Creative destruction for green, inclusive growth

The Nobel-winning work shows that a continual dismantling of the old is central to the idea of sustainable growth

Change is chaotic. For every breakthrough product, there’s an incumbent business, job type, or way of doing things that may be displaced. This truth lies at the heart of the concept of creative destruction – innovation that builds but also damages or displaces what came before. The 2025 Nobel Prize in Economics, awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt, brings this process into sharp relief. In particular, the Aghion-Howitt model provides us with analytic tools not only to understand how economies grow, but also how they must manage conflicts to let growth persist, and how these strap into sustainable development.

The prize has honoured work that places innovation – and the wrenching upheaval it brings – at the heart of long-run prosperity. Aghion and Howitt’s formalisation of “creative destruction” showed, with mathematical clarity, that sustained economic growth depends on a continual process in which new ideas and products render older technologies and business models obsolete; that very obsolescence is both the engine of higher living standards and a source of conflict that, if mismanaged, can choke off progress. The Royal Swedish Academy of Sciences stressed that the laureates, together with Joel Mokyr, who contributed a complementary historical perspective, illuminated not only how innovations fuel persistent growth but also how the distributional and political frictions they create must be dealt with constructively if economies are to escape stagnation and spread the gains of prosperity.

The model constructed by the laureates departs from simple, smooth models of growth by embedding Schumpeterian turnover – firms rise, innovate, and are replaced – into a formal growth framework. Crucially, the model shows feedback that policymakers and businesses cannot ignore: if incumbents expect that future research will rapidly make their investments worthless, they may underinvest today; conversely, if the political economy allows entrenched firms to block entry or slow adoption, innovation is muted and growth falters. The laureates’ formalism made it possible to analyse these forces quantitatively and to think seriously about the institutions and incentives that sustain dynamic, innovation-led growth.

Why emphasise the “constructive” angle of destruction? Because creative destruction is not an automatic social good, it produces winners and losers. The framework makes plain that when those who lose from technological change can use political power or market frictions to resist displacement, the social returns to innovation fall. Incumbents may lobby for protection, delay the diffusion of superior technologies, or use scale and network effects to raise switching costs, dampening the very experiments and market reallocation that generate aggregate productivity gains.

Environmental sustainability and climate-neutral transitions require rapid diffusion of new green technologies: renewables, storage, energy-efficient industrial processes, and carbon removal methods. But those transitions threaten legacy firms and regions dependent on fossil-fuel capital, and they create distributional losses among workers and communities. The Aghion-Howitt lens reframes green transition policy: it is not enough to subsidise clean innovation; societies must design institutions that make the process of destruction constructive. That means protecting the social fabric, in parallel to keeping competition and entry incentives strong so that new, eco-friendly firms can compete and scale, for instance, through retraining, wage insurance, place-based economic regeneration, and phased exit strategies for carbon-intensive assets.

Innovating for social returns

Another policy dimension that emerges from the creative-destruction framework concerns competition policy and the governance of dominant platforms. When a few companies capture large market shares, their ability to slow or shape the direction of innovation can be profound. The laureates’ work implies a trade-off: too much protection of incumbents dampens entry and the Schumpeterian churn that raises
productivity; too little attention to market power can let incumbents reap scale advantages that block nascent rivals. The practical takeaway is nuanced – regulators should tilt the playing field toward vigorous rivalry in product and technology markets while providing predictable rules for intellectual property, standard-setting, and data portability that lower the political returns from blocking disruptive challengers. This helps innovation produce social rather than merely private returns, and it prevents the political economy of incumbency from calcifying into stagnation.

Third, the Aghion-Howitt perspective emphasises the importance of complementary institutions: finance, education, and public research. Financing the risky, early-stage innovations that displace well-established technologies requires patient capital and markets that reward experimentation rather than short-term rent-seeking. Education systems that equip workers with transferable skills and lifelong learning lower the social cost of turnover, making the workforce resilient in the face of technological reallocation. Public research and infrastructure investments shape the frontier of technological opportunity; they can manoeuvre creative destruction towards socially valuable goals – for example, sustainability, health, and inclusive digitalisation – if coordinated with industrial policy that avoids cronyism.

The Nobel of Aghion, Howitt, Mokyr, and their peers signals a broader intellectual shift: growth theory now more explicitly recognises dynamics, institutions, and politics. The mathematics of creative destruction gave economists a tool to move beyond static welfare comparisons into a richer analysis of path dependence, lock-in, and political economy. That matters for sustainable development because the environmental and social challenges of the 21st century – climate, biodiversity loss, demographic shifts – are problems of dynamic transformation, not one-off reallocations.

To steer these transformations towards resilient and equitable outcomes, policymakers must create environments where destructive displacement is not a source of permanent impoverishment but a managed passage towards better livelihoods and a healthier planet. The prize thus celebrates not only a model but a policy imagination, one that sees the management of conflict and the design of institutions as central instruments of long-term prosperity.

(The writers teach at the Berlin School of Business and Innovation)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)