What The Latest Nobel Prize Can Tell Us About the Future of AI

The Nobel Prize in Economics winners for 2025 named on Monday: (L-R) Joel Mokyr, Philippe Aghion, and Peter Howitt (Jonathan Nackstrand / AFP / Getty Images)

In the year of artificial intelligence, it’s fitting that the latest Nobel Prize is all about understanding new technologies.

On Monday, the Royal Swedish Academy of Sciences awarded the 2025 Nobel Prize in economics to Joel Mokyr, Philippe Aghion, and Peter Howitt. Their work on the economics of technological innovation is timely and foundational to understanding how AI could change the economic landscape. And it’s a reminder that U.S. innovation relies on a fragile balance of government policy and free markets.

“This year’s laureates both explain how innovations feed into sustained economic growth, and how a regime emerged in which new products and processes are continuously introduced in the marketplace despite the conflicting interests they create,” the selection committee said in explaining their decision.

The three laureates help us understand how we’ve reached our current state of technology.

Before the industrial revolution, economic growth stagnated for centuries. Since then, though, advanced economies have seen comparatively sustained growth. Mokyr is an economic historian, and his work focused on the reason for that shift. In his telling, science and the practical knowledge of industrial production began a virtuous cycle that continues through today.

Scientists do basic research and produce knowledge that on its own doesn’t impact economic growth. Technologists and capitalists take that science and turn it into new products, services, and business processes, creating the wealth that funds new scientific inquiry through private and public grants. Mokyr says the 19th century brought a new culture of openness to science and technology, despite the threat to established interests that they bring.

The work of Aghion and Howitt takes up the story from there, theoretically describing the “creative destruction” of moments like today, when the technological landscape is shifting, unsettling the largest players.

Technological innovations undermine the advantages that incumbent companies have, and they allow new companies to steal business from them. Aghion and Howitt’s work took the idea of creative destruction, which was already familiar to economists, and peered into the nuts-and-bolts of it. Their work, and that of other economists who followed, has been the go-to policy framework for encouraging innovation.

The U.S. has a particularly dynamic economy, with high rates of job and firm creation and destruction happening at the same time. This churn is the result of a bundle of policies and institutions that encourage innovation at the firm level, and protects yesterday’s innovators without making them entrenched.

The Nobel committee members were likely thinking about AI when they awarded the prize. The technology has brought one of those inflection points when new companies have a chance to supplant incumbent powers, the same way the incumbents were once challengers. Mainframe computers were disrupted by PCs, which were disrupted by the World Wide Web, which was disrupted by smartphones. The incumbents don’t go away, but the new entrants can race past them.

All of it is now being disrupted by AI in ways not fully understood at this early stage. Private investors are counting on this disruption; since 2024, they have funded AI start-ups with $259 billion, according to Crunchbase. Big Tech companies are defending their turf, also spending hundreds of billions to stave off irrelevance in the AI age.

Aghion and Howitt lay out key ingredients that enable the innovation flywheel: patent protection that doesn’t go too far, support for higher education, innovative financing, countercyclical fiscal policy, open trade, and lenient bankruptcy laws that efficiently reallocate capital and labor.

A few of those ingredients are being challenged by new Trump administration policies, but most of America’s innovation framework remains in place. That suggests continued upheaval among tech businesses, with new tech giants emerging and some going away.

OpenAI is making an early bid to become a colossus in the AI age, but many of these new companies may not yet be on anyone’s radar, and some might not even exist.

To the latest Nobel laureates, that’s exactly how it should be.

Oracle stock had another whipsaw week. Shares have been volatile since early September, when the company reported a massive increase in its backlog, which turned out to be driven largely by a new multiyear $300 billion cloud contract with OpenAI. The stock soared 36% on the news.

At the time, this column recommended that Oracle investors bank some profits. Since then, Oracle shares have declined 5.0% while the tech-heavy Nasdaq 100 is up 3.5%.

The slide could trigger a short-term rally, but investors shouldn’t forget the long-term risk tied to OpenAI, which underlies Oracle’s growth.

There’s still no clear answer as to where OpenAI will get the money for its Oracle cloud contract. Or how Oracle itself will finance the capital expenditures required to fulfill its end of the bargain. Perhaps most complicated: Where will the companies find the electricity to power these data centers?

Oracle’s long-term value relies on answers to these thorny questions.

Write to Adam Levine at adam.levine@barrons.com