[THE VIEW]How Do Nations Become Wealthy?

A Hint from the Nobel Prize
Changing Growth Formulas:
The Intersection of Technology, Human Capital, and Institutions

Why are some countries wealthy while others remain poor? What must a nation do for its economy to grow? The origins of modern economics lie in these very questions. Beginning with Adam Smith's "The Wealth of Nations," countless economists have spent centuries researching these topics. The Nobel Prize in Economics announced this month also recognized achievements in addressing such questions. So, what are the accomplishments of this year's Nobel laureates?

First, it is important to trace how economists have explained national wealth and economic growth over time. "Classical theories of national wealth" refer to the ideas of 18th and 19th-century economists. Adam Smith argued that the division of labor and an autonomous market free from government intervention were the driving forces of economic growth. David Ricardo emphasized free trade, while Thomas Malthus pointed to the relative ratio of resources to population as the key factor in growth.

In the 20th century, Robert Solow's research came to dominate growth theory. The so-called "Solow model" identified technological progress as the main driver of economic growth. In other words, affluent countries are those where technological advancement is active, while poorer countries lag behind due to slower technological development. In recognition of this work, Solow was awarded the Nobel Prize in Economics in 1987.

However, Solow's theory has a critical limitation: Why does technology advance in some countries but not in others? The Solow model did not provide an answer to this question. As a result, it lacked solutions to the practical issue of "what policies should a nation implement to achieve economic growth?" Subsequently, the field of economics expanded toward various growth theories with policy implications.

Robert Lucas and Gary Becker viewed "the accumulation of human capital" as the key factor in economic growth. According to their theories, a nation must encourage the accumulation of knowledge through education to foster economic growth. Another school of thought emphasized national and social institutions as fundamental drivers of growth. They argued that productivity rises-and thus economic growth follows-when individuals and companies can freely engage in economic activities and are fairly rewarded for their achievements. Therefore, governments should implement policies that guarantee fair compensation for investment and labor.

Recently, however, the trend in growth theory has shifted back toward a focus on "technological progress." Paul Romer, who won the Nobel Prize in Economics in 2018, and this year's laureates-Aghion, Howitt, and Mokyr-are prominent examples. They share the view that technological advancement is not something that suddenly comes from outside, but is determined within the economic system itself.

Yet there are differences among them. Paul Romer explained that the accumulation of intellectual capital across society (such as the development of new products) drives technological progress. In his view, existing technologies do not disappear but coexist with new ones.

In contrast, this year's laureates presented "creative destruction" as the core mechanism of technological progress. Creative destruction refers to the process in which innovation occurs amid competition among firms to create better products and services, resulting in existing technologies and products being replaced by new innovations. According to this theory, companies that succeed in innovation can enjoy monopoly profits for a certain period, but their position is eventually overtaken when another innovative company emerges.

The theory of creative destruction offers two important implications for national policy. First, technological innovation flourishes when economic openness and freedom of competition are guaranteed. This has significant implications for the current debate over protectionism and high tariff policies. Second, it directly addresses the fact that technological innovation can exacerbate inequality.

Workers accustomed to existing technologies may lose their jobs or experience industrial shifts due to innovation. Therefore, governments must provide support so that these individuals can maintain their livelihoods during periods of unemployment, and strengthen education and retraining programs to help them adapt to new technologies.

Seo Boyoung, Professor at Indiana State University, USA