Philippe Aghion of the College de France, London School of Economics and INSEAD has been awarded the 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He has won it alongside Peter Howitt and Joel Mokyr “for having explained innovation-driven economic growth” and in particular, “for the theory of sustained growth through creative destruction”.
We are particularly proud of this in the European Economic Association, as Philippe was President in 2017.
My first thought on hearing that he had won, which I swiftly relayed to my friend and co-author, was “well, it’s about time!”. Philippe has deservedly won just about every other prestigious economics prize from the Yrjö Jahnsson Award in 2001 to the BBVA Foundation Frontiers of Knowledge Award in Economics in 2020.
As the full citation (here) elegantly describes in detail, his 1992 paper with Peter Howitt, “A Model of Growth Through Creative Destruction” lays the modern analytical foundation for understanding economic growth.
There are two key building blocks. First, nonrival Research and development (R&D) spills over to other firms. Future innovators “stand on the shoulders of giants”, using past knowledge to generate new ideas. This positive intertemporal externality benefits means that the original inventor only captures a small fraction of the total social benefit of innovation. As Gustave Flaubert said in his Dictionnaire des idées reçues: “Inventors - All die in the poor house. Someone else profits from their discoveries, it is not fair.” This is the foundation of endogenous growth theory.
The second building block - and pulling somewhat in the opposite direction - is the fact that when competition is imperfect, innovations by successful entrepreneurs steal the business from their rivals. This makes the process of innovation inherently disruptive, as it creates losers as well as winners.
The 1992 paper combined these forces in an elegant general equilibrium model, which gave a tractable way of addressing positive and normative questions on growth.
Normative implications
The decentralized market economy will not generate socially optimal levels of innovation. Knowledge spillovers will generally lead to underinvestment, but business stealing will push towards over-investment. Which effect dominates is ultimately an empirical issues, although the existing evidence tends to show that there is too little R&D investment, with social returns outstripping private returns by a considerable margin.
Crucially, modern endogenous growth theory breaks with the traditional view that Total Factor Productivity (TFP) growth is “manna from heaven”. Governments can and do influence the rate of growth through changing the rate (and direction) of technical change for both good and ill. This is important for current debates. Productivity growth has slowed down precipitously since the global financial crisis, but we do not have to accept this as an inevitable situation. Better policies and institutions can change this. Philippe himself has been deeply emersed in these policy debates as a commentator and adviser to governments.
The battle over the rents from innovation creates incentives for more R&D. But also incentivises incumbents to create barriers to make it harder for new entrants to displace them. This could be in the form of lobbying and business practices. A successful society must embrace the dynamism of creative destruction and provide ballast against incumbents exploiting their existing market power to entrench their positions.
The precise form of policy interventions are often subtle, as the theory gives reasons for why there may be too much destructive innovation due to business stealing. Innovation creates losers and can therefore widen inequality. But the key aspect is to remove barriers to talented inventors and entrepreneurs, for example through access to human capital.
Positive implications: from macro theory to micro empirics
The Aghion-Howitt paradigm bridged macro growth theory with the microeconomic insights from Industrial Organization. The paper coincided with the opening up of rich seams of micro panel data on firms from administrative, accounting and survey sources. These increasingly matched information on productivity, jobs and innovation measures, such as patents and R&D. This data enabled both rigorous testing of models with more credible methods and the subsequent refinement and development of growth theory.
One example of this data-theory interplay is the study of the relationship between innovation and product market competition. Models of endogenous growth without creative destruction generally predict that competition should reduce innovation incentives, because competition erodes the temporary product market rents that flow from new ideas. This prediction is in tension with much firm-level panel work from the 1990s onwards that found that competition tended to increase innovation. The `step by step innovation’ extension to the basic growth model allowed firms to have different positions on the innovation ladder and undid the simplistic Schumpeterian prediction. When firms are neck and neck, rather than too far ahead or behind, there are strong incentives to innovate in order to escape competition. Consequently, the impact of competition depends on the specific context. At the macro level, these offsetting forces can generate an `inverted U’ relationship, where stronger competition increases innovation over a wide range, but can reduce it when competition is very intense.
A second example is the explosion of work on firm dynamics. The entry and exit process is fundamental to the spread of innovation in Aghion-Howitt and the new firm micro data enabled a detailed documentation of firm turnover and its relationship to productivity growth. About 10% of US firms enter and exit each year and these are mainly within four digit industries, so this turnover is more than simply a structural transformation across sectors. Turnover is positively associated with productivity and reallocation along this extensive (and intensive margins) accounts for a substantial fraction of aggregate TFP growth.
Impacts
Almost three decades after Aghion-Howitt, there was a four day conference in Paris to map out the impact of their work on the profession. Hundreds of scholars, many Nobel laureates and even the French President discussed the work. The book that came out of the Festschrift documented Philippe’s profound influence not only on growth and IO, but also on fields as diverse as trade, labour, taxation, the environment, political economy, finance and organizational economics.
What was striking is not just Philippe’s intellectual influence on the profession, but also on how he has co-authored with so many other scholars to advance knowledge. He is generous in offering his time to young researchers. He is an innovator par excellence, never content to rest on his laurels and always hungry for the next challenge, the next big idea.
On a personal level, one of the wonderful things about Philippe is his boundless enthusiasm. In research, he is always brimming with ideas and unceasingly restless to explore new avenues and approaches. Working with him on papers has been a wonderful experience and the highlight of my professional life. In policy, Phillippe is also engaged with the fundamental questions of the day – on inequality, taxation, monetary and fiscal policy and AI, for example. He is generous in engaging with policymakers. In teaching and presenting, he captivates an audience with both content and performance, often bouncing around a stage – and often in serious danger of falling off.
So although he is teetotal, I hope you will all join me in raising a virtual glass to our new European Nobel Laurate, Philippe Aghion!
John Van Reenen
October 19th 2025