The Nobel winning paper by Aghion and Howitt

The Nobel winning paper by Aghion and Howitt: A comment

In popular information released by the Nobel committee this year, it calls the model presented by Aghion and Howitt “a groundbreaking model”. It stated,

The model that Aghion and Howitt presented in their 1992 paper was the first macroeconomic model for creative destruction to have general equilibrium.

Modern general equilibrium models started with the Arrow Debreu (1954) model. In their paper, Arrow and Debreu acknowledged an assumption in the model is “clearly unrealistic”. After the general equilibrium model gains dominance over time, few people bother to mention if the assumptions in their works are “clearly unrealistic”.

Let’s read the paper by Aghion and Howitt (1992) and check its assumptions.

There is a continuum of infinitely-lived individuals, with identical intertemporally additive preferences defined over lifetime consumption, and the constant rate of time preference r > 0. (Aghion and Howitt, 1992, P 327)

In their model, people live an infinite life. There is no demographic change. It excludes the most important long-term factor in social and economic changes. This is clearly unrealistic.

Productivity parameter, defined in (2.3) in their paper, is

Here  > 1, t is the total number of innovations, which increases over time. Productivity parameter is a non-decreasing function of time. In this economy, the worst thing that can happen is stagnation. Decline is an impossibility in this model.

Each innovation creates a new monopoly and destroys the old monopoly. This is how “creative destruction” is modelled. Since the productivity parameter defined in the model increases over time, “sustained growth” is guaranteed from its assumptions.

However, a creative destruction doesn’t necessarily generate growth in reality. Two recent examples of creative destruction are the blowup of Nord Stream pipeline and the gain of function research that predates COVID19.  In neither case, the creative destruction generates “sustained growth”, although certain people benefited handsomely from such destructions.  

These assumptions are extremely unrealistic and restrictive. The assumptions of the model, by themselves, ensure “sustained growth”. This is purely a toy model. It gains no insight about the actual mechanism of economic activities. However, it is not merely a waste of resources. It can and do cause a lot of damages to our society.

First, there is no cost in innovation or any other economic activities in their model. This situation is very common in modelling in economic theory. In the early models of equilibrium theory, such as Arrow Debreu model, costs were there. To prove the existence of equilibrium, they had to introduce a “clearly unrealistic” assumption. In later models, to avoid such a “clearly unrealistic” assumption, they simply drop the cost altogether, which makes the model even less unrealistic.

The lack of cost in economic modelling, among other things, blinds the public from the danger of resource depletion and the rising cost of resource extraction. Indeed, in many resource poor and high resource consumption countries, fertility rates have already dropped below replacement rate for a long time. These societies are aging. Their social structures are crumbling. The majority of people outside the elite class have experienced “sustained decline”. Yet, the dominant institutions continue to sing the tune of “sustained growth”, completely oblivious of the plight and suffering of the ordinary people.

Second, it enables and justifies the heavy exploitation of the majority of the population by the powerful minority with massive taxation and wealth redistribution. Since innovation is the only thing matter, heavy taxation to the ordinary people, who do most of the work keeping up the society, is justified. Massive wealth is redistributed to a small group of oligarchs, who are supposed to be innovators.

Third, it justified the forcible replacement of the existing technologies by newer technologies, without allowing the people to choose. For example, some governments mandate the abolishment of the new internal combustion engine cars by 2035. This makes the new and hence innovative electric car manufacturers enormously valuable. Only when other countries make better electric cars, the same governments, which heavily subsidize their own electric car industries, now complain bitterly about unfair subsidy by foreign governments.

Fourth, in the model of Aghion and Howitt (1992), monopoly, as a reward to innovation, is the sole driver to the “sustained growth” of economy. It glorifies monopoly in an age when wealth and power is increasingly monopolised by a small group of people. Monopoly is the key in creating and maintaining wealth. (Galbraith and Chen, 2025) Everyone, innovator or not, instinctively seek monopoly for themselves under all circumstances. Monopoly certainly can be a driver for innovation. But more often, monopoly is the driver for suppressing innovation.

Fifth, in such an “endogenous” growth economic model, the economy is incapable of going down. Any time when the economy is going down, it must be caused by some “exogenous” shocks, such as oil price changes, or unfair foreign competition. In a society dominated by the doctrine of “endogenous growth”, it is incapable of reflecting on its own problems.

It would be fine for researchers, or anyone else, to play with unrealistic toy models, such as the general equilibrium models, which form the very foundation of the mainstream economic theory. But why are these models accorded great prestige, such as Nobel prizes?

This is probably because, for many people, we have been unable to achieve “sustained growth” for some time. In most parts of the world where the standard economic theory dominates the landscape, the fertility rates have dropped below the replacement rate. We can’t even replace ourselves, let alone achieve “sustained growth”.

When the majority of people in many parts of the world are struggling to achieve the parity of life enjoyed by their parents, it is important for the elites, who have caused so much destruction, creative or not, to the life of ordinary people, to justify the “sustained growth” of their own wealth and prestige. The mainstream economists are rewarded for implementing this justification, finely calibrating their theory to the ever-changing environment.

Many economists saturate their papers with boring and misleading mathematical models, such as the one presented in the Aghion and Howitt paper. What is the purpose of mathematics in mainstream economic theory? It is not for informing. It is for intimidating and harming, just like weapons of soldiers are for intimidating and harming. Soldiers are rewarded for their ability to intimidate and harm. Economists are rewarded for their ability to intimidate and harm, so few people would dare to question the orthodox. The awards themselves, such as the Nobel prizes, are also weapons of intimidating and harming.

While the paper was published some years ago, the authors of the paper are awarded for Nobel economic prize this year. The ideas presented in this paper are still highly relevant today, at least from the perspective of mainstream economists.

References

Aghion, P. and Howitt, P., 1992. A Model of Growth Through Creative Destruction. Econometrica: Journal of the Econometric Society, pp.323-351.

Galbraith, J.K. and Chen, J., 2025. Entropy economics: the living basis of value and production. University of Chicago Press.

Nobel Economics Committee, 2025, From stagnation to sustained growth

https://www.nobelprize.org/prizes/economic-sciences/2025/popular-information/