Published in South Asia Journal. October 25, 2025
This year’s Nobel laureates in economics — Joel Mokyr, Philippe Aghion, and Peter Howitt — received the prize for their research on, among other things, creative destruction. The idea that “destruction” itself can be creative was first presented as a theory by Harvard professor Joseph Schumpeter, who remains a favorite economist of millions, including myself.
What is this theory that has been discussed by students and teachers for generations?
Its central idea is that economic growth, the evolution of capitalism, and technological progress occur through a continuous cycle in which new technologies, products, institutions, or business models replace the old ones. Schumpeter placed particular emphasis on the role of the entrepreneur. Indeed, the entrepreneur is the driving force of innovation, because, according to Schumpeter, it is the entrepreneur who breaks down existing structures and reorganizes resources in new and more productive ways.
He considered the capitalist economy to be inherently dynamic. According to him, progress depends on continuous change — the decline of old industries, the emergence of new ones, and the replacement of outdated methods. Although this process is creative, it also has destructive aspects. Schumpeter warned of its negative consequences — such as economic instability, worker displacement, and political resistance from entrenched interest groups. Notably, these symptoms are now visible in Bangladesh.
Schumpeter elaborated on these ideas in his famous book Capitalism, Socialism and Democracy. In the same work, he also argued that capitalism would ultimately destroy itself as it evolved. He reasoned that the socio-psychological foundations of capitalism would gradually erode and eventually vanish. In this sense, his words seem to echo those of Karl Marx.
However, the causes he identified were different from Marx’s. Schumpeter argued that capitalist institutions, bureaucracies, and vested interests typically resist change. He further predicted that bureaucracy would eventually dominate industrial enterprises, diminishing the spirit of innovation. Massive inequality, he warned, would emerge — leading to public resistance and, consequently, increased state control and regulation. In other words, capitalism would meet its demise. Thus, Schumpeter suggested that the real challenge lies in sustaining the vitality and dynamism of innovation while skillfully managing its destructive outcomes. The downfall of capitalism, though undesirable, is an inevitable fate.
What did he say about socialism? He did not support Marx’s revolutionary communism, but he believed that through democratic and bureaucratic evolution — and due to the instability created by capitalism’s creative destruction — a form of socialism would gradually replace capitalism. This transformation, he argued, would occur peacefully. However, Schumpeter was skeptical about the efficiency of socialism. In his view, innovation under socialism would not be as dynamic as in capitalism, and the system would lack entrepreneurial energy.
The 2025 Nobel Prize in Economics was awarded “for explaining innovation-driven economic growth.” One part of the prize went to Joel Mokyr, while the other was jointly awarded to Philippe Aghion and Peter Howitt.
Mokyr identified the preconditions for sustained growth through technological progress. His research demonstrated how creative destruction becomes possible — what conditions allow innovations to build upon one another, and which social, cultural, and institutional factors sustain innovation over centuries. In particular, he showed that a knowledge-based culture, institutions that encourage freedom of exchange, and a mindset open to risk-taking are all crucial. Without these, the process of innovation can stagnate.
Philippe Aghion and Peter Howitt, in their model, explained how sustained growth can occur through Schumpeter’s theory of creative destruction. They transformed qualitative insights into a precise and analytically testable framework. These models help us understand how innovation generates growth from within the economy, how old institutions are displaced, how competition stimulates innovation, and how economic policies, institutions, and market structures influence this dynamism. The central premise of their theory is that growth emerges from a continuous cycle of innovation and destruction.
The Royal Swedish Academy awarded the prize to these three economists “for explaining innovation-driven economic growth.” The Academy noted that their work demonstrates that “economic growth cannot be taken for granted; it requires continuous effort,” and that “to avoid stagnation, the processes underpinning creative destruction must be kept alive.” They also explained how new products and discoveries accelerate economic growth.
To grasp the true significance of this Nobel-winning research, we must see how it builds upon Schumpeter’s original theory. Schumpeter’s framework was primarily philosophical and conceptual. Aghion and Howitt placed his ideas within a formal mathematical structure, allowing for quantitative analysis. Mokyr, on the other hand, added historical and institutional depth — exploring the long-term social, cultural, and scientific factors that make creative destruction possible. He identified the essential preconditions for sustaining innovation, encompassing cultural, institutional, and scientific dimensions.
The new research helps us understand which policies stimulate innovation and what their potential drawbacks are — for instance, how to preserve competition, how to design patent systems, how to address resistance from incumbents, and how institutions can remain open to new ideas. In this sense, their work represents a major advancement beyond Schumpeter’s original theory.
They also integrated Schumpeter’s ideas with more contemporary issues such as globalization, trade, openness, and the challenges of stagnation. The 2025 Nobel laureates’ research offers deep insights into why some economies, despite having access to technology, become stagnant or fail to innovate.
The celebrated 1992 article by economists Philippe Aghion and Peter Howitt, “A Model of Growth through Creative Destruction,” marked the birth of modern Schumpeterian growth theory. Through it, they transformed Schumpeter’s qualitative insights into a formal theoretical model. According to their framework, growth arises from a continuous process of innovation, in which new products and processes replace old and inefficient ones.
In earlier exogenous growth models, technological progress was treated as an external factor. Aghion and Howitt, however, made it endogenous — that is, driven by deliberate efforts and incentives. Firms invest in research and development to gain temporary monopoly power, but once superior technologies emerge, the old ones are replaced. Progress thus occurs through competition among innovators — a perpetual race in which success may be short-lived, yet society as a whole benefits from it.
While Aghion and Howitt presented the mechanics of innovation through formal models, economic historian Joel Mokyr explored its spirit. In his books The Lever of Riches and A Culture of Growth, Mokyr asked two profound questions: Why did the Industrial Revolution occur in Europe — and why did it endure? After years of research, he found his answer. He discovered that the Industrial Revolution was not merely a revolution in markets or machinery, but a revolution in thought, mindset, and culture.
According to Mokyr, Europe’s economic transformation emerged from a unique cultural and intellectual environment — one that valued curiosity, experimentation, and rational inquiry. The so-called “Republic of Letters” — a transnational network of scholars, scientists, and inventors across Europe — allowed knowledge to flow freely across borders. This openness gave rise to what Mokyr calls “the Industrial Enlightenment,” a period when scientific discovery and technological innovation began to reinforce one another.
For Mokyr, innovation is not merely an economic activity; it is a cultural institution. Progress occurs when a society rewards new ideas and tolerates the uncertainty that accompanies them. But where imitation, censorship, or fear of failure prevail, the light of creativity fades. His research offers a profound historical lesson: for sustainable growth, capital and labor alone are not enough — a thriving ecosystem of freedom, trust, and intellectual openness is equally essential.
What can Bangladesh learn from this research? The country’s garments industry has been the cornerstone of its industrialization. However, to remain competitive, it must increasingly rely on automation, design innovation, and environmentally sustainable production methods. Similarly, the rise of Bangladesh’s digital economy — from e-commerce to IT services — requires preparing young entrepreneurs to innovate.
Bangladesh’s growth model, driven by cheap labor and export-oriented production, though impressive, cannot be sustained indefinitely. The challenge now is to foster innovation-driven growth — one that depends not merely on physical infrastructure, but on creating an environment where creativity, experimentation, and entrepreneurial spirit can flourish.
N N Tarun Chakravorty 