Three researchers nab Nobel economics prize for explaining ‘creative destruction’

Three researchers who probed the process of business innovation won the Nobel memorial prize in economics Monday for explaining how new products and inventions promote economic growth and human welfare, even as they leave older companies in the dust.

Their work was credited with helping economists better understand how ideas and technology succeed by disrupting established ways – a process as old as steam locomotives replacing horse-drawn wagons and as contemporary as e-commerce shuttering shopping malls.

The award was shared by Dutch-born Joel Mokyr, 79, who is at Northwestern University; Philippe Aghion, 69, who works at the Collège de France and the London School of Economics; and Canada-born Peter Howitt, 79, who is at Brown University.

The winners were credited with better explaining and quantifying “creative destruction”, a key concept in economics that refers to the process in which beneficial new innovations replace – and thus destroy – older technologies and businesses.

The concept is usually associated with economist Joseph Schumpeter, who outlined it in his 1942 book Capitalism, Socialism and Democracy. Schumpeter called the concept “the essential fact about capitalism”.

The Nobel committee said Mokyr “demonstrated that if innovations are to succeed one another in a self-generating process, we not only need to know that something works, but we also need to have scientific explanations for why”.

Aghion and Howitt studied the mechanisms behind sustained growth, including in a 1992 article that offered a complex mathematical model for creative destruction that added new aspects not included in earlier models.

Examples of creative destruction include e-commerce disrupting retail, streaming services replacing videocassette and DVD rentals, and internet advertising undermining newspaper advertising. A classic illustration is horse-cart whip makers put out of business by the automobile.

“The laureates’ work shows that economic growth cannot be taken for granted. We must uphold the mechanisms that underlie creative destruction, so that we do not fall back into stagnation,” said John Hassler, chair of the committee for the prize in economic sciences.

Howitt and Aghion’s model showed that markets with too few dominant companies can hinder innovation and growth – a concern that has been raised about industries such as telecommunications, social media platforms and airlines.

They found it was important to support people who are affected by changes while making it easy to move to more productive workplaces – to protect workers more than specific jobs. They also stressed the importance of social mobility, where a person’s profession or trade is not defined by their parents’ identity.

Mokyr has long been known as an optimist about technological innovation. About a decade ago, many economists took a more pessimistic view, arguing that inventions such as smartphones, or even the Internet, had less of an economic impact than previous developments such as the airplane or the car.

Mokyr responded that, because many new services were either cheap or free, their impact wasn’t evident in economic data, but they still provided enormous benefits.

Mokyr, whose work stresses the need to be open to innovation and change, acknowledged that the disruption from new inventions often caused at least short-term job loss or reduced earnings for workers. Like many economists, he argued that the innovations also created new, unexpected jobs that offered fresh opportunities.

The Nobel committee noted that, for much of human history, economic stagnation, rather than growth, was the norm. Starting with the Industrial Revolution in the 18th century, however, European and, later, other economies, began to grow steadily.

Innovation – and how to foster it – is an urgent question in Europe, where a report by former European Central Bank head Mario Draghi argued that Europe faces a rising productivity gap with the United States in digital technology. Aghion said the challenge was for Europe to keep pace with the US and China in innovation by promoting research and, through venture capital financing, to turn ideas into businesses.

The new US tariffs, or import taxes, are “not good news for growth” but can be “a wake-up call for Europe”, he told AP. “We have to wake up. Because, you know who will win in this competition? Those who innovate.”

AP