What do the 2025 Nobel awards in economics say to us?
One of the economic puzzles of human existence is that for most of it, going back to its beginnings, the material standard of living did not change much. Then, about 200 years ago, it began increasing; in some places more than others but material living standards in even the poorest regions are today markedly higher than in 1800, and higher than they possibly could have conceived of then.
Economic historians have struggled with what triggered this economic growth. There is no consensus but this year’s Nobel Prize in economics was half-awarded to Dutch-Israeli economist and economic historian Joel Mokyr for his seminal contribution to understanding it. (I deal with the other half below.)
There was a lot of ill-informed comment about the award. It was not the first Nobel in economic history; in 1993 Robert Fogel and Douglas North were so recognised. Nor was it the first award about the role of technology in economic growth; Robert Solow was recognised in 1987. However, neither they, nor their successors, tackled the question of the trigger.
The answers are outside narrow economics. Solow, who first studied sociology under Talcott Parsons, dismissed sociological theories as too fuzzy by economic standards. Mokyr was not as nervous.
First, he defined culture as ‘a set of beliefs, values, and preferences, capable of affecting behavior, that are socially (not genetically) transmitted and that are shared by some subset of society’, distinguishing culture from institutions by regarding culture ‘as something entirely of the mind’ which is ‘to an extent, a matter of individual choice’. By contrast, institutions are ‘socially determined conditional incentives and consequences to actions. These incentives are parametrically given to every individual and are beyond their control.’ (Economists have thought a lot about the role of institutions; its first Nobel economics award was to Ronald Coase in 1991.)
Mokyr focuses on the cultural shift which precipitated economic growth. Between the 16th and 18th centuries, a group of European intellectuals groped their way towards a new view of nature and knowledge in which by disinterested and open inquiry, nature’s secrets could be understood and then used to the benefit of humankind, nurturing the Scientific Revolution and the Enlightenment. The approach percolated throughout society, influencing individual behaviour. Once the notion became widespread that objective knowledge was possible and could be used to improve people’s lives, the emergence of self-sustaining economic growth became possible.
Scroll back to the period before. Have you noticed how its histories are dominated by warfare – as economically destructive an activity as humanity has invented? True for Māori oral histories, but also for written ones from other cultures. You get a sense that the point of human existence was seen to be in the honour which came from fighting (women hardly appear). Economists have tended to explain this by the lack of investment opportunities (although there was often a lot of conspicuous consumption of constructing large buildings – cathedrals and palaces – which may have stimulated economic activity but did not stimulate economic growth).
There was nothing particularly ‘European’ in this cultural shift – it just happened there first. Similarly, I don’t think there is anything particularly European in quantum mechanics even though it was pioneered by Europeans and Americans; today we acknowledge the contributions of Asians with Nobels too. (Perhaps as an aside, the first Nobel to a non-European economist was in 1979 to West Indian Arthur Lewis; I still draw on his insights.)
Mokyr then went onto to trace how this cultural shift transmitted into economic growth. Of course industrialisation happened in particular places which had the resources (such as coal in the English Midlands) and institutions (typically stable ones dominated by the rule of law).
As Solow saw, although initially only vaguely, this change in attitudes kept identifying new production possibilities – technologies – which meant that the same combination of labour and capital could produce more output (and new kinds of output). The new technologies lifted the material standard of living, much more than capital accumulation by itself.
Hence the second half of the 2025 economics Nobel award. Philippe Aghion and Peter Howitt describe a process whereby the new technology is introduced. It involves creative destruction – first identified by Joseph Schumpeter who would have received a Nobel had they existed when he was alive – in which firms die and new ones grow.
Crucial may be the willingness of society to allow this to happen. It may not be so critical when there is that accelerated growth phase through which many countries go. (New Zealand’s was in the late 1930s and 1940s; China’s may be coming to an end.) But during the period of sedate growth which follows, it is politically tempting to shore up industries and businesses (and regions) from the past. Their winding down and closure is socially painfully, especially to the workers involved.
In my view we need to recognise this pain and evolve a system of redeployment and upskilling – like the social unemployment insurance scheme the Ardern-Robertson Government was developing. That will only soften the disruption but it will not be eliminated. I am reminded of a unionist who was vociferous in opposition to the closure of his freezing works but some years later told me that it ‘was the best thing that happened’ to him.
Aside from the scholarly interest, is there a contemporary relevance in Mokyr’s findings? Didn’t the Scientific Revolution and the Enlightenment happen sometime ago? But is there not some reaction against it going on? I am not talking here of the rise of Romanticism which occurred shortly after the Enlightenment and pointed out that it did not cover the entirety of the human experience. As John Stuart Mill’s autobiography illustrates, both approaches are needed.
Rather the forces of the counter-Enlightenment appear to be rising especially in the US with its MAGA right but also in the woke left (except that is not as well-organised or powerful). Those tendencies exist here too.
They amount to a reversion to approaches which dominated a quarter of a millennium ago. Very often the holders of these archaic ideas do not understand what has happened since. Just because we (including me) do not understand quantum mechanics does not mean it is wrong. Indeed, applications of quantum mechanics are riddled through our everyday life. If you want to reject quantum mechanics, you should abandon your mobile. If you want to reject the Scientific Revolution and the Enlightenment, you should opt for the material standard of living which was normal for our ancestors for thousands and thousands of years.
So the second leg recognised by the 2025 Nobel in economics, creative destruction, is at the heart of modern-day living. Hence the resistance to change. But as Catherine Booth, cofounder of the Salvation Army, said, ‘if we are to better the future, we must disturb the present’.
I don’t think New Zealand is particularly prone to social inertia except that our small size makes it easier for the conservative leadership to resist change and to promote platitudes in place of insight and wisdom while excluding those with whom they disagree – and may be ahead of them – from their conversations.
That is why we have to maintain an open stance to new ideas and to the world. Mokyr argues the enlightenment transformation occurred because its participants were in a ‘republic of letters’ in which they corresponded across distances and time. MAGA seems to be turning its back on the openness, even repressing it. Let’s not join it.