2025 Nobel Prize in Economic Sciences Awarded
In News
What Happened
Why It Matters
Background
History & Context
What Changed
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Growth Modeling (Before vs. Now): BEFORE, the Solow-Swan model attributed long-term growth to unexplained, external technological shocks. NOW, the Aghion-Howitt 'Schumpeterian growth theory' mathematically proves that growth is endogenous, driven directly by profit-seeking entrepreneurs investing in R&D.
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Mechanism of Innovation: BEFORE, macroeconomic models (like Romer's 'expanding varieties' model) assumed new technologies peacefully coexisted with old ones. NOW, Aghion and Howitt's model incorporates 'creative destruction', quantifying how new technologies (e.g., streaming) render old ones (e.g., DVD rentals) entirely obsolete.
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View on Market Competition: BEFORE, perfect competition was viewed as the ultimate ideal, and monopolies were seen purely as market failures. NOW, Schumpeterian models show that the lure of temporary monopoly rents is the essential incentive for innovation, though permanent monopolies stifle the next wave of entrants.
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Understanding Historical Stagnation: BEFORE, historians struggled to explain why pre-18th-century societies experienced technological advances but no sustained economic growth. NOW, Mokyr's framework proves that growth requires a continuous feedback loop between 'propositional knowledge' (scientific theory) and 'prescriptive knowledge' (practical engineering).
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Economic Policy Focus: BEFORE, governments often prioritized protecting legacy industries and existing jobs to maintain economic stability. NOW, the accepted framework dictates that policy must protect the workers (via retraining and social safety nets) rather than the obsolete firms, allowing creative destruction to naturally occur.
What Did NOT Change
Despite proving the necessity of creative destruction, the laureates' work does not advocate for unregulated, cutthroat capitalism. The necessity of strong state institutions—to enforce competition policy, protect intellectual property rights, fund basic scientific research, and prevent successful innovators from blocking future entrants—remains as crucial as ever for translating technological change into broad prosperity.
Prelims Angle
NCERT Connection
Common Misconceptions
✗ Economic growth is primarily achieved by maximizing capital accumulation and maintaining perfectly competitive markets at all times.
✓ Temporary monopoly power (and the resulting abnormal profits) is a necessary incentive. Without the promise of these temporary 'rents', firms would not invest in risky Research & Development.
Basic microeconomics teaches that perfect competition is the ideal market structure for maximizing consumer surplus, often ignoring the dynamic, long-term incentives required to fund innovation.
✗ Endogenous growth theory was entirely created by Aghion and Howitt in the 1990s.
✓ Endogenous growth was pioneered by Paul Romer and Robert Lucas in the 1980s. Aghion and Howitt specifically contributed the 'Schumpeterian' branch, which added the element of 'destruction' to Romer's earlier models.
The broad umbrella term 'endogenous growth' is often conflated with its specific sub-theories, masking the distinct, Nobel-winning contribution of formalizing creative destruction.
Practice Questions
Q1
How Many CorrectConsider the following statements regarding theories of economic growth: 1. The Solow-Swan model treats technological progress as an endogenous variable driven by profit-seeking R&D investments. 2. According to Joel Mokyr, sustained economic growth requires a continuous feedback loop between propositional knowledge (science) and prescriptive knowledge (engineering). 3. The Aghion-Howitt model diverges from Paul Romer's earlier endogenous growth models by explicitly incorporating the obsolescence of existing technologies. How many of the statements given above are correct?
Q2
Match the FollowingMatch the Economic Model/Concept (List I) with its Core Characteristic (List II): List I: A. Solow-Swan Model B. Romer's Expanding Varieties Model C. Aghion-Howitt Model D. Mokyr's Framework List II: 1. Innovation continuously renders previous technologies obsolete 2. Long-term growth is driven by exogenous, unexplained technological change 3. Historical analysis of how scientific theory and practical engineering interact to form 'useful knowledge' 4. Growth occurs by inventing new types of goods that do not necessarily replace old ones Select the correct answer using the code given below:
Q3
Assertion & ReasonAssertion (A): According to Schumpeterian growth theory, government policies that strictly prevent any firm from acquiring even temporary monopoly power will maximize long-term economic growth. Reason (R): The process of creative destruction relies on the lure of temporary monopoly rents to incentivize entrepreneurs to invest heavily in research and development. Select the correct answer: