Reigniting the Australian Growth Engine

Last week, Joel Mokyr, Philippe Aghion, and Peter Howitt received the Nobel Memorial Prize in Economic Sciences for their research on how technological progress drives sustained economic growth. Together, their work explains why long-term prosperity depends on continuous innovation and renewal.  

Mokyr, an economic historian, reminds us that while growth and rising living standards seem inevitable, they are a recent phenomenon. Aghion and Howitt built on this by showing that modern economic growth depends on cycles of innovation and creative destruction – when old firms cannot keep up and exit, their workers and resources shift to more productive ones. This process of renewal drives long-run progress.  

What are the lessons for Australia? 

Australia’s economy thrived during the mining boom of the 2000s and early 2010s, but the momentum did not last. Productivity growth has flatlined, suggesting the next wave of innovation and renewal has been slow to emerge. Fewer firms are starting up or shutting down, industries have become more concentrated, workers are switching jobs less often, and business research and development (R&D) spending growth has slowed. Together, these trends suggest Australia’s growth engine has lost momentum – the very slowdown in creative destruction that Aghion and Howitt warned could hold back long-run growth. 

A growing body of Australian evidence suggests that Australia’s economic growth, like that of other economies, depends on continuous creative destruction: 

• The role of young firms: New research by e61 shows that young firms are powerful engines of job creation, productivity and economic growth. Exiting firms also play a role by making space for more productive businesses. As exit rates fall, these renewal forces are weakening. 

• High growth firms: In Australia, a small group of high growth “gazelle” firms drive disproportionate gains in employment and productivity, while many others struggle to catch up. Lower business dynamism, weaker technology diffusion and declining competitiveness in manufacturing and services mean fewer new ideas spread across the economy – holding back innovation, jobs and growth. 

• Increasing concentration: Evidence from e61 finds that rising market concentration and the persistence of “zombie” firms – unproductive businesses kept alive by policy distortions, or barriers to entry and exit – may be hindering competition, productivity growth and the renewal of the business sector. 

• R&D support: Recent evidence by Petr Sedlacek with his co-authors Marek Ignaszak and Daniel Robbins suggests that young and fast-growing, rather than small and old, firms offer the highest “bang for buck” from R&D subsidies. However, in Australia – where the economy tends to adopt rather than invent new technology – subsidies alone appear insufficient to trigger transformative innovation.  

• Job switching: Previous e61 research emphasises that workers switching jobs is an inherent piece of the creative destruction process, which can also lead to wage and productivity gains. The removal of non-compete clauses can strengthen these gains by allowing talent and ideas to flow freely across firms. 

These findings echo the message of this year’s Nobel Prize winners: when economies stop replacing the old with the new, productivity and long-term growth stalls. 

Why does this matter? 

The awarding of a Nobel Prize can seem like a remote and slightly abstract thing. But it is important because the Nobel laureates’ work offers something of a roadmap for reigniting Australia’s economic growth:  

1. Fostering open and dynamic markets: Competition policy that keeps labour and product markets open and dynamic can help new firms emerge, and old ones to adapt. While policy often helps small or established businesses to survive, genuine renewal requires the least productive firms to give way to more productive businesses. When barriers to entry or exit rise – through increased regulation, high compliance costs, or entrenched market power – it becomes harder for new ideas to challenge incumbents. 

2. Rewarding innovation: Stronger competition can support stronger innovation. R&D incentives – government support for certain types of innovation – work best when they reward experimentation and knowledge diffusion, not when they further concentrate market power among incumbents.  

3. Investing in talent: Tapping into a wider talent pool – through education, reskilling, and migration – is important for renewal. For instance, this could include viewing migration as a source of innovation capacity, creativity, and entrepreneurial energy, not just a population lever or a means to fill perceived industry skills shortages in the here and now. 

4. Securing the safety net: Sedlacek’s research demonstrates that periods of rapid innovation can result in a more unequal and volatile form of creative destruction that may increase economic uncertainty or even trigger downturns that lead to business closures and involuntary job loss. Reforms should ensure a safety net that supports Australians through the transition to a more dynamic and competitive economy.  

None of this is easy. Politics pushes in the opposite direction: industrial bailouts on an industrial scale, nostalgia for car making, suspicion of openness and trade, international student caps, and a tendency to weaponise business failures for political gain. As outlined in a e61-UNSW Policy Research Partnership report, the global economic landscape has changed – with amped up industrial policy and the use of trade as negotiation coin. In some ways, Australia has pushed admirably against this tide. In others, Australia has jumped right in.    

The work of the Nobel laureates makes clear that policymakers need to embrace change rather than resist it. This is how Australia can rekindle the creative destruction on which an economy thrives.