The 2025 Nobel Prize in Economics has been awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their foundational contributions to understanding how innovation drives sustained economic expansion and improves living standards globally. Mokyr’s research emphasizes the historical role of knowledge cultures in shaping modern economies, showing how the interplay between scientific discovery and practical application has led to technological breakthroughs that boost productivity. He argues that a society’s ability to foster, share, and utilize useful knowledge is central to long-term development, with intellectual property (IP) systems playing a vital role by protecting inventors and encouraging the dissemination of new ideas. Strong IP frameworks, according to Mokyr, transform abstract knowledge into measurable economic advancement.
Aghion and Howitt are recognized for developing the theory of Schumpeterian “creative destruction,” which describes how continuous innovation displaces outdated technologies and business models, thereby enhancing productivity and societal welfare. Their work demonstrates that this process is not spontaneous but shaped by institutional support, cultural norms, and public policy—especially investments in research and development (R&D) and balanced IP protections. Temporary monopoly rights granted through patents allow innovators to recoup R&D costs, providing essential motivation for continued investment. However, the economists caution that excessive IP protection can hinder follow-on innovation and raise entry barriers for new competitors, potentially slowing progress. Their findings stress the need for carefully calibrated IP policies that encourage invention without stifling competition.
The shift toward a knowledge-based economy is evident in corporate valuation trends. In 1975, over 80% of the value of S&P 500 companies came from tangible assets such as machinery and labor. Today, intangible assets—including patents, software, trade secrets, and brand equity—account for approximately 90% of the index’s total worth. This transformation underscores the growing importance of IP in modern markets. Aghion and Howitt’s studies reveal a positive correlation between patent activity and per capita GDP growth in the U.S., reinforcing the economic value of innovation incentives. Yet they also highlight the risks of overprotection, advocating for policy frameworks that balance exclusivity with open access to knowledge.
Public investment in R&D is another key factor in sustaining innovation, especially since private firms often underinvest due to their inability to capture the full social benefits of their research. Government funding—through grants, tax credits, or subsidies—not only supports foundational science but also stimulates additional private-sector investment. Despite this, the U.S. now relies predominantly on private firms for R&D spending, a reversal from the 1960s when federal funding played a more dominant role. For private enterprises to maintain high R&D expenditures, they must be confident in their ability to protect and monetize intangible assets. This reinforces the necessity of a robust, yet balanced, intellectual property regime in economies driven by knowledge and innovation.
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The Knowledge Economy: Nobel Laureates Highlight Innovation and Intellectual Property as Keys to Sustained Economic Growth
At a pivotal moment for the world economy, the 2025 Nobel Prize in Economics rightly honors Joel Mokyr, Philippe Aghion, and Peter Howitt for showing how the forces of innovation drive sustained economic growth and lift global living standards.
Joel Mokyr was recognized for his influential work on the role of knowledge in driving sustained economic growth. He showed how the interaction between scientific knowledge and practical know-how enabled the transformation of ideas into technologies that fueled productivity and prosperity. In A Culture Of Growth: The Origins Of The Modern Economy Mokyr emphasizes that modern economic development emerged from a culture that valued the pursuit, sharing, and application of useful knowledge. Central to this process is a robust system of IP rights, which not only incentivizes the creation of new ideas but also ensures their broader dissemination and implementation. By protecting inventors and rewarding innovation, a strong IP system plays a crucial role in turning knowledge into tangible economic progress, a key insight of Mokyr’s contribution.
Philippe Aghion and Peter Howitt won the award for their groundbreaking theory of sustained economic growth through Schumpeterian “creative destruction” – a continuous cycle where new innovations continuously replaces outdated technologies and business models, boosting productivity and welfare. They emphasize that this process does not happen by accident but rather shaped by the complex interplay of culture, institutions, and public policy, particularly through public investments in research and development (R&D) and a strong intellectual property (IP) system. For the innovation cycle to be sustainable, society and the government must protect innovators’ rights, allowing them to keep control over their inventions and earn returns on their efforts. This protection provides the necessary profit incentives and motivation for inventors and firms to continue investing in and improving upon existing technologies.
More than anything, the joint work of these economists shifted the focus to the Knowledge Economy in which we all live today. In 1975, over 80% of the value of S&P 500 firms was derived from tangible assets like labor, machinery, and capital with only a small share attributed to intangible assets. Today the trend has completely reversed. Intangible assets, such as patents, trade secrets, know-how, software, and brand value, now account for around 90% of the value of S&P 500 firms.
In this modern Knowledge Economy, intangible IP assets such as patents and know-how play a critical role. Aghion and Howitt’s work underscores that patents and other forms of IP protection are essential for incentivizing innovation by providing inventors temporary monopoly power to recover R&D investments. Their research, for instance, shows a positive correlation between patent activity and per capita GDP growth in the United States. However, Aghion and Howitt also warn of the risks of overly expansive IP protections. When patent rights are too broad or too long-lasting, they can actually stifle innovation by blocking follow-on inventions and raising barriers to entry for new challengers. Thus, their work highlights the importance of striking the right balance in IP policy. It has to be strong enough to incentivize innovation, but not so strong that it suppresses competition and future progress.
The laureates further highlight the importance of investments in R&D as a driver of innovation and long-term economic growth, as well as incentives that drive those investments. They collectively make a compelling case that innovation generates positive externalities, and therefore public support for R&D is essential particularly because firms tend to underinvest in R&D given they cannot fully capture the broader social value of their innovation. Importantly, public funding (grants, subsidies, tax credits) crowds in private investment rather than crowding it out. And yet, in the United States today, the vast majority of R&D investments comes from private firms and not from public sources, a sharp contrast to the 1960s when government played a more dominant role. For private firms to continue investing heavily in R&D, they must be able to recoup their investments in intangible assets – IP, including know-how. This further underscores the essential role of a strong IP system particularly in a market-based knowledge economy like that of the United States.