Nobel Prize for Innovation: what does that actually mean?

Rajesh Gopalakrishnan Nair, 28 October, 2025

The 2025 Nobel Prize in Economic Sciences recognised Their work historically contextualised and mathematically explained 'creative destruction' and the necessity of public patronage of innovation through R&D investment.

This award signals the formal absorption of innovation into the mainstream neoclassical economic paradigm. This article explores the implications of this watershed moment, examining the intellectual lineage of these ideas, the consequences of this 'paradigm capture', and the prize's history of selective recognition.

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The 2025 Nobel Prize in Economics has been awarded to three eminent economists—Joel Mokyr, Philippe Aghion, and Peter Howitt, for their work demonstrating the critical role of public investment in science and innovation for long-term, sustained economic growth.

Economic historian Joel Mokyr (2017) identified three prerequisites for 'sustained growth': co-evolution of science and technology, mechanical competence, and society's preparedness to disruptive change. He showed that scientific explanation of 'why innovations work' is important for systematic progression. Absence of this scientific explanatory power limited growth in the pre-industrialized world.

Econometricians Phillipe Aghion and Peter Howitt (1992) mathematically explained the process through which companies predict and invest in an optimal level of R&D for product/process improvement, leading to a selection environment that replaces older technologies with new. This is ‘creative destruction’—an idea invented by the Austrian American political economist Joseph Alois Schumpeter (1883-1950)

The award signals formal absorption of innovation into the mainstream (neoclassical) economic paradigm. While this potentially marks a watershed moment for innovation research, it also raises questions about intellectual lineage, disciplinary boundaries and normative direction.

The Schumpeterian Legacy

Schumpeter introduced the concept of 'innovation' in his 1934 book 'The Theory of Economic Development' as the engine of the capitalist mode of production. Although his theory left a lasting impact on economic thought, it was never absorbed into the mainstream (neoclassical) economics. Neo-Schumpeterians later developed and paradigmatically positioned it for a head-on collision with mainstream economics. This makes its belated recognition all the more significant and somewhat amusing!

‘Creative destruction’ has its roots in Karl Marx’s notion of capitalism as a dynamic system that evolves through internal contradictions (Reinert and Reiner 2006). Schumpeter reframed it in a more evolutionary and less revolutionary tone. The phrase itself is said to be drawn from Indian metaphysics—the cosmic dance of ‘Shiva’, the Hindu deity—introduced to the West by Nietzsche (Soumonni and Muchie 2023). This adds yet another layer of philosophical intrigue to its neoclassical embrace.  

Schumpeter’s rejection of the neoclassical axioms (equilibrium, marginalism, and value-neutrality) kept his work outside mainstream economics. Following his death in 1950, his theory was eclipsed by the Keynesian paradigm, which dominated economic policy until its collapse in the wake of the global economic crisis in the 1970s. The subsequent rise of monetarism ushered in neoliberalism, a political philosophy that neoclassical economics adopted to advance its agenda of free markets, deregulation, and state withdrawal.

Since its separation from classical political economy in the late 1800s, neoclassical economics has positioned itself as a science, value-neutral and apolitical. Its simplified growth models accounted for only two variables: capital and labour, treating technology as ‘exogenous’, as if it were readily available like ‘manna falling from heaven’ (Robinson 1949). The first serious attempt to explain the technology came in 1957, when Robert Solow modelled it as a large unexplained ‘residual’. This earned him a Nobel Prize in 1987, recognizing his effort to bring the neoclassical paradigm closer to technology, without which it could no longer influence policy and power.   

The ‘Solow residual’ sparked a renewed interest in technology and innovation, drawing together a bunch of interdisciplinary scholars who would be identified later as ‘neo-Schumpeterians’. Frustrated by the neoclassical inattention to technology they built upon Schumpeter’s theory and founded a new discipline called ‘Innovation Studies’.

The 1970s economic crisis put the neoclassical paradigm in a tough situation as it could not find a way out of the global economic meltdown. Neo-Schumpeterians leveraged this opportunity to propose an alternative paradigm—National Innovation System (NIS) (Freeman 1987, Lundvall 1992), armed with the robust theoretical foundation provided by evolutionary economics (Nelson and Winter 1982) and the institutional space and policy legitimacy offered by the OECD (Mytelka and Smith 2002).

