Nobel Prize in Economics 2025: Joel Mokyr, Philippe Aghion and Peter Howitt – Growth and prosperity need innovation!

Nobel Prize in Economic Sciences 2025: Those who slow down investments lose – a warning for the German economy

The 2025 Nobel Prize in Economic Sciences went to three researchers whose work contains a clear message for German economic policy: Joel Mokyr, Philippe Aghion, and Peter Howitt were honored for their groundbreaking insights into innovation-driven growth. Their research demonstrates that sustainable prosperity can only be achieved through continuous innovation and the willingness to creatively disrupt outdated structures. These findings are particularly crucial for Germany, which has been experiencing three years of growth stagnation.

US-Israeli economic historian Joel Mokyr of Northwestern University receives half of the prize for his historical analysis of the prerequisites for sustainable growth through technological progress. The other half is shared by Frenchman Philippe Aghion of the Collège de France and Canadian Peter Howitt of Brown University for their theory of permanent growth through creative destruction. Their work makes it clear that economic growth cannot be taken for granted, but must be actively promoted through the right framework.

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Historical Roots: How Innovation Changed the World

The Nobel laureates' findings are based on a profound historical analysis of the Industrial Revolution and its consequences. Joel Mokyr's work demonstrated that the transition from centuries of economic stagnation to sustained growth was based on fundamental changes in the way societies dealt with knowledge and innovation. Until the Industrial Revolution, people's living standards changed little from generation to generation. Only in the last 200 years has continuous growth become the new normal.

The decisive breakthrough occurred when two forms of knowledge were combined: practical skill knowledge and scientific propositional knowledge. Mokyr describes this as the transition from merely knowing that something works to understanding why it works. This combination made it possible to build on existing inventions and initiate a self-sustaining innovation process.

The first industrial revolution in England around 1780 impressively illustrates this process. James Watt's invention of the steam engine not only revolutionized production but also enabled the development of the railway, which in turn accelerated and reduced the cost of transporting goods. These technological innovations did not arise in isolation but systematically built upon one another. The spinning frame and the power loom propelled the textile industry to the leading sector of the English economy.

The role of the railway as a driving force for industrialization was particularly significant. Between 1811 and the 1830s, the colliery railways evolved into the modern railway system, which not only revolutionized freight transport but also fundamentally changed the perception of space and time. In 1843, Heinrich Heine commented on the opening of the French railway lines with the words: "The railway kills space, and all that remains is time."

The second industrial revolution, which began in 1880, brought another fundamental change with the advent of electricity. The development of dynamos, long-distance power lines, and the construction of power plants supplied electricity from the 1880s onward, initially to small businesses, then to city districts, and finally to entire cities. German companies like Siemens and AEG experienced rapid growth – by 1914, every second electrical machine worldwide came from these companies.

The Mechanisms of Progress: Creative Destruction as an Engine of Growth

The concept of creative destruction, originally developed by Joseph Schumpeter and mathematically formalized by Aghion and Howitt, describes the fundamental mechanism of capitalist development. Schumpeter recognized as early as the 1940s that economic progress does not arise from continuous improvement of existing structures, but rather from revolutionary upheavals that destroy old orders and create new ones.

In 1992, Aghion and Howitt developed a mathematical model that precisely describes this process: When a new and improved product comes onto the market, companies selling older products lose their market position. Innovation is creative because it creates new opportunities, but it is also destructive because established companies with outdated technology are forced out of the market.

This process frees up resources previously tied up in outdated technologies. Capital and labor can thus be redirected to new, more productive areas, leading to direct positive effects on growth and prosperity. Aghion and Howitt's model shows that policy should support this process with two measures: first, by supporting innovative companies, and second, by providing social security for those who lose their jobs due to technological progress.

The endogenous growth theory, to which the prizewinners' work makes a significant contribution, overcomes a central weakness of the older neoclassical models. While in the Solow model, technological progress fell "like manna from heaven" as an exogenous factor, the new models explain how innovations arise endogenously through the decisions of economic actors. The driving force is the profit incentives of companies, guided by institutional frameworks, market structures, and competition.

Crucial to the success of this process is the concept of the open society, which Mokyr derives from the 18th-century Enlightenment. An open society enables the peaceful resolution of social and economic conflicts arising from technological progress. It also promotes the optimal use of technological progress, since knowledge is usually distributed decentrally in rational discourse.

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Germany's present: stagnation instead of innovation

The German economy is experiencing an unprecedented period of weakness, underscoring the relevance of the Nobel laureate's findings. After a weak fourth quarter of 2024, experts expect stagnation again in 2025. The German Institute for Economic Research (DIE) has revised its economic forecast for Germany to zero percent growth. This would mean that Germany will stagnate for the third year in a row – a historically unprecedented event for a developed industrial nation.

