At a pivotal moment for the world economy, the 2025 Nobel Prize in Economics rightly honors Joel Mokyr, Philippe Aghion, and Peter Howitt for showing how the forces of innovation drive sustained economic growth and lift global living standards.
Joel Mokyr was recognized for his influential work on the role of knowledge in driving sustained economic growth. He showed how the interaction between scientific knowledge and practical know-how enabled the transformation of ideas into technologies that fueled productivity and prosperity. In A Culture Of Growth: The Origins Of The Modern Economy Mokyr emphasizes that modern economic development emerged from a culture that valued the pursuit, sharing, and application of useful knowledge. Central to this process is a robust system of IP rights, which not only incentivizes the creation of new ideas but also ensures their broader dissemination and implementation. By protecting inventors and rewarding innovation, a strong IP system plays a crucial role in turning knowledge into tangible economic progress, a key insight of Mokyr’s contribution.
Philippe Aghion and Peter Howitt won the award for their groundbreaking theory of sustained economic growth through Schumpeterian “creative destruction” – a continuous cycle where new innovations continuously replaces outdated technologies and business models, boosting productivity and welfare. They emphasize that this process does not happen by accident but rather shaped by the complex interplay of culture, institutions, and public policy, particularly through public investments in research and development (R&D) and a strong intellectual property (IP) system. For the innovation cycle to be sustainable, society and the government must protect innovators’ rights, allowing them to keep control over their inventions and earn returns on their efforts. This protection provides the necessary profit incentives and motivation for inventors and firms to continue investing in and improving upon existing technologies.
More than anything, the joint work of these economists shifted the focus to the Knowledge Economy in which we all live today. In 1975, over 80% of the value of S&P 500 firms was derived from tangible assets like labor, machinery, and capital with only a small share attributed to intangible assets. Today the trend has completely reversed. Intangible assets, such as patents, trade secrets, know-how, software, and brand value, now account for around 90% of the value of S&P 500 firms.
In this modern Knowledge Economy, intangible IP assets such as patents and know-how play a critical role. Aghion and Howitt’s work underscores that patents and other forms of IP protection are essential for incentivizing innovation by providing inventors temporary monopoly power to recover R&D investments. Their research, for instance, shows a positive correlation between patent activity and per capita GDP growth in the United States. However, Aghion and Howitt also warn of the risks of overly expansive IP protections. When patent rights are too broad or too long-lasting, they can actually stifle innovation by blocking follow-on inventions and raising barriers to entry for new challengers. Thus, their work highlights the importance of striking the right balance in IP policy. It has to be strong enough to incentivize innovation, but not so strong that it suppresses competition and future progress.
The laureates further highlight the importance of investments in R&D as a driver of innovation and long-term economic growth, as well as incentives that drive those investments. They collectively make a compelling case that innovation generates positive externalities, and therefore public support for R&D is essential particularly because firms tend to underinvest in R&D given they cannot fully capture the broader social value of their innovation. Importantly, public funding (grants, subsidies, tax credits) crowds in private investment rather than crowding it out. And yet, in the United States today, the vast majority of R&D investments comes from private firms and not from public sources, a sharp contrast to the 1960s when government played a more dominant role. For private firms to continue investing heavily in R&D, they must be able to recoup their investments in intangible assets – IP, including know-how. This further underscores the essential role of a strong IP system particularly in a market-based knowledge economy like that of the United States.
It is therefore no surprise that as intangible assets, including IP and proprietary know-how, becoming more central and important in driving firm value and economic growth, we see a growing trend in the number of IP-related disputes. In recent years, both the frequency of these disputes and the median damages awarded or settled in litigation have grown significantly. Moreover, IP disputes are also becoming more global in nature, with many lawsuits having multiple proceedings in United States, as well in other jurisdictions such as China, Europe, UK, and beyond.
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