Surprising Insights and the 2025 Nobel Laureates in Economics

The 2025 Nobel Laureates in Economic Science are being recognized for their contributions to understanding the determinants of economic growth. Growth is generally seen as a good thing and the work being recognized was done more than 30 years ago. So, what was the surprising insight and, more importantly, what do others not understand about it?

I want to start on a personal note: I am pleased to say that the Canadian member of this trio (Peter Howitt) was a professor at Western University while I worked on my Ph.D. thesis. He was a quietly impressive scholar even then. It really is surprising how much you learn by being around smart people. Many decades later, I am still benefiting from what I learned during my time with that group of faculty.

It is not surprising that economic growth enables lots of good things to happen: people have more income to spend (obviously) and loosening the income constraint enables societies to worry less about non-financial concerns (such as climate change, redistribution). The benefits of growth are so well-known now that some historic context is needed to understand its fundamental nature. An article in the Economist ($) notes that, for most of human history until the 1700s, growth was almost non-existent. Now, if the annual growth rate were less than 2% per year, economists and governments worry.

For the best discussion, I suggest reading the “Popular Information” or “Advanced Information” provided by the Nobel Foundation. Reading the comments on news articles at leading newspaper (Globe and Mail ($) in Canada and the New York Times in the United States) shows how much is misunderstood.

To over-simplify the comments, and apply the theme of this blog, the contribution of these Laureates surprises people because it is not about the well-known effects of an innovation on a short run equilibrium (where an innovative firm gains profit and market share from less innovative competitors) nor is it about the well-known effects of an innovation on a long run equilibrium (where competitors survive by copying or offsetting the innovation). Their contribution is beyond the never-ending debates about monetary and fiscal policy.

Their work studied equilibrium growth in a very long run sense, where the average rate of innovation is a consequence of other factors. Their insight is about finding a point of balance between the investments in innovation made by one firm when those innovations stimulate other innovations (by other firms!) and when all innovations have a limited economic life span. That kind of analysis needs a perspective beyond any one invention, any one inventor, or any one market.

These points seem to be a surprise to some critics and commentors.

Some comments said that economists focus on growth excessively. Yet, innovation enables gains from trade: e.g., new medicines have increased the quantity and quality of life. The decisions which enable growth have an opportunity cost which is measured in terms of using non-renewable resources or environmental damage, but it is inaccurate to say that all growth is bad or that economists focus on growth more than other people.

Some comments criticized the discipline of economics because, supposedly, the only acceptable answers are those accepted by an elite cadre of billionaires and powerful capitalists. This type of comment is amusing given that the Award notes currently-powerful companies will be replaced by more innovative companies just as today’s innovative companies replaced a previous generation of companies in the world, US and Canada.

Some comments mentioned artificial intelligence as a good or bad innovation. Certainly, AI is newsworthy but, as was true of previous great innovations, it is not yet clear that AI is profitable or productive for users.

Sillier comments deserve a silly response.

• Many of the comments were about old problems: e.g., the environment, income inequality, and current political debates.
  • These problems are real. They would be harder to solve if economic growth stopped. The comments usually failed to note the Laureates’ insight.
  • This debate between too much and too little growth reveals the need to think “on the margin” about the effects of broad economic forces.
• Some noted that economists hide the obvious with jargon and obscure mathematical symbols.
  • I find that, especially for dynamic problems with lots of uncertainty, mathematical analysis is necessary if you want to avoid self-deception. “The cry ‘I could have thought of that’ is a very popular and misleading one, for the fact is that they didn’t, and a very significant and revealing fact it is too.” Douglas Adams
• Some noted that Economics is not a Science while other commentators noted that the Award was given to tenured faculty members who did not need to deal with real world problems.
  • Those comments seem to refute each other.
  • This award explains why, for most of human existence, practical knowledge alone did not enable economic growth.
• Constructive comments proposed thought leaders who might be more deserving.
  • Some of that work is worth reading.
  • Some of the proposals are not. I say this because my list of five basic principles was developed by recognizing flaws in seductive-but-limited arguments. Or, as a previous Nobel Laureate said when asked why only Economic Science has a Nobel Prize but not Psychology or History: “Don’t worry, they have already have a Nobel Prize in … Literature”.

Congratulations to these Laureates. Best wishes to the surprising new ideas which are overlooked by most people today and will be recognized in the future.