NIS challenged the neoliberal emphasis on wage competition and knowledge suppression and called for 'structural competitiveness'—that is public investment to enhance national innovation capabilities (Freeman 2004). By mid-1990s many countries adopted NIS as national policy framework. All this offered a tough resistance to the deepening of neoliberalism.  

But neo-Schumpeterians were not alone in this struggle. Joan Robinson, for instance, pioneered research on endogenous determinants of technological change as early as 1949. Her critique of the growth theory, advocacy of Listian ‘systems approach’, use of historical methods, and engagement with the Schumpeterian legacy not only resembled but also preceded the NIS approach. Yet, her work was largely overlooked by both neoclassicals and neo-Schumpeterians (Oughton and Tobin 2023). 

As the neoclassical camp became increasingly aware of the policy relevance of technology and innovation, and its own limitations in addressing them, it began to recognise more modelling work focussed on innovation. This shift encouraged development of more endogenous growth models such as Robert Lucas’ 1988 model of human capital accumulation and Paul Romer’s 1990 model of technological change through R&D and knowledge spill overs. They were subsequently laureated in 1995 and 2018 respectively. Aghion and Howitt are the latest entrants to this lineage.

Paradigm Bridging vs Territory Expansion.

Nobel Prize Outreach (2025) indicates that the award recognises Mokyr’s work "The Lever of Riches: Technological Creativity and Economic Progress" (Mokyr 1990) and the journal article "A model of growth through creative destruction" by Aghion and Howitt (1992). Through this strategic combination, the Nobel Committee hopes to compensate for the absence of a unified neoclassical framework that combines empirical analysis with historical context—an inherent and debilitating weakness for which the neoclassical paradigm has been incessantly critiqued. This shortcoming has now been ingeniously addressed by embedding the econometric model within a broader narrative of the economic history of innovation, even though the works themselves stand independently.

Mokyr (1990) surveys the relationship between technology and economic progress from ancient times to the First World War, in a bid to explain why Europe was more technologically creative and economically advanced than China, India and civilisations elsewhere. He argues that a cultural mindset that supported creativity was a determinant of the Europen society's inventiveness, innovativeness and thereby technological creativity and economic advancement.

While widely acclaimed Mokyr’s work is also critiqued for an over emphasis on culture and ideas, neglect of institutions, institutional change and economic cycles, a strong Eurocentric bias and elite centric narrative etc. While Mokyr has discussed institutions, he treats them as environments in which culture evolves, and not as causal agents of change. This rather downplays the role of institutions in technological and societal change—a central theme in evolutionary economics and innovation systems. Mokyr is also critiqued for downplaying factory-floor innovations, which accounted for major productivity growth during industrial revolution (Hodgson 2022, McAllister 2017, Diebolt 2017, Clark 2012).

Aghion and Howitt (1992) developed a simple yet elegant mathematical model of the Schumpeterian theory of capitalist growth. Schumpeter demonstrated two major patterns of industrial innovation. In “Theory of Economic Development (1934)”, analysing the late nineteenth century European industrial scenario dominated by numerous small firms, he argued that the ease of entry allowed new entrepreneurs to introduce new ideas, replace the old ones along with rents associated with them, disrupt the manner of production, and drive progress.

Evolutionary economists Nelson and Winter (1982) called this pattern ‘Schumpeter Mark-I’. In “Capitalism, Socialism and Democracy (1942)”, Schumpeter introduced the second pattern based on the early twentieth century American industrial scenario dominated by large firms. Institutionalisation of innovation through large-scale R&D enabled them to create entry barriers for new entrepreneurs, and harvest monopoly rents. This pattern was called Schumpeter Mark-II.

According to Aghion and Howitt (1992), these models co-exist and evolve. Mark-I fuels early-stage innovation and diversity. Mark-II supports cumulative innovation and sustained growth. Nevertheless, old and new firms experience a differential comparative advantage with respect to R&D investments favouring the young, small firms. As the incumbent large firms have less incentives to make huge investments in R&D they resort to creating entry barriers to new firms in a rent seeking behaviour. Hence, institutional balancing through government R&D subsidies are essential to prevent entry-barriers and monopoly rents, thereby ensuring uninterrupted creative destruction.