The causes of this stagnation are complex and affect precisely those areas that the Nobel laureates identified as crucial for sustainable growth. Germany suffers from a pronounced lack of innovation, which manifests itself in several dimensions. While other countries are taking the lead in disruptive innovations like ChatGPT, Germany is hardly producing any groundbreaking innovations.

Mechanical engineering, traditionally a German strength, is a prime example of this problem. Investments in innovation have stalled since the pandemic. The German Mechanical and Plant Engineering Association expects production to decline by around five percent in 2025. Particularly alarming is that 31.9 percent of mechanical engineering companies report declining competitiveness against foreign competitors—the highest rate ever recorded.

However, the structural problems extend far beyond individual sectors. According to the Center for European Politics, Germany is no longer a place where new industrial solutions can scale. Growth conditions have deteriorated due to the limited availability of skilled workers, capital, and infrastructure. Furthermore, there is a lack of sufficient venture capital for disruptive transformation processes.

Digitalization, a key area for future growth, is progressing too slowly in Germany. The country "ticks analog, not digital," as the Center for European Politics notes. Digitalization is failing because it is being managed industrially – in terms of processes, but not in terms of newly emerging markets. As a result, the German economy is stuck in old, but currently declining, markets instead of developing future markets itself.

Another structural problem is the increasing regulation and bureaucracy that hampers innovative companies. While Economics Minister Robert Habeck's industrial policy is relying on ever greater government omnipotence, politicians are missing out on important progress in digitalization policy. Increasing reporting requirements, overregulation, and bureaucratic hurdles are making rapid innovation processes more difficult for agile companies and tying up valuable resources.

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Lessons from practice: Success and failure of creative destruction

The theory of creative destruction can be vividly illustrated by looking at specific corporate stories. The cases of Nokia and Kodak are particularly striking, demonstrating how established market leaders can lose their dominant position within just a few years due to disruptive innovations.

Until the early 2000s, Nokia was considered an innovation leader in the mobile communications sector. The Finnish company developed the Symbian operating system in cooperation with Samsung, Motorola, and Sony Ericsson and launched the first smartphone, the "Nokia Communicator," in 1996. However, Nokia made three crucial mistakes: The Symbian operating system proved to be unuser-friendly, the company focused too heavily on hardware rather than software, and management failed to anticipate the market changes brought about by touchscreen devices.

The Nokia case is a prime example of how market leaders can become arrogant due to their comfortable position. Management assumed they could dictate the rules of the mobile phone market and failed to realize that a newcomer with a new technology could trigger disruptive change. This miscalculation led to the dramatic downfall of a company that had been considered untouchable just a few years earlier.

Kodak's fate was similarly dramatic. Founded in 1892, the company was long one of the world's most successful corporations and a leader in photographic equipment. Paradoxically, Kodak was even one of the first companies to market a digital camera in 1989. Nevertheless, the company missed the digital transformation because it continued to focus on the lucrative film business while its competitors were already focusing all their efforts on the digital market.

Kodak is a prime example of how companies fail when they fail to respond to their customers' needs. Instead of enabling customers to capture, store, edit, and share images digitally, management prioritized the company's interests by pursuing higher margins on film.

These examples illustrate a central insight of creative destruction: Past success offers no protection against future upheavals. On the contrary, established companies are often particularly vulnerable because they defend their existing business models for too long and recognize disruptive changes too late.

Positive examples of successful transformation, however, can be found in companies that responded to changes early on. The automotive industry is currently undergoing a similar transformation process. Tesla's consistent focus on electromobility has enabled it to put established automakers under pressure and set new standards. German automakers such as BMW, Mercedes, and Volkswagen have had to fundamentally rethink their strategies and make massive investments in electromobility.

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Challenges and contradictions: The dark side of progress

However, creative destruction not only creates winners, but also systematically produces losers. In his work, Mokyr emphasizes that technological progress always evokes fears of loss and encounters resistance. Even in the 19th century, people fought against innovations, as demonstrated by the example of the Luddites, who opposed the introduction of machines in English weaving mills in 1779.

This resistance is not irrational, but reflects real economic threats. When new technologies render entire occupational groups obsolete, massive social upheaval ensues. The Silesian Weavers' Revolt of 1844, which Gerhart Hauptmann depicted in his famous drama, illustrates the social tensions that can arise from technological progress.

Modern digitalization is exacerbating this problem even further. Artificial intelligence and automation no longer threaten only simple tasks, but also highly skilled professions. Studies show that up to 40 percent of all jobs could be at risk due to automation in the coming decades. This presents societies with the challenge of both reaping the benefits of innovation and mitigating its social costs.

