Introduction
In 2025, Peter Howitt was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his contributions to the study of innovation-driven sustained economic growth. Together with Philippe Aghion, he published a research article in 1992 titled, “A Model of Growth Through Creative Destruction.” In this work, he introduced technological shocks as a key variable to standard growth models, alongside other factors that may disrupt the growth equilibrium. The addition became a foundation for his theory on creative destruction and its ability to produce sustained aggregate growth. His theory, which was widely regarded as a modern and advanced approach to previous growth theories, successfully earned him recognition as a Nobel prize candidate.
Peter Howitt’s theory, namely the theory of sustained growth and creative destruction, presents us with complex mathematical frameworks that perfectly encapsulate how creative destruction generates economic growth. The theory is an expansion of the term ‘creative destruction’ by Joseph Schumpeter, which refers to a cycle where new innovations displace obsolete technology. Additionally, he provided descriptions on the impacts of endogenous factors—particularly the cycle of innovation— towards market structures and dynamics. It is also mentioned that the result of creative destruction is firm competition, where each firm competes to innovate to maintain its significance.
The word ‘creative’ in creative destruction refers to newly emerged technological innovations, meanwhile ‘destruction’ refers to the natural process of eliminating older technology as a consequence. In “A Model of Growth Through Creative Destruction” (1992), Howitt explained that innovation is a driving-force of aggregate growth by enabling firms to produce larger quantities of output and increasing their production efficiency. Additionally, he mentioned that anticompetitive behavior arises subsequently, marked by the emergence of market barriers created by incumbent firms to maintain market dominance. The anticompetitive behavior will result in aggregate stagnation due to the impediment of innovation. These phenomena became a guiding tool for analysts and policymakers to identify possible causes behind patterns in annual GDP movements.
Sustained Growth in Relation to Creative Destruction
The theory of sustained growth and creative destruction refers to a process where the cycle of creative destruction, if occurring continuously, can generate sustained macro-level growth. In his article, Peter Howitt explained how innovation yields shocks to aggregate growth by establishing new production methods that are more efficient relative to previous methods, as each input of innovation simultaneously decreases production cost and increases output, resulting in a higher flow of profit for firms. Presented below is a GDP per person figure based in the United Kingdom and Sweden ranging in years 1825–2022 presented with major innovations in accordance to each period to illustrate the positive effects of innovation towards aggregate growth. For example, the invention of railways enables long-distance mobility and transfer of logistics at less time and cost in comparison to carts and wagons, thus stimulating economic productivity as illustrated by the ascent of the graph in the years 1825–1900.
Source: The Royal Swedish Academy of Sciences. (2025). From Stagnation to Sustained Growth. The Nobel Prize.
Sporadic patterns of growth stalling and stagnation have been linked to the rise of incumbent firms, as observed by Peter Howitt in “Creative Destruction and US Economic Growth” (2020). As innovation generates greater efficiency and profit, every firm that is in equal level competition undertakes research initiatives to gain leverage. Once innovation is achieved, the winning firm gains the leading market shares, while lagging firms contract. Thereafter, the incumbent firm will enforce anticompetitive barriers through research, patents, and lobbying to maintain its position and halt future innovations. Recalling that innovation generates aggregate growth, impediments will lead to static growth and if prolonged will result in decline as evidenced in models relating to firm productivity categorized by market shares and the job creation and destruction rate, when productivity of lesser firms and the job creation and destruction rate diminish.
Market Analysis & Model Usage
Several baselines and assumptions were made under Peter Howitt’s framework: (1) Every firm is in constant competition to innovate and innovation generates losses as well as gains; (2) Firms feature significant heterogeneity in development costs and innovation scale; (3) Incumbent firms improve on their products; (4) Firms eclipsed by a competitor in terms of innovation, rapidly contract; and (5) Creative destruction is centralized in firm dynamics. It is also mentioned in the 1992 research article that perfect competition in all markets is assumed, with the market for intermediate goods and patents excepted. Additionally, it is also noted that innovations simultaneously reduce production costs and increase output efficiency perpetually, with the new reduced costs serving as the current basis for future innovators. An increase in research would reduce the tenure of current monopolists, consequently reducing the expected present value of their rent. It is also important to recognize that each firm, especially incumbents, sought after patents for unconstrained use of new technologies.