While this model brings the neoclassical paradigm a step closer to the neo-Schumpeterian paradigm, contradictions in their theoretical foundations prevents total convergence. In the Schumpeterian model, the state of perpetual disequilibrium is what fuels innovation-led progress. On the contrary in the neoclassical model, welfare maximization happens at a state of equilibrium resulting from competition of market forces.

The New Growth Theory underlying Aghion and Howitt (1992), and Aghion et al. (2021) retains neoclassical assumptions. While emphasising patents they overlook systemic and historical approaches. The model treats wages as outcome of innovation, which is opposed to both Joan Robinson’s and the neo-Schumpeterian arguments of wages driving innovation by stimulating demand and investment. The model is critiqued for its failure to explain declining productivity, neglecting non-frontier innovation, and overt supply-side focus overlooking public sector roles and demand side constraints such as wage-stagnation and inequality (Oughton and Tobin 2023, Sanders 2025, Treibich 2025, Durand 2025).

Notwithstanding these differences neo-Schumpeterians have generously welcomed the prize    as a belated recognition of their ‘strategic research choices made in the 1980s’ (Soete and Verspagen 2025) and for building a bridge between neoclassical economics and heterodox, institutional and evolutionary approaches (Sanders 2025). The key question is whether this award signals a genuine bridging of paradigms or a mere extension of intellectual territory. While this may sound sceptical, it is a necessary inquiry, because the answer suggests the future trajectory of innovation-led growth, particularly in the context of grand societal challenges.   

Historically, the Nobel Prize has legitimised and institutionalised ideas, often leading to their paradigmatization (Sebastian and Chen 2021). Paul Samuelson's (1970) and Robert Solow's (1987) Nobel prizes helped cement Keynesian economics as a dominant paradigm in the mid-20th century. Similarly, Elinor Ostrom's 2009 award brought Institutional Economics and the study of Commons Governance into mainstream economic discourse.

The 2025 award has effectively sanctioned the integration of innovation into the neoclassical framework, thereby consolidating its intellectual hegemony. The award is likely to trigger proliferation of university departments, research centres and journals dedicated to a new "neoclassical innovation-economics". This in turn would set stage for its competition with other interdisciplinary fields studying innovation—for both resources and policy attention.

Major issues addressed in Mokyr (1990) and Aghion and Howitt (1992) that the award committee has recognised as prize-worthy have been previously studied in depth elsewhere. But neither recognises any of those studies (except Nelson and Winter 1982) by appropriate citations. A summary of a preliminary exploratory analysis is furnished in the table below. This suggests that the scholars aim to consolidate ‘neo-Schumpeterian economics’ as a new disciplinary specialty within the neoclassical paradigm—an effort they may well succeed in, given the powerful legitimacy conferred by the Nobel Prize.

Notably, this consolidation occurs without acknowledging prior foundational work in the field. Soete and Verspagen (2025) in their cautious congratulatory note, makes a subtle reminder that “…while each Nobel Prize draws attention to the extraordinary work of the Prize winners, it also signals the role of the broad academic community in which this work takes place…”.

