This year's Nobel Prize in economics went to Joel Mokyr, a professor at Northwestern University in the United States; Peter Howitt, a professor at Brown University in the United States; and Philippe Aghion, a professor at the London School of Economics and Political Science in the United Kingdom, who identified the factors that make sustained economic growth possible.
According to the Nobel Committee for the Royal Swedish Academy of Sciences on the 13th (local time), the three professors, using different methods, uncovered how "creative destruction" leads to sustained economic growth. Mokyr identified the mechanisms enabling sustained growth through historical analysis, while Aghion and Howitt did so through mathematical economic models.
The Nobel Committee highlighted the importance of sustained growth by citing the economic development of the United Kingdom and Sweden. According to the Committee, per capita gross domestic product (GDP) in the two countries saw little change from 1300 to 1700. Even though new ideas emerged, they had little effect on growth across the broader economy.
But after the Industrial Revolution in the 19th century, the United Kingdom and Sweden achieved a dramatic leap unlike the past. Many industrialized countries, including the two, recorded average annual growth of around 2%, and economic growth became not a temporary event but a new "steady state."
The Committee said, "This means that income doubles over one person's working life," adding that uncovering how sustainable growth occurred during the Industrial Revolution "has a major impact on the world and the quality of human life."
◇ Mokyr: "UK and Sweden's economic growth owed to technological progress and an open society"
Economic historian Mokyr examined how technological progress led to sustainable economic growth, based on historical observation.
He explained that two types of knowledge are needed for economic growth. One is "propositional knowledge," which shows why things work, and the other is "prescriptive knowledge," which explains the procedures and methods required for things to work.
He argued that before the Industrial Revolution, technological innovation relied mainly on prescriptive knowledge. People knew that things worked but did not know why. However, with the rapid advances in science in the 16th and 17th centuries, interaction between propositional and prescriptive knowledge improved. As a result, useful knowledge that could be applied to the production of goods and services accumulated.
In particular, Mokyr pointed to the presence of skilled artisans and technicians as the reason sustained growth first occurred in the United Kingdom. To realize new ideas, practical, technical, and commercial knowledge are all needed, and the artisans in the United Kingdom at the time had the capacity to understand designs and turn them into commercial products.
He also emphasized that society at the time was open to change. New technologies often threaten the interests of existing privileged groups and prompt resistance, but the wave of Enlightenment that swept through the 16th and 17th centuries increased receptivity to change. The analysis is that such institutional changes removed major barriers that had blocked sustained growth.
◇ Aghion and Howitt analyze the optimal scale of R&D for economic growth
While Mokyr identified the drivers of economic growth through historical observation, Aghion and Howitt presented mathematical economic models using modern data to explain how technological progress leads to sustained growth.
The two economists focused on the dynamism of competition and innovation among corporations below the national level of growth. Aghion and Howitt argued that the process of "creative destruction," in which corporations and jobs constantly disappear and reemerge, is the core mechanism of sustained growth.
Corporations that develop better products or more efficient production methods rise to the top of the market, but soon other corporations threaten that position with better innovations. The explanation is that these forces balance and lead to economic growth.
The two professors cited as evidence that the more corporations increase research and development (R&D) investment, the shorter the average innovation cycle becomes. For example, the more corporations judge that they can obtain temporary monopoly profits through patents, the more R&D investment increases, the shorter the innovation intervals become, and the corporation currently at the top is pushed down the competitive ladder.
Based on this, the two professors analyzed the appropriate scale of R&D to achieve the optimal level of economic growth. In the process, they saw R&D as interacting with different markets—production, finance, and household saving—and built a general-equilibrium macroeconomic model in which all these markets are in balance. In a 1992 paper, they presented the first macroeconomic model of creative destruction.
◇ Nobel Committee: "We must recognize and respond to threats to sustained growth"
Regarding their research, the Nobel Committee said, "It helps us understand today's trends and how to respond to important issues," adding, "In particular, Professor Mokyr's research shows that artificial intelligence (AI) can strengthen interaction between propositional and prescriptive knowledge and accelerate the pace of useful knowledge accumulation."
The Committee also said, "Their research shows that we must recognize and respond to threats to sustained growth," adding, "Such threats can stem from excessive market dominance by a few corporations, restrictions on academic freedom, knowledge expansion that remains at the local level, or the exclusion of groups that could be disadvantaged."
The Committee said, "If we fail to respond to these threats, the engine of creative destruction that has brought us sustained growth could stop," adding, "But if we follow the laureates' important insights, we can avoid that."