The basic model of the sustained growth theory and creative destruction allows us to determine production of consumption goods through four tradeable objects––such as land; labor; consumption goods; and intermediate goods, the rate of costs affected by intermediate goods, calculating a market monopolist’s price and flow of profits, computing firm innovation levels, and determining research costs and labor wages in firms. Each model is interconnected, such that each incremental increase in innovation escalates consumption goods production, subsequently reducing the firm’s costs and introducing new lines of profit. Increased levels of labor in manufacturing and research results in higher wages, yet stimulates innovation and production of goods, which offers higher profit for firms. However, creative destruction disrupts these processes by reducing the flow of profit for lagging firms, in contrast to larger profits gained by firms that adopt new innovations.
Peter Howitt also extends his research to aggregate growth by applying endogenous factors to prior growth models in quantifying the effects of creative destruction. In particular, he endogenized the average rate of growth (AGR) and variability of the growth rate (VGR). He also considered conditions that could potentially deter research by measuring the marginal utility per new innovation under different elasticities and marginal rates of substitution, introducing varying arrival parameters to growth models, and analyzing innovation levels under laissez-faire. The results of his research provide us with insights towards conditions that supplement and discontinue growth within the topic of creative destruction, therefore solidifying his theory that creative destruction generates sustained growth, although under strict and specified conditions that does not discourage utility and inventions.
In another work, notably “Creative Destruction and US Economic Growth” (2020), Peter Howitt, alongside Philippe Aghion, analyzed setbacks in US economic growth using their developed growth theory. In the article, Howitt linked stagnation in US productivity growth to the existence of superstar firms–––firms with exceptionally large market shares––– by applying ideas constructed by David Autor and coauthors (2020) regarding innovation and entry discouragement of nonsuperstar firms by superstar firms. Compiling data from works of previous authors, Howitt argued that superstar firms contributed to setbacks in the US economy, as evidenced in the decline of the annual rate of job creation and destruction and the decline in productivity among weaker firms (95% of global firms) as opposed to dominant firms (the top 5% of global firms). The article therefore solidified the statement that creative destruction fuels economic growth, while market dominance as a result of competition hinders progress.
Conclusion
In 2025, Peter Howitt was awarded the Nobel prize in economics for his growth framework. Peter Howitt’s theory of sustained growth and creative destruction became a crucial part in grasping the influences behind economic prosperity, particularly innovation. However, fierce market competition that results in a single or few-firm market dominance became hindrances in achieving prosperity. Howitt studies market productivity data by using creative destruction as a basis in developing his mathematical models, developing previous growth theories to be applicable to realistic modern markets. Peter Howitt’s contributions became significant tools for economic analysis, providing us with new perspectives in evaluating aggregate performance.
References
Aghion, P., & Howitt, P. (2022). Creative Destruction and US Economic Growth. Capitalism
and Society, 16(1), 3–11. Retrieved from https://ssrn.com/abstract=4138770.
Aghion, P., & Howitt, P. (1992). A Model of Growth Through Creative Destruction.
Econometrica, 60(2), 323–351. https://doi.org/10.2307/2951599.
The Committee for the Prize in Economic Sciences in Memory of Alfred Nobel. (2025,
October 13). Scientific background to the Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel 2025. The Royal Swedish Academy of Sciences. https://www.nobelprize.org/uploads/2025/10/advanced-economicsciencesprize2025-1.pdf
Klenow, P.J. (2025, October 22). Sustained growth through creative destruction: Nobel
laureates Philippe Aghion and Peter Howitt. CEPR. https://cepr.org/voxeu/columns/sustained-growth-through-creative-destruction-nobel-laureates-philippe-aghion-and
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