UPSC CARE Mains Practice 13th october 2025

Introduction

The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Joel Mokyr, Philippe Aghion, and Peter Howitt “for having explained innovation-driven economic growth.” Their pioneering work explores why global growth accelerated over the last two centuries after centuries of stagnation. By combining historical insights and formal economic models, they have shown how innovation, knowledge creation, and creative destruction form the foundation of modern prosperity and policy.

Body

• Joel Mokyr: The Role of ‘Useful Knowledge’ in Sustained Growth
• Mokyr’s Policy Implications: Skilling and Openness to Change
• Aghion–Howitt Model: The Economics of Creative Destruction
• Policy Dilemmas: Subsidising Innovation and R&D
• Contemporary Relevance: Innovation-Led Growth

Conclusion

The 2025 Nobel laureates have deepened our understanding of how societies grow not merely by accumulating capital but by creating, diffusing, and adapting knowledge. Joel Mokyr’s historical perspective connects scientific curiosity with industrial progress, while Aghion and Howitt’s model quantifies the perpetual churn of innovation. Together, their work underscores that sustained prosperity demands an innovation ecosystem — one that combines skilled human capital, research incentives, and social flexibility. For nations like India, embedding these principles into policy could turn demographic potential into enduring economic dynamism

UPSC Syllabus

Innovation-Led Growth

Why was this question asked?

“Economic growth in the recent past has been led by increase in labour productivity.” Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity. (2022)

Introduction

The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Joel Mokyr, Philippe Aghion, and Peter Howitt “for having explained innovation-driven economic growth.” Their pioneering work explores why global growth accelerated over the last two centuries after centuries of stagnation. By combining historical insights and formal economic models, they have shown how innovation, knowledge creation, and creative destruction form the foundation of modern prosperity and policy.

Body

Joel Mokyr: The Role of ‘Useful Knowledge’ in Sustained Growth

• Joel Mokyr’s research in economic history identifies “useful knowledge” as the key driver of sustained growth.
• He distinguishes between:
• Propositional knowledge – understanding how the natural world works.
• Prescriptive knowledge – practical instructions or blueprints on how to make things work.
• Mokyr argues that during the Scientific Revolution (16th–17th centuries), the integration of these two forms of knowledge — through measurement, experimentation, and reproducibility — created the intellectual base for the Industrial Revolution.
• Example: Improvements in the steam engine and steel production arose from deeper scientific understanding of pressure, vacuums, and oxygen-carbon interactions.
• His central insight: innovation thrives when a society institutionalizes feedback between science and technology — turning ideas into applicable knowledge.

Mokyr’s Policy Implications: Skilling and Openness to Change

• Mokyr’s findings imply that technical skills and openness to innovation are vital for sustained development.
• Britain’s early growth stemmed from the presence of skilled artisans and engineers who could commercialize ideas.
• Hence, governments must:
• Invest in education and vocational training to bridge the gap between ideas and implementation.
• Foster cultural openness to new technologies, as innovation creates both winners and losers.
• Resistance from entrenched interests can stifle progress; thus, social adaptability becomes as important as technological ingenuity.

Aghion–Howitt Model: The Economics of Creative Destruction

• Building on Joseph Schumpeter’s concept of creative destruction, Philippe Aghion and Peter Howitt developed a formal mathematical model to explain how technological change sustains growth.
• Their model assumes firms invest in Research & Development (R&D) to innovate, gain patents, and earn temporary monopoly profits.
• However, new innovators continuously challenge incumbents — replacing outdated technologies with superior ones.
• This dynamic process ensures continuous productivity gains, even though it displaces old firms and workers.
• It mathematically captures the trade-off between innovation’s short-term disruption and long-term prosperity.

Policy Dilemmas: Subsidising Innovation and R&D

• The Aghion–Howitt framework reveals two competing forces guiding R&D policy:
• Positive externality: Older technologies, once displaced, still benefit society — implying underinvestment in R&D without government support.
• Diminishing returns: Incremental innovations can lead to excessive private R&D, where social benefits are smaller than private gains.
• Therefore, governments must balance R&D subsidies — encouraging genuine breakthroughs while avoiding wasteful duplication.
• The model offers practical guidance on designing innovation policies, patent laws, and public funding to achieve optimal innovation intensity.

Contemporary Relevance: Innovation-Led Growth in the 21st Century

• The laureates’ insights are directly applicable to emerging economies like India seeking inclusive, technology-driven growth.
• Key takeaways for policymakers include:
• Strengthening human capital through skilling and STEM education.
• Supporting startups and R&D-intensive sectors with targeted incentives.
• Creating a regulatory environment that rewards innovation but manages transition costs for displaced industries.
• Promoting international cooperation in technology transfer, especially in green energy and digital innovation.
• As global economies navigate AI, automation, and climate challenges, innovation remains the linchpin for productivity and resilience.

Conclusion

The 2025 Nobel laureates have deepened our understanding of how societies grow not merely by accumulating capital but by creating, diffusing, and adapting knowledge. Joel Mokyr’s historical perspective connects scientific curiosity with industrial progress, while Aghion and Howitt’s model quantifies the perpetual churn of innovation. Together, their work underscores that sustained prosperity demands an innovation ecosystem — one that combines skilled human capital, research incentives, and social flexibility. For nations like India, embedding these principles into policy could turn demographic potential into enduring economic dynamism.