Creativity drives growth. Pioneering ideas and technologies raise productivity. But at a cost — they destroy older methods, products, and businesses unless they too innovate and adapt. This transformation or ‘creative destruction’ is the central theme of this year’s Nobel prize in economics.
Highlighting innovation-driven growth, the Nobel Committee honoured the economic historian, Joel Mokyr, and the economists, Philippe Aghion and Peter Howitt, for identifying its foundations and self-renewing mechanisms. In a series of illuminating charts, the Committee described how, over the past two centuries, the world economy has defied its earlier stagnation, achieving growth that not only endured but also remained exceptionally stable. This was built upon innovation and progress.
The recognition resonates with today’s context of low global growth and surging expectations from the next wave of productivity driven by Artificial Intelligence. The laureates’ research, combining history and neoclassical economics while encompassing culture, institutions, politics, and the dynamic conflict between opposing forces, finds universal relevance — whether in advanced economies facing long-term productivity decline, such as the United Kingdom and Europe — the base of Mokyr’s meticulous book, A Culture of Growth (2016) — or those aspiring to rapidly climb up the ladder like India.
Mokyr traced the cultural shift in mid-17th-century Europe towards valuing new ideas and intellectual progress supported by institutions that enabled their spread and by the fusion of scientific knowledge with practical engineering (for example, the Royal Society in Britain). Political trust in creativity and change — exemplified by the British Parliament’s ability to manage entrenched elites — facilitated this transformation. These “prerequisites” led to subsequent discoveries and inventions, beginning with the Industrial Revolution and the self-reinforcing spiral of growth thereafter. Open societies that embraced change, Mokyr showed, explained Europe’s industrial lead over Asia as well as Britain’s enduring growth and China’s lag, where creative ideas were constrained.
Aghion-Howitt validated ‘creative destruction’ as the foundation of economic growth, formalisng its dynamics in 1992. Their model described the constant replacement of old processes, products, and technologies by new ones, creating conflict between opposing forces. Old firms must either adapt or perish, which involves spending on innovation and research and development to survive. When competition is weak, incumbents can survive by excluding new entrants and ideas because markets are protected and social, political, or commercial incentives align to preserve the status quo. Like Mokyr’s historical analysis, Aghion and Howitt linked innovation-driven growth to incentives and market structures.
Creative destruction is by nature ruthless, ubiquitous, yet often clearer in hindsight. Although the canvas is lengthy and vast, the technological advancements of the 1990s, particularly in information and communications,vividly demonstrate its unfolding in recent times.
With its culture of risk-taking and enterprise, supported by government beliefs and an enabling ecosystem, the United States of America occupies the world’s technology frontier, beginning with the internet boom, a wave of tech firms-led innovations in e-commerce, cloud computing, streaming services, electronics and computer software, social media, electric vehicles, GPU design and manufacturing, and AI. Many older firms and business models collapsed in this process: Amazon and other online marketplaces displaced brick-and-mortar retail; Netflix rendered video rental and cable TV firms obsolete; fintech and mobile banking squeezed traditional banks; and digital platforms disrupted print media. Markets, business models, and jobs were reshaped through the integration of these technologies even as concentration in the tech sector rose and, with it, unemployment and inequality, highlighting the role of policies.
Though not an inventor, India experienced similar transitions from fixed to mobile phones, terrestrial to satellite television, physical to online commerce, and postal to courier services. Each shift compelled adaptation, technology uptake, and the creation of new firms, while many others, often public entities, ceased to exist or linger with government support. The computerisation and telecom revolution spearheaded by the government in the mid-1980s laid the early groundwork, while India’s specific skill advantages facilitated the use of these technologies, transforming work processes across the economy.
None of this was painless. Jobs were lost, transformed, and often fewer. Nor was it free of resistance — banking and worker unions opposed computerisation and automation; entrenched interests lobbied against change. The ongoing tussle between established and new firms displays this underlying churn. For example, in the transition from internal combustion engines to electric vehicles, there are frequent reports of lobbying against policies, subsidies, norms and so on that might benefit new entrants.
Perhaps the most visible illustration of creative destruction in daily life is retail trade where frictions between physical and online stores and their quick-commerce variants are constant. The outcomes are discernible: improved service and home delivery by small stores; tighter cash-flow and stock management through direct manufacturer connections; the displacement of traditional trade by modern business models; new investments in logistics, warehouses, and distribution centres; and the transformation of shop assistants into delivery agents. Many small retailers have expanded market reach, connecting to distant customers and reshaping markets, while consumers benefit from greater choice and convenience.
Economic efficiency clearly rises with such changes. Yet productivity growth, that which cannot be explained by additions to the workforce and capital stock addition, is a long-term phenomenon that is not immediately visible. Policies and incentives can also blunt its effects. For instance, raised or selective tariffs, the absence of a level playing field, discretionary regulation favouring a few, the forced exits of foreign entities with adverse decisions or rulings, and barriers to competition imposed by powerful domestic firms can be counterproductive. These suggest a half-hearted tolerance for creative destruction.
Finally, resistance to modernisation can deter or stall creative destruction when compensatory measures or safety nets are absent, especially when vulnerable groups stand to lose — the reversal of agricultural market reforms in 2020 is an example. In a post-award interview, Aghion highlighted the importance of inclusive innovation, ensuring that the benefits of innovation-driven growth are broadly shared rather than captured by top earners. A dynamic economy, he explained, must combine flexible labour markets and social security with good education and low barriers to facilitate new firm entry. The guidance is as relevant for India as for the US.
Renu Kohli is Senior Fellow, Centre for Social and Economic Progress. Views are personal