Why the 2025 Nobel Prize in Economics matters for innovation policy

Note: The research careers for this year’s triple winners support the underlying arguments for public involvement in technology-based economic development. Well-designed and sustained public-private regional innovation initiatives—the work of SSTI and its member organizations—can make a positive difference for local competitiveness.  

When economist Joseph Schumpeter described creative destruction in the 1940s, he captured a paradox at the heart of capitalism: progress depends on disruption. Old industries must give way so that new ones can emerge. For decades, this insight has shaped how we understand economic change, but Schumpeter could only describe the pattern, not explain why it began when it did or how societies sustain it over time. 2025 Nobel laureates Joel Mokyr, Philippe Aghion, and Peter Howitt built upon Schumpeter’s foundational ideas to show how continuous innovation became the defining feature of modern growth and how it can be strengthened or undermined by public policy.

Mokyr’s historical research showed that the Industrial Revolution wasn’t a single moment, but a shift in how science (knowing why) and technology (knowing how) worked together. Once scientific understanding began reinforcing practical invention and societies became more open to new ideas, innovation became self-perpetuating. Later work by Aghion and Howitt formalized this in a model of economic growth. Their theory captures the essence of Schumpeter’s insight that when new and better technologies emerge, they create winners and losers. The process is creative because it generates new possibilities, but also destructive, because it displaces firms, workers, and ideas that can’t keep up. Their work showed that competition, openness, and incentives for innovation fuel long-run prosperity. They also demonstrated that if entrenched interests or rigid institutions suppress or block new entrants, innovation slows and economies risk stagnation.

The work of Mokyr, Aghion, and Howitt underscores the importance of building innovation ecosystems rather than isolated programs. Economic development agencies can cultivate these systems by linking universities, technical colleges, entrepreneurs, and manufacturers, creating the feedback loops between science and technology that Mokyr identified as the core of sustained progress. States can also invest in practical skills such as apprenticeships, advanced manufacturing training, and maker spaces to foster the mechanical competence that drives modern advanced industries. Mokyr also demonstrated that ideas spread faster in societies that reward transparency and the exchange of ideas. States can help create open accountability and creativity by supporting shared test beds, open data platforms, and cross-sector partnerships that encourage knowledge flow.

Aghion and Howitt’s model demonstrates that reducing regulatory barriers and ensuring fair access to state procurement and incentives can help small and young companies challenge incumbent firms and drive economic growth. Yet because creative destruction inevitably disrupts established jobs and industries, innovation policy should also be paired with support to help communities and workers adapt rather than resist. And tailoring strategies to local conditions, rather than applying one-size-fits-all models, will help ensure that all regions contribute to national growth.  

At the federal level, Mokyr, Aghion, and Howitt’s work suggests that policy should sustain the basic research infrastructure to fuel discovery (sustaining and increasing federal R&D investments), ensure competition and antitrust enforcement, and support retraining systems that ease adjustment to technological change. Current federal programs, such as NSF Engines, DOE Lab Partnerships, Build 2 Scale and EDA Tech Hubs, recognize that continued economic growth depends on  regionalized innovation investments.

As a central part of creating and supporting innovation ecosystems, universities can strengthen translational science, promote interdisciplinary and hands-on learning, and act as regional anchors that connect people, ideas, and capital. By aligning their research priorities with regional needs and building partnerships with industry and government, universities can become catalysts of precisely the “knowing why/knowing how” feedback loop that Mokyr described.

The 2025 laureates’ work suggests that innovation policy must be evidence-based and adaptive. Monitoring firm formation, patenting, workforce transitions, and technology adoption allows governments to see whether the mechanisms of creative destruction remain healthy or if policy corrections are required.