.

from Blackberry to iPhone: a vivid example of creative destruction

on January 9, 2007, Mike Lazaridis, founder of Research in Motion (BlackBerry's parent company), was walking on a treadmill at home. On the TV, Steve Jobs was unveiling the iPhone at Macworld in San Francisco. Jobs showed the phone seamlessly downloading music, videos, and maps from the Internet. lazaridis was puzzled: "How did Apple do that? The network can't handle that." He thought it was "impossible."

at the time, BlackBerry was at its peak. it had 50 percent of the U.S. smartphone market in 2009-2010 and 20 percent of the global market. At its peak, it had 85 million users. president Barack Obama and Kim Kardashian used BlackBerrys. Its core values were efficiency and security.

blackBerry executives didn't see the iPhone as a threat: "It wasn't a threat to our core business," said Larry Conley, Lazaridis' top lieutenant. "It wasn't secure, the battery died quickly, and the digital keyboard sucked." blackBerry believed that the iPhone would only attract recreational consumers, and that business users still needed a physical keyboard.

blackBerry responded, but made a fatal mistake. in November 2008, it released the BlackBerry Storm, nicknamed the "Apple Killer" internally. it featured a moving glass screen and a clickable digital keyboard. verizon promised a $100 million marketing budget.

the results were a disaster: 1 million units were sold in the first two months, but by 2009, nearly every Storm needed replacement. the browser was slow, corner clicks were unresponsive, and it froze frequently. verizon demanded $500 million in compensation. blackBerry paid out more than $100 million in repairs, upgrades, and free replacements.

what, on the other hand, did Apple do right? the iPhone changed the paradigm: it eliminated the constraints of a physical keyboard with a full touchscreen interface. it opened the App Store in July 2008, offering infinite scalability. it transformed the smartphone from a tool to a lifestyle product. A single, unified platform attracted developers from around the world.

in 2010, BlackBerry's market share dropped to 14.8 percent, while the iPhone soared to 16.7 percent and Android to 25.5 percent. In 2012, it fell below 5 percent, and in 2013, it dropped to 3 percent. in 2013, BlackBerry was sold for $4.7 billion. it had evaporated 93 percent of its value from $67 billion at its peak. in 2024, BlackBerry's market share is effectively zero percent.

time magazine summarized BlackBerry's failures as threefold: it misjudged the consumer market, was late to the app economy, and was obsessed with physical keyboards. blackBerry tried to copy Apple, but every imitation was too late and inferior.

this is creative destruction. blackBerry's business model, market share, thousands of jobs, and $67 billion in value were destroyed. at the same time, it created the app economy, the touchscreen revolution, the mobile computing era, and millions of developer jobs. the iPhone didn't compete with BlackBerry; it created a whole new category.

electric vs. hybrid

in 2024, electric and hybrid sales surpassed 20 percent of U.S. auto sales for the first time: 3.2 million motorized vehicles were sold. 1.9 million were hybrids and 1.3 million were pure electric vehicles. it's the first time in modern automotive history that traditional internal combustion engine vehicles have fallen below 80 percent.

the resurgence of hybrids is remarkable. Many experts saw hybrids as a transitional technology, and expected pure electric vehicles to quickly dominate. But the reality in 2024-2025 was different: hybrid market share reached an all-time high of 10.8 percent in Q3 2024. Hybrid sales grew 63 percent year-over-year, while electric vehicles grew only 51 percent.

consumer preference data backs this up. according to Edmonds, hybrids sell in 25 days from dealer inventory, while electric cars take 72 days. that's almost a threefold difference. In India, hybrid sales quadrupled to 82,607 units in 2023 from 20,000 units in 2022. interestingly, this happened in the face of a 43 percent tax on hybrids and a 5 percent tax on electric cars.

in the European Union, hybrid registrations grew 18.4 percent in January 2025, accounting for 34.9 percent of the total market. in South Korea, total hybrid registrations surpassed 2 million units for the first time in 2024.

toyota's strategy is proving to be spot-on. while Tesla was making headlines and traditional automakers were rushing to switch to electric vehicles, Toyota stuck with hybrids, saying it had a "long bridge to full electrification." Environmental groups criticized Toyota, but the results in 2024 are clear. toyota expects a record $30.3 billion in net income and sold 3.4 million hybrids in 2023.

why are hybrids winning now? first, they address range anxiety. you can go short distances on an electric motor and long trips on gasoline. you can refuel at any gas station, but charging stations are limited. Second, it's the price advantage. the average transaction price of an electric car in March 2025 was $59,200, 25 percent more than the overall market average of $47,500. hybrids offer fuel economy improvements without the extreme price premium.

third, there are infrastructure realities. charging station deployment is slower than expected. rural and suburban areas remain underserved. home charging requires a garage or dedicated parking space. hybrids completely bypass infrastructure constraints.

this demonstrates multi-level disruption. hybrids destroyed traditional internal combustion engine vehicles (2000-2010s), and electric vehicles were expected to destroy hybrids (2010-2020s). but hybrids are making a comeback as a "bridge technology," destroying the pure EV narrative (2024-2025). the future is uncertain. will EVs eventually dominate, or will hybrids outlast them?

