This year’s Nobel lesson for India: Adapt to technological change but manage disruption too

Consider telephones: from rotary dials to smartphones, each leap has been creative. But it’s also destructive, as each new phone outmodes its predecessor. This year’s Nobel Prize in Economics honours the scholars who decoded this paradox. How did sustained economic growth begin and how did it continue despite the disruption it causes? The answers carry profound implications.

Laureate Joel Mokyr notes that technological innovation alone can’t explain economic growth because technological change predates sustained growth. For millennia before the Industrial Revolution, major innovations took place: the heavy plough, printing press, etc. Yet, GDP per capita in England, Sweden et al barely budged for four centuries. Mokyr identified the crucial prerequisites.

First, “useful knowledge” must combine prescriptive knowledge (instructions for operating a technology) and propositional knowledge (scientific understanding of why it works). Second, skilled mechanics and engineers were needed to translate ideas into economic reality. Finally, societies required openness to change: institutions that let competing interests negotiate and come up with mutually beneficial compromises, unlike the resistance of Luddites, for example, who destroyed textile machinery.

The other laureates, Philippe Aghion and Peter Howitt, created a mathematical framework of creative destruction, where new innovations continually replace older ones to sustain growth. It reveals two crucial insights: creative destruction can generate stable aggregate growth despite firm-level disruptions and moderate market power is essential for innovation.

While monopolists can block entry, too much competition can leave little incentive to innovate. Governments must balance support for innovation against the “business stealing” effect. Technology could also bite back: higher pollution and privacy invasions can lead to further innovations or “destructive creation.”

The model guides practical questions: How should we set R&D subsidies? How do we design safety nets for workers displaced by technological change? The Nobel laureates’ message is sobering: 200 years of unprecedented economic growth is brief compared to millennia of stagnation. We must not take progress for granted. Instead, we must nurture the factors that sustain growth.

For India, three critical challenges emerge. First, with limited resources, should India aim to innovate at the frontier or adapt existing technologies? Most economies aren’t at the technological frontier, yet many experience substantial growth.

The bicycle race analogy is instructive: being second, sheltered from the wind, can still mean reaching the finish line in impressive time. Perhaps more important than frontier innovation is the widespread deployment of new technologies, through labour market organization, efficient bankruptcy and skill development. Less glamorous than building AI centres, but likely more consequential.

Second, India must adapt technologies to its unique context. As a labour-abundant country with expanding working-age cohorts, basic economics suggests emphasizing labour-intensive production. Yet, paradoxically, India increasingly adopts capital-intensive technologies, with exports shifting from textiles to engineering goods.

Consider AI’s potential. Nearly half of India’s working-age population works in agriculture, where AI can enhance productivity. The PM-Kisan chatbot makes direct benefit transfers accessible through voice-enabled information. This approach could extend to the Public Distribution System and other programmes where digital literacy limits access. Technology can be adapted for developing contexts. The challenge is scaling it cost-effectively.

Third, India must address labour market disruptions from technological transitions. Active labour market policies like training programmes, skill development and employment subsidies plus passive policies like unemployment insurance can mitigate the adverse effects of major transitions.

Yet, globally, median spending on active programmes is merely 0.3% of GDP. India’s spending focuses primarily on active schemes like the rural job guarantee, rather than passive unemployment insurance and other benefits. With over 90% of jobs informal and lacking social security, workers have minimal support between jobs or for reskilling across sectors. The fundamental question isn’t whether technological change generates aggregate benefits. It’s whether societies can implement complementary policies to ensure equitable distribution.

The Nobel Prize reminds us that sustained prosperity requires more than brilliant innovations. It demands institutional frameworks that harness creative destruction while protecting those it displaces.

For India, this means making strategic choices on innovation versus adaptation, ensuring that technologies fit local contexts, and investing in labour markets. The new labour codes are an important reform.

Two centuries of growth have transformed humanity, but the next chapter depends on whether we can maintain openness to change and adaptation while managing its inevitable disruptions. Our greatest challenge lies in finding innovative ways to maintain this balance.

The author is professor of economics at Ashoka University and director and head of Ashoka Isaac Centre for Public Policy.