Another problem is the increasing polarization between winners and losers of technological progress. While highly skilled workers in technology-intensive industries benefit from rising wages, low-skilled workers often lose their jobs or suffer wage cuts. This development can lead to social tensions and political upheavals, as is already evident in several countries.

The globalization of creative destruction brings with it additional complexities. Whereas innovative companies once primarily displaced local competitors, today companies compete with each other globally. German mechanical engineering companies face competition not only from European or American rivals, but also from Chinese companies, which often operate with lower labor costs and government support.

The pace of change has increased dramatically. While the industrial revolution spanned decades, digital transformations often occur within a few years. This makes it difficult for companies, employees, and societies to adapt. The half-life of knowledge is continually shortening, making lifelong learning a necessity.

Finally, new forms of power concentration are emerging. While creative destruction fundamentally threatens monopolies, successful platform companies can establish new, hard-to-attack dominant positions. Google, Amazon, Apple, and Meta have created such strong network effects in their respective fields that traditional competition is hardly possible anymore.

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Future trends: Innovation as a survival strategy

An analysis of future developments shows that the mechanisms identified by the Nobel laureates will have an even stronger impact in the coming years. Artificial intelligence is becoming the dominant innovation trend and is expected to permeate all areas of the economy by 2030. Experts expect AI to play a fundamental role similar to that played by electricity or the internet today.

The next wave of AI development will be characterized by more powerful models, AI agents, and sustainable technologies. AI agents will not only perform administrative tasks but also support more complex activities such as decision-making and strategic planning. Generative AI tools like ChatGPT are experiencing unprecedented rapid adoption—by August 2024, nearly 40 percent of the US population had already tried out such AI systems in their everyday lives.

Quantum computing represents the next major technological revolution. This technology could exponentially accelerate certain computations and open up entirely new areas of application. The first commercial applications are expected in the coming years, which could fundamentally challenge established IT architectures.

Biotechnology is developing into one of the most promising future industries. A study by the FutureManagementGroup identifies the biotech industry as Germany's most promising future industry by 2040. The combination of AI and biotechnology opens up new possibilities in drug development, personalized medicine, and sustainable production.

Sustainable technologies are increasingly becoming growth drivers. The environmental and recycling industries rank third among Germany's future industries, followed by analytical, laboratory, and medical technology. These sectors are benefiting from the major transformative changes in the energy and climate sectors.

Connectivity as a megatrend will take networking to a new level. 6G technology, immersive technologies, and intelligent automation will create a hyper-connected society in which real-time communication, smart cities, and autonomous systems shape everyday life.

This presents both opportunities and risks for Germany. McKinsey studies show that Germany could increase its economic output by almost 50 percent by 2035 if it exploits its full growth potential. Average household income could rise by around 31,000 euros, from the current 72,000 euros to over 100,000 euros.

However, this requires a fundamental reorientation of economic policy. Germany must shift its portfolio toward dynamic future fields that demonstrate global growth momentum and align with its domestic strengths. Deep tech, healthcare, solid-state battery technology, and new materials such as high-performance alloys offer particularly good opportunities.

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The lessons for Germany: Courage to transform

The work of the Nobel laureates in economics contains a clear message for Germany: Those who slow down investments in innovation will lose their prosperity in the long run. The German economy faces a choice between painful but necessary transformation or long-term decline. The findings of Mokyr, Aghion, and Howitt point the way to achieving sustainable growth through innovation.

The prerequisites for successful creative destruction are well known: an open society that embraces change, institutional frameworks that promote innovation, and the willingness to abandon outdated structures. Germany must consistently implement these principles if it wants to maintain its position as a leading industrial nation.

The state should abandon its role as an active industrial policy actor and instead create a business-friendly environment based on open markets and competition. Less regulation, faster approval procedures, and more venture capital for innovative companies are necessary steps. At the same time, social security for those who lose their jobs due to change must be strengthened.

Digitalization must finally be consistently pushed forward. Germany can no longer rely on analog technology while the rest of the world advances digitally. Investments in digital infrastructure, education, and research are essential. Administration must be modernized and bureaucracy reduced so that innovative companies can operate quickly and flexibly.

Time is running out. While Germany is discussing reforms, other countries are already implementing creative destruction. China is investing heavily in future technologies and expanding its technological leadership. The US is leveraging its innovative strength to open up new markets. Europe, and Germany in particular, must catch up before the gap becomes unmanageable.

The Nobel laureates have shown that innovation cannot be left to chance, but must be actively promoted. Germany has a choice: It can accept the challenge of creative destruction and emerge stronger, or it can cling to outdated structures and gamble away its prosperity. The decision must be made now—before it's too late.

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