This year’s prize in economics in honour of Alfred Nobel went to economic historian Joel Mokyr and economic theorists Philippe Aghion and Peter Howitt. Their work shares the theme of trying to understand the role of innovation in growth. Economic historians look at the past. Economic theorists build abstract models. Does any of this work have lessons for India as it seeks to become an advanced economy in just over two decades?
Mokyr is one of several economic historians who have documented the role that technological progress played in economic growth, especially the unprecedented growth that came with the industrial revolution. In some sense, it is unsurprising that innovation is what matters for sustained, rapid economic growth. But the precise mechanisms matter. Discoveries can languish, or even be rejected. Innovations can have temporary impacts if they are not followed by further innovations. Mokyr’s research highlighted the importance of a society having a critical mass of people with education, skills, openness to new ideas, and progressive attitudes.
Joseph Schumpeter’s idea of creative destruction
Aghion and Howitt, coming at the question of innovation and growth with completely different methods, formalised the ideas of Joseph Schumpeter, the concept of creative destruction, in which competition among firms drives growth, with the motivation for and diffusion of innovations working through the processes of competition. Successful innovative firms drive out stagnant incumbents under the right conditions.
In the background for both types of work is the importance of institutions, both social and governmental, that are inclusive and effective. That was the central theme of the work rewarded in the 2024 economics Nobel awards. Another important factor, explicit in Mokyr’s work, and present in theoretical work by other economists that complements that of Aghion and Howitt, is openness to trade. This openness can include services and ideas as well as goods. It can also be facilitated by openness to international capital, though the latter carries risks and does not always promote innovation in the host country.
If one believes this body of research, empirical and theoretical, then the lessons for a country like India are clear. Policies that allow firms to be more dynamic, allow for easier entry and exit, constrain the anti-competitive power of incumbents, and catalyse private sector innovation through subsidised basic research are all potentially beneficial for growth. All the evidence suggests that India’s policy environment is still not sufficiently supportive of these mechanisms for growth despite three decades of reforms.
Policies that support broad-based acquisition of general education and specific skills and those that increase the openness of the economy to new ways of doing things will also make faster, more sustained growth possible. India’s history of colonial exploitation and ideologies of social exclusion work against openness, but there is no good reason for either to be salient in the national discourse.
When China’s closed curbed its creative potential
Mokyr’s work highlighted the case of China, a society that was innovative and relatively rich, at a period in history before Europe took off. But China’s rulers closed their economy and they stifled domestic innovation and creativity. Every other society around the world became vulnerable to European conquest and exploitation, but the case of China was especially painful. We are now witnessing that country’s concerted effort to recover from that history. Not long ago, China’s standard of living was about the same as India’s. Now it is three times as high.
China has not been a well-rounded model of development, and its harnessing of the benefits of openness has been uneven. But one can see many of the lessons of this year’s Nobel prize research illustrated in China’s recent success. The importance of innovation is clear. Interestingly, China’s experience fits less well with the themes of the 2024 Nobel prize—the importance of inclusive institutions.
But inclusion arguably has benefits beyond the purely material. A society can value a range of freedoms, whatever their effects on material progress. India has a unique opportunity to do better than China if it is serious about becoming an advanced economy. It can pursue economic growth without sacrificing other dimensions of development.
The Nobel awards in economics for 2024 and 2025 are somewhat poignant as the country that seemed to be the best contemporary illustration of how to grow rapidly and consistently—the US—is now ruled by an angry and disingenuous elite that wants to assert privilege, leverage the power of incumbency, undermine institutions, and crush dissent. In the short run, this situation hurts every other country in the world. The Chinese are rapidly adjusting to this new world order and turning it to their advantage, but India is yet to figure out what to do.
Caution and consensus are natural in a democracy, especially one as heterogeneous as India. But the 2025 Nobel prize in economics provides a reminder of the importance of innovation for material progress and that of openness and competition for innovation. Policies that promote these two drivers of innovation ought to be a priority for India.
The author is Professor of Economics at University of California, Santa Cruz