…for an economy to thrive, it’s essential not only to have solid property rights but also to embrace what can broadly be termed as âeconomic freedoms.â This includes labor mobility; the removal of guilds; eliminating monopolies, both local and global; reducing excessive regulations; and, crucially, enabling free trade. Without such frameworks, a society risks stagnation and poor growth. —Joel Mokyr
The conventional argument for free trade often doesn’t highlight its most compelling advantages. Typical justifications emphasize static efficiency, referring to the optimal use of a limited set of resources. Economists use the term comparative advantage to explain how specialization and trade among people can result in collective gains compared to self-sufficiency.
However, trade plays a much more critical role in what economists describe as dynamic efficiency, the capacity of an economy to harness innovation and uplift living standards over time. This idea of dynamic efficiency is of prime importance to the economists who were awarded the 2025 Nobel Prize: Philippe Aghion, Peter Howitt, and Joel Mokyr.
Aghion and Howitt examined what Joseph Schumpeter famously termed creative destruction. A century on from Schumpeter, we witness this phenomenon routinely within the fields of computing, communications technology, and software development. Mainframes have been overshadowed by personal computers and the Internet, landlines by smartphones, and artificial intelligence has begun to challenge numerous industries.
Mokyr was acknowledged for his contributions to economic history, especially his insights into the Industrial Revolution. He noted that technological advancements result from a beneficial cycle wherein practical inventions spark curiosity, trigger scientific breakthroughs, and then lead to enhancements in practical applications.
Moreover, Mokyr stressed that innovation and growth can be hindered by protectionist measures. It is this dynamic efficiency that suffers when trade barriers are established. This remains a vital lesson that contemporary policymakers seem hesitant to acknowledge.
In our 2011 publication, Invisible Wealth Nick Schulz and I had the privilege of including an interview with Mokyr, along with discussions with other advocates of dynamic efficiency, such as Douglass North, Robert Fogel, and Paul Romer. In light of his recent Nobel recognition, revisiting themes from that interview is particularly timely.
Mokyr posits that the Enlightenment represented a challenge to economic protectionism.
In my book, I assert that one significant development in eighteenth-century Europe was a backlash against what we might call, in modern economic terms, ârent-seeking,â a concept that fundamentally encapsulates the essence of the Enlightenment. It was about religious freedoms, tolerance, and human rightsâyet also a counteraction to mercantilism…
Adam Smith shouldnât be credited with originality in isolation… There were many thinkers advocating a similar message: the need to dissolve guilds, monopolies, and various restrictive legislations. Most critically, the advocacy for free trade, both internally within Britain and on a global scale….
…observing those few regions in Europe where Enlightenment ideas either failed to take hold or were actively resisted by entrenched interests, we can see a direct correlation with economic underperformanceâconsider Spain and Russia, in particular. (p. 119â120)
Mokyr discussed how ideas circulate through personal interactions.
A significant portion of technological discourse occurs via direct personal exchanges…You can only glean so much from books, even in this digital age. (p. 122)
Tacit knowledge can only be absorbed through face-to-face interactions.
Mokyr cautioned that protectionist forces are always present in a thriving society.
Historically, it is evident that no entity retains technological dominance indefinitely. This phenomenon occurs primarily because technological advancements foster vested interests determined to resist new innovations that threaten to displace them, just as they ousted previous technologies…These groups employ various tactics, including regulations framed as safety measures, environmental protection, or job preservation, to shield the human and physical capital tied to outdated technologies. (p. 123)
In the absence of the pressures from global trade, industries risk stagnation.
Take, for example, the American automobile sector of the 1950s, where there was a complete lack of technological progress…By the late 1960s, they were still producing vehicles like the Vega and the Pintoâsome of the most poorly made cars ever…
Then came the Japanese manufacturers…They produced superior cars using better materials at lower costs, resulting in longer-lasting vehicles. Fast forward to today: American-made cars are significantly improved compared to those from the late 1950s through early 1970sânot due to a lack of capability but because competition mandated innovation. (p. 126)
Currently in America, many politicians appear swayed by the enticing rhetoric of protectionists. Industrial policy, which equates to protectionism, is garnering increasing support. Concepts like globalization and neoliberalism have become pejorative terms.
However, drawing lessons from history, itâs evident that anti-globalization sentiments will devolve into basic special-interest politics. Instead of fostering dynamic efficiency, we may inadvertently invite economic stagnation. The insights from the 2025 Nobel Laureates serve to remind us of this reality.
[1] Quoted from an interview conducted in Arnold Kling and Nick Schulzâs Invisible Wealth, p. 119.
[2] Invisible Wealth was initially published in 2009 as From Poverty to Prosperity
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…for an economy to thrive, we need more than solid property rights; we must embrace what could be described, albeit somewhat loosely, as “economic freedoms.” Key components include labor mobility, the dismantling of guilds, the elimination of monopolies, both local and global, the eradication of overly restrictive regulations, and importantly, the promotion of free trade. Without these elements, we risk stagnation and insufficient growth…
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Today, the Nobel Prize in Economics was awarded to Joel Mokyr (Northwestern University), Philippe Aghion (London School of Economics), and Peter Howitt (Brown University) “for elucidating innovation-driven economic growth.â1 This follows a noteworthy trend where the Committee has been recognizing economics focused on growth and innovation over traditional economic considerations…
