THE BRIEF #016 The Nexus Between Innovation and Economic Growth

IN BRIEF

The winners of this year’s Nobel Prize in Economics show the relationship between scientific and technological innovations and sustained economic growth. What are the factors involved in making this connection work? And is economic growth, on its own, enough?

THE GIST

On October 13, 2025 it was announced that this year’s Nobel Memorial Prize in Economic Sciences was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt “for having explained innovation-driven economic growth.” Providing context for the decision, the Royal Swedish Academy of Sciences stated: “Over the past 200 years, the world has witnessed more economic growth than ever before. Its foundation is the constant flow of technological innovation; sustained economic growth occurs when new technologies replace old ones as part of the process known as creative destruction.”

Joseph Schumpeter’s concept of “creative destruction” refers to the process by which innovation continually disrupts and transforms the economy. He argued that capitalism advances through cycles in which new technologies, products, and business models replace outdated ones — destroying old industries while creating new opportunities for growth. Think, for example, of the potential decline of industrial livestock and the rise of cultivated meat.

A process of creative destruction is almost certainly underway today with the diffusion of AI. There are widespread concerns that AI, combined with automation, might drive a large proportion of the workforce into unemployment. Experts around the world are striving to understand AI’s impact on the labor market. As discussed on The Brief last month, recent studies suggest that instead of triggering large-scale layoffs, generative AI is more likely contributing to a slowdown in the hiring of junior and entry-level positions.

THE TAKEAWAY

Now, to understand the impact of AI or any other new technology on society, first it is helpful to grasp what factors are necessary for new ideas to bear fruit and create economic growth. Here the work of this year’s Nobel Prize in Economics winners is extremely relevant. First, practical, technical, and commercial knowledge are necessary. Joel Mokyr stressed that sustained growth first occurred in Britain because it was home to many skilled artisans and engineers who were able to transform ideas into commercial products. Another factor that Mokyr claims is necessary for sustained growth is that society is open to change. New inven-tions replace old technologies and can destroy existing structures and ways of working, which is why new technology is often met with resistance from established interest groups. The Enlightenment brought a generally increased acceptance of change, Mokyr has argued.

But is economic growth, on its own, enough? In his recent book Growth: A Reckoning, economist Daniel Susskind argues that while technological innovation has long been the engine of prosperity, its benefits are no longer translating into broad-based economic or social progress. Automation, AI, and other frontier technologies are increasing productivity but not necessarily improving living standards or reducing inequality. Susskind’s key point is that societies must rethink how the gains from technological progress are distributed and how innovation can be directed toward inclusive forms of growth.

Amid processes of creative destruction like the one we are currently going through with the spread of AI, policymakers should ensure that the rewards from innovation are equitably distributed across society, take measures to address systemic inequalities, and promote shared prosperity.

DELVE DEEPER

Scientific background to the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2025 (The Royal Swedish Academy of Sciences, 13 October 2025)

A Culture of Growth: The Origins of the Modern Economy (Joel Mokyr, 2016)

A Model of Growth through Creative Destruction (Philippe Aghion and Peter Howitt, 1992)