Topics addressed by Mokyr (1990) and Aghion and Howitt (1992), Aghion et al (2021)	Existing work by Innovation Studies / Evolutionary Economics / heterodox economics etc. not cited by Mokyr, Aghion and Howitt.
Analysis of secular stagnation, historical enigmas associated with the process of world growth, and the role of the state and civil society in innovation and growth.	The distribution of income and policies to speed up scientific discovery, innovation and diffusion (Robinson 1974/1980, 1949)
Scientific understanding as a basis for innovation: Mokyr found that growth accelerated when innovation was grounded in scientific understanding.	Role of STI and institutions in shaping innovation. Universities and institutions as central actors in the NIS (Freeman 1974, Rothwell et al. 1974)
Creative destruction and market competition: Aghion and Howitt modelled how competition drives innovation by replacing old products and processes.	SPRU work has long engaged with Schumpeterian dynamics, new technology systems, 'long waves and structural changes', techno-economic paradigm, etc. (Freeman, C., Clark, J., & Soete, L. 1982, Freeman, C., & Perez, C. 1988)
Limits of R&D Investment: In the long run, older firms lose incentives for R&D investments.	SAPPHO project showed that success in innovation depends on user needs and external knowledge, not just R&D spending. (Rothwell et al. 1974). Freeman (1987) emphasised routines, learnings and bounded rationality, and the state's role in coordinating innovation.
Entrepreneurial state: state subsidies are needed to sustain innovation beyond market incentives.	The state as the central actor in coordinating innovation systems (Freeman 1987, Lundvall 1992). SPRU pioneered the idea of state-led innovation (Freeman & Soete, 1994). Mazzucato (2013) pioneered the idea of the entrepreneurial state.
Social Consequences of Innovation: Safety nets are needed, as innovation could cause job losses and firm failures.	Nelson & Winter (1982) focused on uneven impacts and structural change. Freeman et al. (1982) discussed unemployment and Technical Innovation. Long-wave theory linked innovation to structural changes (Freeman & Perez, 1988). Freeman's (1987) research on Japanese NIS showed how institutions mitigate the negative impact of innovation.
Green Innovation and Sustainability: concerns about environmental degradation and innovation for sustainability.	SPRU led early work on sustainability and greening of technology (Freeman 1994), environmental policy and green growth (Soete 2019), Green techno-economic paradigms (Freeman and Perez 1988), and environmental externalities (Freeman and Louca 2001).
Openness and Global Collaboration as driving innovation vs protectionism hindering growth.	SPRU research emphasised international collaboration and global knowledge flows (Freeman and Soete 1997), Catching up and global diffusion (Freeman 1995, Freeman and Louca 2001, Perez and Soete 1988)

What this means to Innovation policy?

A major critique on Science Technology and Innovation (STI) policy since the Lund declaration has been that in its current framing, it is unfit-for-purpose to addressing grand challenges. The argument is that STI policy is trapped in its preoccupation with economic growth. Hence a reframing is necessary before it can be employed to redirect innovation to meet societal challenges (Schot and Steinmueller 2018). This cogent argument has stirred the STI research and policy communities alike driving them to think of alternative frameworks capable of addressing this formidable challenge.

It is at this juncture that the Nobel Prize has been appropriately awarded to foundational theoretical contributions in innovation. While the award confers powerful legitimacy to innovation policy, an important question arises: how it helps reframing STI policy (and research) for transformational purposes?

While Mokyr, Aghion, and Howitt demonstrate the role of innovation in driving long-term 'sustained' economic growth, their frameworks apparently treat economics as a value-neutral science, without any normative direction.  While this is consistent with the fundamental ethos of neoclassical economics, it is not helpful for an innovation policy fit for transformational purpose.

Mokyr’s historical analysis acknowledges environmental sustainability as a cost, and social exclusion as a consequence of progress. Societal challenges is a central concern in Aghion’s and Howitt’s growth strategy, which demands innovation policy, safety nets and civil society action. But the proposal is to achieve them through neoclassical market-based instruments of tax incentives, subsidies, and such other temporary measures.

In a 2009 NBER working paper coauthored with Daron Acemoglu, Aghion states that “environmental problems can be solved with only temporary intervention and without causing major long-run distortions” ... and that “...optimal environmental regulation involves small carbon taxes because research subsidies are able to redirect innovation to clean technologies before there is more extensive environmental damage.”

This simplified view of innovation, technical change and behavioural change persuades policy that institutional changes are less important than innovation under laissez-faire and carrot and stick taxation strategies. Such a perspective not only fails to support current efforts for transformational innovation policy but may even undermine them. Nevertheless, these efforts might still draw some spill-over benefit from the legitimacy that the Nobel Prize grants to innovation as a policy tool.

What this moment signals to STI policy research is the need to continue its boundary-spanning engagement with both policy and politics, in order to build a new paradigm capable of driving transformative innovation and systemic change. The innovation policy research community should remain alert to the opportunity to leverage the extraordinary attention from policy and politics that this Nobel Prize has brought to innovation.     

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