Vishleshan for Regulatory Exams 14th October 2025: Why ‘Creative Destruction’ Won the 2025 Economics Nobel

Staying updated on economic and regulatory issues is non-negotiable for exams like RBI, SEBI, or NABARD. Every topic matters. Every update can turn into a question. In today’s Vishleshan, we focus on ”Why ‘Creative Destruction’ Won the 2025 Economics Nobel” This issue is timely. Its relevance is growing. And its impact is deeply linked with policy and regulation. Understanding it now will not just help in exams but also sharpen your perspective.

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Why ‘Creative Destruction’ Won the 2025 Economics Nobel

Context: The 2025 Nobel Prize in Economics was awarded for explaining the powerful engine of ‘creative destruction’. This summary explores how new technologies disrupt old markets to create new ones, and why the laureates’ work is a crucial reminder that progress is not guaranteed.

Link to the Article: Business Standard

The article discusses the 2025 Nobel Prize in Economic Sciences, awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their work on innovation-driven growth and “creative destruction.” It argues that the award reflects a global anxiety, particularly in the West, about the sources of future economic growth in the face of competition from China. The author posits that the key lesson for Indian policymakers is that long-term prosperity comes only from innovation, which requires a culture that embraces risk and is willing to upend the status quo. The piece concludes that India’s current low spending on research and its gradualist reform process, which often protects vested interests, are significant barriers to fostering such an innovative culture.

The Nobel Prize in Economic Sciences:

History of the Award:

Contrary to popular belief, the economics prize was not one of the original Nobel Prizes established by Alfred Nobel’s will in 1895.

• Institutionalisation: It was established in 1968 by Sveriges Riksbank (Sweden’s central bank) to commemorate the bank’s 300^th anniversary. Its official name is the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.”
• First Award: The first prize was awarded in 1969.
• Selection: The winners are selected by the Royal Swedish Academy of Sciences, the same institution that selects the laureates for physics and chemistry.

Winners of 2025:

The 2025 prize was awarded to three economists for their groundbreaking work on how innovation drives long-term economic growth.

• Winners:
  • Joel Mokyr (Economic Historian)
  • Philippe Aghion (Economist)
  • Peter Howitt (Economist)
• Their Core Contribution: They provided a deep understanding of the forces behind technological progress and its impact on economies.
  • Aghion and Howitt formalised Joseph Schumpeter’s theory of “creative destruction” into a mathematical model, demonstrating that long-term growth is a result of new technologies displacing old ones, driven by entrepreneurs seeking profits.
  • Mokyr, through historical analysis, added a crucial layer, arguing that it is a society’s culture—its openness to new ideas, its institutions, and its political will for change—that ultimately determines whether innovators can triumph over those who benefit from the status quo.

Trends in Nobel-Winning Themes:

The prize often reflects the prevailing economic concerns of the era.

• Early Years (1970s): Focused on development and welfare economics.
• Washington Consensus Era (1980s-90s): Honoured proponents of the neoclassical, free-market model, often from the “Chicago School.”
• Post-Financial Crisis (2010s): Shifted towards scepticism of perfect markets, behavioural economics, and labour market issues.
• Recent Years (2020s): A clear focus on the role of institutions, innovation, and culture in driving long-term prosperity, reflecting global anxieties about slowing growth and technological competition.

Creative Destruction: The Engine of Growth

Meaning and History

Creative Destruction (a term popularised by Austrian economist Joseph Schumpeter in his 1942 book Capitalism, Socialism and Democracy) is the process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. In simple terms, it’s the idea that for an economy to grow and advance, old, inefficient industries, technologies, and ways of doing things must be replaced by new, innovative ones.

• Example: The rise of smartphones (the “creation”) led to the decline of traditional camera companies, landline phones, and GPS device manufacturers (the “destruction”).

The Core Hypothesis: The theory posits that this constant churn is not a bug but the very engine of capitalism. Entrepreneurs are motivated by the prospect of earning “monopoly profits” from a new invention. This innovation disrupts the market, displaces existing firms (the “incumbents”), and leads to a more productive and advanced economy.

R&D Expenditure and GDP:

The theory of creative destruction implies a strong link between investment in research and development (R&D) and economic growth. Countries that spend more on R&D tend to be more innovative and have higher GDP per capita.

Country/Region	R&D Expenditure (% of GDP)
Israel	~5.6%
South Korea	~4.9%
United States	~3.5%
Japan	~3.3%
Germany	~3.1%
China	~2.4%
India	~0.64%

This data starkly illustrates the article’s point that India spends too little on research.

Innovation in India: A Snapshot

Capital Expenditure (CapEx) Trends:

The government has been trying to foster innovation through increased capital expenditure.

• Budgetary Push: The Union Budget has seen a significant increase in the allocation for capital expenditure in recent years, rising from around ₹4.39 lakh crore in 2020-21 to a budgeted ₹11.11 lakh crore for 2024-25. This investment in infrastructure is aimed at creating a better environment for private innovation.

Start-up Ecosystem:

India has emerged as a major global hub for start-ups.

• Growth: India is the third-largest start-up ecosystem in the world, with over 100 unicorns (start-ups valued at over $1 billion).
• Focus: These start-ups are at the forefront of innovation in sectors like fintech, e-commerce, healthtech, and software-as-a-service (SaaS).

Patent Registration Trends:

A key indicator of innovation is the number of patents filed.

• Significant Growth: India has seen a dramatic increase in patent filings. In 2023-24, a record 90,300 patents were granted, a sharp rise from just 24,871 five years prior in 2018-19. This shows a growing culture of intellectual property creation.

WIPO Global Innovation Index (GII):

• India’s Performance: India’s rank in the GII has improved significantly, rising from 81^st in 2015 to 38^th in 2025 among 132 economies. This reflects improvements in its innovation ecosystem, including its knowledge and technology outputs and the sophistication of its market.

Decoding the Article: An Analysis

The Nobel’s Reflection on Global Malaise:

The article argues that this year’s Nobel Prize is not just an academic honour but a reflection of a deep-seated “malaise in the policymaking system.” Western nations are worried about losing the technological race to China and are grappling with how to reignite growth. The prize’s focus on innovation underscores that this is now the central economic question of our time.

The Fundamental Conflict of Growth:

The article masterfully explains the core lesson from the laureates’ work: there is a “fundamental conflict between those who are rich today… and the putative entrepreneurs who seek to replace them.”

• This is the essence of creative destruction. For new, innovative companies to rise, old, established ones must be allowed to fail. Growth requires disruption of the status quo.

The Lesson for India: A Need for Disruption

The author directly applies this lesson to India. If innovation is the only path to prosperity, then India’s current approach is flawed.

• Low R&D Spending: As the data shows, India’s spending on R&D at 0.64% of GDP is a fraction of what innovative nations spend. This signifies a lack of deep investment in creating new knowledge.
• Gradualist and Solicitous Reforms: The author criticizes India’s reform process as being “too gradual and solicitous of those with a vested interest in the status quo.” This means that policies often protect incumbent, powerful businesses rather than creating a level playing field for new, disruptive innovators to challenge them.

In conclusion, the article uses the occasion of the Nobel Prize to deliver a powerful critique of India’s economic policy orientation. While celebrating the growth of start-ups and patents is important, the core message is that without a fundamental cultural and political shift towards embracing risk, competition, and the “destruction” part of creative destruction, India’s long-term growth potential will remain constrained.