The age of AI, realizing the Nobel Prize in Economics' theory of innovation

the artificial intelligence revolution of 2024-2025 is perhaps the most important wave of technological disruption since the Internet. according to an International Monetary Fund (IMF) analysis, 40 percent of global employment is exposed to AI. in developed countries, 60 percent of jobs could be affected, with half benefiting from productivity gains and half facing job losses or lower wages.

the University of Pennsylvania's Wharton School budget model predicts that AI will increase GDP by 1.5 percent by 2035, nearly 3 percent by 2055, and 3.7 percent by 2075. by 2030, AI is estimated to contribute $19.9 trillion to the global economy. generative AI alone is expected to have an annual global economic impact of $1.3 trillion.

real-world adoption is rapid. by the end of 2024, 26.4 percent of U.S. workers will have used generative AI in the workplace. Workers report saving an average of 5.4 percent of their time at work. that's 2.2 hours per week on a 40-hour work week. overall labor force productivity increases by 1.1 percent.

chatGPT reached over 100 million monthly active users within two months of launch - the fastest product adoption in human history. more than 4 billion prompts are issued daily across all major large language model platforms. 73 percent of organizations worldwide are using or piloting AI in core functions.

AI is a perfect example of Schumpeter's theory. employment in fully automatable jobs fell by 0.75 percent between 2021-2024 (disruption). at the same time, new roles are emerging in AI development, training, ethics, and integration (creation). industries from customer service to healthcare, from finance to supply chain management, are being reshaped (change).

clarna reduced its customer support workload by 66 percent using AI assistants. morgan Stanley uses GPT-4 to power a knowledge assistant for financial advisors. ikea uses generative AI to summarize customer support logs and predict product return issues. unilever automates internal documents, policies, and supply chain emails.

the Nobel Prize-winning theory of innovation provides important insights here. as Agon and Howitt's model shows, creative destruction is inevitable. in the short term, there may be job losses and increased inequality, but in the long term, better, more productive jobs are created. the key is the right policies. protect workers, but don't protect jobs. We need retraining programs, strong social safety nets, and a culture that embraces change.

mokir's theory also applies. AI can strengthen the feedback loop between propositional knowledge (understanding why things work) and prescriptive knowledge (how to do things). this will increase the rate of accumulation of useful knowledge, but requires the right regulatory and social environment. we need to minimize harm without stifling innovation.

frequently asked questions (FAQ)

Q1. Who will win the Nobel Prize in Economics in 2025 and what did they win for?

joel Mokier, Philippe Agyon, and Peter Howitt were awarded the prize for identifying the prerequisites for sustainable growth through technological progress, and Agyon and Howitt for developing the theory of sustainable growth through creative destruction. They mathematically demonstrated how innovation drives economic growth.

Q2. What is creative destruction and why is it important?

creative destruction is the process by which an economy evolves as new technologies or products replace old ones. for example, the iPhone replaces the Blackberry, and electric cars threaten the internal combustion engine. This process causes job losses and company bankruptcies in the short term, but in the long term it creates better products, higher productivity, and more wealth. the Nobel Prize-winning theory of innovation shows that this is the key to sustained economic growth.

Q3. Why did BlackBerry fail and why did the iPhone succeed?

blackBerry was obsessed with physical keyboards, misjudged the consumer market, and underestimated the importance of the app economy. they saw the iPhone launch in 2007 and didn't recognize it as a threat, calling it "impossible." Apple, on the other hand, changed the smartphone paradigm with its full touchscreen, app store, and beautiful design. blackBerry's market share plummeted from 50 percent in 2009 to 3 percent in 2013 and is now effectively zero. a $67 billion valuation has evaporated.

Q4. Is electric or hybrid the future?

the 2024-2025 data reveals something surprising: While many experts predicted that pure electric vehicles would quickly dominate, hybrids are making a comeback. hybrid sales are growing faster than EVs, and they're leaving dealer inventories three times faster. the reasons: range anxiety, high EV prices, and lack of charging infrastructure. Toyota's "bridge technology" strategy is proving to be correct. while the future is still uncertain, it's likely that hybrids will stick around much longer than expected.

Q5. How can I avoid losing my job in the AI era?

According to the IMF, 40 percent of global employment is exposed to AI. but not all jobs will disappear - half will be made more productive and half will be threatened. The key is to adapt. Highly skilled workers who can leverage AI will benefit. retraining and upskilling will be essential. governments need to provide strong social safety nets and active labor market policies. as the Nobel Prize in Economic Theory of Innovation emphasizes, protecting workers, not jobs, is key.

conclusion

the 2025 Nobel Prize in Economics sends us an important message. economic growth is not a given, and we need to maintain the institutions and cultures that enable innovation to avoid reverting to stagnation. Joel Mokier has shown why Europe achieved the Industrial Revolution before China. political competition, knowledge networks, open organizations, and an Enlightenment culture were the foundations for sustained growth.

philippe Agyon and Peter Howitt mathematically proved how creative destruction works: the process of new technologies replacing old ones is the engine of economic development. the transition from BlackBerrys to iPhones, from internal combustion engines to hybrids and electric vehicles, and from traditional to AI-enhanced work are all living proof of this theory.

the Nobel Prize-winning theory of innovation provides the key to understanding the AI revolution we are currently experiencing. change is inevitable, destruction brings creation, and only those who adapt survive, but at the same time, society has a responsibility to protect and retrain the losers of change.

south Korea has experienced rapid economic growth, but more needs to be done to ensure continued innovation. we need to lower barriers to entry for businesses, invest in retraining workers, and strengthen a culture that embraces change. the work of Nobel laureates in economics provides a roadmap for this journey.

continuous learning and adaptation is essential if we are to stay ahead of the innovation curve. just as BlackBerry's obsession with physical keyboards killed it, resting on the laurels of the present will cost you the future. flexible strategies win, just as Toyota did with hybrids, and that's the lesson of the 2025 Nobel Prize in Economics.