The 2025 Nobel Prize in Economics and the Brazilian Challenge of Stagnant Innovation

This article was originally published in Ceteris Paribus, on October 13, 2025.

On Monday morning (13), the world of economics received a clear message: innovation without institutions does not sustain growth. The 2025 Nobel Prize in Economics crowned a trio — Joel Mokyr, Philippe Aghion, and Peter Howitt — for explaining economic growth driven by innovation. This is the second consecutive Nobel Prize centered on economic growth theory. The trio consecrates an agenda that unites history, theory, and public policy — and offers a clear diagnosis for Brazil’s greatest bottleneck: stagnant productivity.

For centuries, humanity’s income remained virtually flat. The so-called “hockey stick graph” shows millennia of stagnation followed by a sudden explosion of wealth. Mokyr dedicated his career to answering what triggered this curve.

His answer is institutional and cultural: the blossoming of an ecosystem of ideas — what he calls the “Republic of Letters” —, a connected, competitive, and intellectually free Europe where scientists and artisans exchanged discoveries and transformed them into technology.

This environment united two types of knowledge: propositional (“knowledge what”, the scientific foundation) and prescriptive (“knowledge how”, practical knowledge). For most of history, these existed in separate worlds. When these worlds met — in English workshops, French laboratories, and Dutch printing presses — the feedback loop between science and practice that sustained the Industrial Revolution was born. Mokyr’s message is simple and powerful: modern wealth is born when knowledge stops being a privilege and becomes a system.

If Mokyr explained why growth began, Aghion and Howitt explained how it is sustained. Their 1992 model, “Growth Through Creative Destruction,” formalized Schumpeter’s insight: economies grow when the new replaces the old — and this occurs in waves, sector by sector.

In the United States, about 10% of companies close and another 10% open each year. Data from 1988 to 2022 show that the sectors with the highest entry and exit of firms and workers are precisely those that increase their productivity the most. In other words, the more movement and renewal, the greater the efficiency gain — it is the famous engine of creative destruction in action.

Aghion and Howitt showed that the growth rate depends on two factors: the intensity of each innovation and the frequency with which they occur across different sectors. Progress does not come from a single revolution, but from thousands of small leaps that add up.

In subsequent works, Aghion and coauthors found an inverted U-shaped relationship between competition and innovation: when a company has too much power, like a monopoly, it has no incentive to innovate. When there is too much competition, companies lack the financial breathing room to invest in R&D. But when a healthy level of competition exists, companies scramble to improve products and processes. This subtle balance — neither monopoly nor price war — depends on good institutions and clear rules of the game.

Brazil is the classic example of a country stuck before the “Aghion-Howitt phase.” We have capital, a market, and good ideas — but we lack the institutional environment that allows the new to defeat the old.

Productivity has grown less than 0.5% per year for two decades. Brazil invested just 1.19% of GDP in R&D in 2023, less than half the OECD average of 2.7%. Furthermore, 60% of companies do not survive past five years in Brazil.

Meanwhile, complex regulations, legal uncertainty, and expensive credit create an ecosystem where the new is costly and the old is protected. The result is predictable: little creative destruction, a lot of status quo.

In Brazil, we still bet on national champions and directed credit, when we should be betting on competition, technical education, and technological diffusion. We need our own “Republic of Letters” — a system of ideas, businesses, and incentives that generates cumulative innovation.

The prize awarded to Mokyr, Aghion, and Howitt does not just celebrate growth theories — it celebrates the rare combination of culture, freedom, and competition that transforms ideas into prosperity. For Brazil, the lesson is clear: without institutions that allow the new to flourish, we will remain rich in ideas and poor in results. Or, in a Schumpeterian version: the future belongs to those who destroy their own past before the market does it for them.