Nobel economics prize 2025: What's the big idea?

This BBC podcast is supported by ads outside the UK. America is changing, and so is the world. But what's happening in America isn't just the cause of global upheaval. It's also a symptom of disruption that's happening everywhere. I'm Asma Khalid in Washington, D.C. I'm Tristan Redman in London, and this is The Global Story. Every weekday, we'll bring you a story from this intersection, where the world and America meet. Listen on bbc.com or wherever you get your podcasts. Hello, and thanks for downloading the More or Less podcast. We're the program that looks at the numbers in the news, in life, and in the Sveria's Riksbank Prize in Economic Sciences in memory of Alfred Nobel 2025. And I'm Lizzie McNeil. Is that time of year again? The time when the Royal Swedish Academy of Sciences inspects the world's economists and decides who among them deserves 11 million Swedish Krona. That's just over a million dollars for their work. This year, they've awarded the Nobel Memorial Prize in Economics to Joel McKeer, Philippe Aguillon and Peter Howitt. Four in the Academy's words. Having explained innovation driven economic growth. As is our annual tradition, we've turned the tables on our illustrious presenter, Tim Harford, an economist himself, no less, to explain why it matters. Hi, Tim. Hello, Lizzie. Love me some Nobel Memorial Prize. Oh, yeah. Yeah, yeah. It's like Christmas. And he comes home. Yeah, obviously. Right, Tim. So tell me, what does having explained innovation driven economic growth mean for us less economically fluent individuals? Fair question. So economic growth is the process by which we get richer. So economies grow, you get more people. But also those individual people in the economy are enjoying a higher standard of living, more money, better medicine, bigger houses, better transport, but just better everything. So it has some downsides, but that's kind of an important thing. In fact, one Nobel Laureate in economics once said, once you start thinking about economic growth, it's hard to think about anything else. But the mystery is, why does it happen? And the classic economic model that goes back to Bob Solo decades ago was that basically economic growth is this process of accumulating capital. So you build more roads and you build more cars, you build more factories, you build more buildings. And as you accumulate more and more of this stuff, more and more tools, your economy gets more productive. And of course, everybody knew, even at the time, that kind of science and technology and ideas must also have something to do with it. But in Bob Solo's original model, that was kind of shuffled off to the side, like, oh, and also, by the way, there's science, but I don't have any don't have anything useful to say about it. And more recent economic models have tried to get to grips with advancing science and advancing technology and how that interacts with the process of economic growth. And that's what the three Nobel Laureates have been doing. So tell me about these guys, who are they actually? So they're a multinational group of researchers. So Joel Mokir is originally from the Netherlands, Philippe Aguillon from France, Peter Howitt from Canada. And Aguillon and Howitt are basically the economic theorists, whereas Joel Mokir is an economic historian. OK, let's get into the history first. So what's interesting is that our current era of constant economic growth is relatively a recent thing, isn't it? Which is weird because we didn't start inventing things in the industrial revolution. There's been scientific advances before, but they haven't really seemed to lead to economic growth. So you've got the printing press in the 1400s. You've got the heavy plow thousands of years ago. You've got you've got the windmill. That's an important innovation. You've got innovations in shipping technology. You've got better better sales, you've got better rudders, you've got the stirrup. There's stuff, people invent stuff, but you don't really, for some reason, have this sustained process of economic growth. So if you look at the income per person, for hundreds of years, it's not really going anywhere. So, for example, in in the UK, really between 1200 and maybe 1700, nothing's really happening. People aren't really getting any richer. The only economic growth you have is population growth. So, Mokir is saying, OK, why do you suddenly get this takeoff in economic growth, in incomes, in 1750, 1800, and just goes and goes and goes and goes. And we're just incomprehensibly richer than people were in, say, 1750. Why does that happen when you had innovation before? And Mokir basically describes this self-reinforcing process. So he has this idea of something called prescriptive knowledge, which is basically practical knowledge. And there's also propositional knowledge, which is basically scientific theories. And it's not until the Industrial Revolution or just before the Industrial Revolution that you get this interplay between scientists and the boffins developing new theories. And then you've got the engineers and you've got the practical people who are developing new things and the new things lead to better theories and the theories lead to better things. And that process really takes off. And that is one of the key contributions that Mokir makes. Yeah, and this ties into Aguion and how it's work, who were working on something called creative destruction, which sounds quite punk, quite like it. Yeah. I mean, creative destruction is most famously associated with the Austrian economist, Joseph Schumpeter, although I believe the phrase was coined by Werner Sombart, who's a German kind of sociologist. But anyway, the whole idea of creative destruction is you create a new idea and it's going to destroy what came before it. You create a better computer chip and you wipe out all the companies that made the old fashioned computer chips. And before then, they're just the transistors. And before the transistors, those funny valves that used to blow up all the time. Each time you come up with a new idea, you're destroying the old. And the whole process of, say, productivity growth, the whole process of people getting richer involves people in less productive jobs losing those jobs and being out of work and then having to find some new way to make a living. So that's a very important idea in general. And you need a culture that can accept it if you want technological progress and economic growth. What Aguion and how it did is quite different from Joel Mocha's scholarly works of economic history was to produce a mathematical model. And this is the kind of thing that economists really like is mathematical models. So they're trying to describe a model that, on the one hand, generates economic growth. So you're describing an economy that's getting bigger and bigger and bigger. And also links that economic growth to the amount of research and development that's being done in the economy. And on top of that is describing the incentives of different players in that economy. So you've got households who might save and that their savings provide the resources to do research. And then the Aguion and how it model also describes the decisions of firms. They they might want to spend money on research in order to get a patent. And if they get a patent, they kind of climb to the top of the as this sort of ladder of top dog firms. So they they climb to the top of the ladder of top dog firms and they're making the most money. But then all the other firms on the other rungs of the ladder are also trying to invest and get their own patent. And then they will get to the top of the ladder. All of this is going into the the mathematical modelling that Aguion and how it are doing. And economists think that sort of thing is tremendously clever. And has this model been kind of proving because it's all one thing coming up for the model? It's another thing to actually run the model and see what the effects are. I mean, proof in economics is a funny thing. Let's just say it stood the test of time in that it's been influential. Economists like it. Economists have found it very useful. And I studied this, the Aguion how it model. So it was published in 1992. I was doing my master's degree in economics in 1996. And Aguion and how it was had become fundamental to the way economists thought about macroeconomics and growth. So I was having to kind of figure this model out as a young economist. It was already influential then. So in that respect, it stood the test of time in terms of whether any model and these models are complicated, but they can be expressed in a few equations. And whether a few equations are ever really going to tell you how the real world itself is going to advance. I mean, I don't think that that's something that these economists would ever promise. Well, thank you, Tim. My pleasure. It's been very nice sitting in your chair. Nice cushion. That's it for this week. If you've seen a number in the news that you think we should take a look at, email us at more or less at bbc.co.uk. We'll be back next week. Until then, goodbye. America is changing, and so is the world. But what's happening in America isn't just the cause of global upheaval. It's also a symptom of disruption that's happening everywhere. I'm Asma Khalid in Washington, D.C. I'm Tristan Redman in London, and this is The Global Story. Every weekday, we'll bring you a story from this intersection where the world and America meet. Listen on bbc.com or wherever you get your podcasts.