Tag: Creative destruction

Mokyr, Aghion, and Howitt Win 2025 Nobel Prize in Economics

Joel Mokyr (photo from news.northwestern. edu)

Philippe Aghion (photo from philippeaghion.com)

Peter Howitt (photo from brown.edu)

For most of human history there was little to no economic growth. Until the nineteenth century, the average person everywhere in the world lived at a subsistence level. For example, although the Roman Empire controlled most of Southern and Western Europe, the Near East, and North Africa for more than 400 years, the living standard of the average citizen of the Empire was no higher at the end of the Empire than it had been at the beginning.

Economists typically measure economic growth by the rate of increase in real GDP per capita. The following figure, updated from Chapter 11 of Macroeconomics (Chapter 21 of Economics), shows the slow pace of growth in real GDP per capita in the world economy from the year 1 to the year 1820 and the much faster rates of growth over the following periods. As discussed in Chapter 11, the figure relies on data compiled by Angus Maddison of University of Groningen in the Netherlands and—for recent years—data from the World Bank.

This year’s three Nobelists have contributed to understanding why economic growth accelerated sharply in the nineteenth century and why England was the first country to experienced sustained increases in real GDP per capita—an event labeled the Industrial Revolution. Joel Mokyr of Northwestern University has conducted decades of research into which innovations were crucial to economic growth and the institutional and economic advantages that allowed entrepreneurs in England to use those innovations to expand production much more rapidly than had happened before. Philippe Aghion of Collège de France and INSEAD and Peter Howitt of Brown University have focused on formally modeling the process of creative destruction that underlies sustained economic growth. The classic discussion of creative destruction appears in Joseph Schumpeter’s book Capitalism, Socialism, and Democracy, published in 1942.

In Macroeconomics Chapter 21, we discuss the process of creative destruction in the context of economic growth. Creative destruction occurs as technological change results in new products that drive firms producing older products out of business. Examples are automobiles driving out of business producers of horse-drawn carriages in the early twentieth century. Or Netflix and other movie streaming sites driving video rental stores out of business in more recent years.

The Nobel Committee’s announcement of the prize can be found here. A longer discussion of the Nobelists’ work can be found here. The scope of their research can be seen by reviewing their curricula vitae, which can be found here, here, and here. The amount of the prize this years is 11 million Swedish kronor (about $1.2 million). Mokyr receives half and Aghion and Howitt receive the other half.

What Will the U.S. Economy Be Like in 50 Years? Glenn Predicts!

Image generated by ChatGPT

A Stronger Safety Net

Modern industrial capitalism’s bounty has been breathtaking globally and especially in the U.S. It’s tempting, then, to look at critics in the crowd in Monty Python’s “Life of Brian” as they ask, “What have the Romans ever do for us?,” only to be confronted with a large list of contributions. But, in fact, over time, American capitalism has been saved by adapting to big economic changes.

We’re at another turning point, and the pattern of American capitalism’s keeping its innovative and disruptive core by responding, if sometimes slowly, to structural shocks will play out as follows. 

The magnitude, scope and speed of technological change surrounding generative artificial intelligence will bring forth a new social insurance aimed at long-term, not just cyclical, impacts of disruption. For individuals, it will include support for work, community colleges and training, and wage insurance for older workers. For places, it will include block grants to communities and areas with high structural unemployment to stimulate new business and job opportunities. Such efforts are a needed departure from a focus on cyclical protection from short-term unemployment toward a longer-term bridge of reconnecting to a changing economy. 

These ideas, like America’s historical big responses in land-grant colleges and the GI Bill, combine federal funding support with local approaches (allowing variation in responses to local business and employment opportunities), another hallmark of past U.S. economic policy. 

With a stronger economic safety net, the current push toward higher tariffs and protectionism will gradually fade. Protectionism is a wall against change, but it is one that insulates us from progress, too. 

A growing budget deficit and strains on public finances will lead to a reliance on consumption taxes to replace the current income tax system; continuing to raise taxes on saving and investment will arrest growth prospects. For instance, a tax on business cash flow, which places a levy on a firm’s revenue minus all expenses including investment, would replace taxes on business income. Domestic production would be enhanced by adding a border adjustment to business taxes—exports would be exempt from taxation, but companies can’t claim a deduction for the cost of imports.

That reform allows a shift from helter-skelter tariffs to tax reform that boosts investment and offers U.S. and foreign firms alike an incentive to invest in the U.S. 

These ideas to retain opportunity amid creative destruction will also refresh American capitalism as the nation celebrates its 250th anniversary. They also celebrate the classical liberal ideas of Adam Smith, whose treatise “The Wealth of Nations” appeared the same year. This refresh marries competition’s role in “The Wealth of Nations” and American capitalism with the ability to compete, again a feature of turning points in capitalism in the U.S.

Decades down the road, this “Project 2026” will have preserved the bounty and mass prosperity of American capitalism.

These observations first appeared in the Wall Street Journal, along with predictions from six other economists and economic historians.