How innovation drives economic growth, Pg10

Key Highlights:

• The 2025 Sveriges Riksbank Prize in Economic Sciences was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their work on innovation-driven economic growth.
• Joel Mokyr received one half of the prize for identifying the prerequisites for sustained growth through technological progress.
• Philippe Aghion and Peter Howitt jointly received the other half for their theory of sustained growth through creative destruction.
• Mokyr's research highlights the importance of both propositional knowledge and prescriptive knowledge for sustained growth.

Detailed Insights:

• Mokyr's work emphasizes that sustained growth requires a continuous flow of useful knowledge, comprising both understanding why things work (propositional) and practical instructions (prescriptive).
• Before the Industrial Revolution, innovators lacked a foundation of prescriptive knowledge, hindering the ability to build upon existing knowledge, which changed with the advent of precise measurement and reproducible experiments.
• Aghion and Howitt's model of creative destruction illustrates how technological advancement drives growth but also displaces existing technologies and firms.
• Their model helps analyze the optimal level of R&D investment by considering the benefits of replaced technologies to society and the potential for excessive profits from incremental innovations.
• Mokyr's research suggests governments should invest in skilling and foster an environment open to change to facilitate sustained growth, as innovation inevitably creates both winners and losers.

Key Concepts Involved:

• Propositional Knowledge: Understanding the natural world and the reasons behind how things function.
• Prescriptive Knowledge: Practical instructions, recipes, or drawings that describe how something works.
• Creative Destruction: The process where innovation leads to progress but also displaces existing technologies and companies.
• R&D (Research and Development): Activities undertaken to improve existing products and procedures, or to create new products and procedures.