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The 2025 Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel is awarded to Philippe Aghion and Peter Howitt, along with Joel Mokyr for understanding how innovation drives economic growth. The global economics community is celebrating their works. Aghion and Howitt have been in the limelight for their pioneering work on “growth through creative destruction.” Their models, building on Joseph Schumpeter, have contributed to formalising how innovation drives long-term economic growth by replacing outdated technologies with new ones. In their elegant equations, entrepreneurs compete to innovate, old firms exit, new firms enter, and economies grow richer.
But viewed from the vantage point of the labour surplus economies like India and others from the Global South, where informality and structural inequality shape the everyday economy, the story does not seem to be this simple and straightforward. The same processes that generate innovation in the North may often translate into precarity, exclusion, and fragmented growth in the South.
A critical political-economy lens reveals that the Aghion–Howitt model, while revolutionary in formal terms, misses the social and political foundations of how innovation unfolds in post-colonial and surplus-labour economies like India.
Understanding innovation in surplus economies
Aghion and Howitt’s framework assumes a capitalist world of formal firms, competitive markets, and wage-labour absorption where these conditions hold, at best, partially in the developing world. In India, nearly 90 per cent of the workforce remains informal, largely self-employed or casually employed outside the purview of labour law and social protection. In the case of such economies, can “creative destruction” translate into creative reallocation or fair redistribution? When industries modernise or automate, displaced workers often do not move into high-productivity sectors; instead, they fall back into low-end urban services or subsistence self-employment. This is not a temporary “adjustment cost” but a structural condition, what Marx called the “relative surplus population.”
Capitalism, in this view, does not aim to fully employ all labour; it thrives on maintaining a reserve army that disciplines wages and sustains flexibility. In the Global South, growth largely relies on drawing cheap labour into circulation, not necessarily on technological upgrading that raises productivity and wages.
The Aghion–Howitt model imagines innovation as growth-enhancing. But, in economies with chronic surplus labour, innovation can deepen exclusion, where creative destruction can turn into continuous informalisation. When textile mills automate, garment units shift to contract work, or app-based logistics replace regular drivers, formal employment shrinks even as “innovation” accelerates. This has increased the presence of precarious insecure labour through increase in jobs in nonpermanent works, which maybe in the domain of the formal yet are not absorbed fully as formal employment.
Informality as structural
In mainstream development thinking, informality is treated as a residual, a temporary stage in the transition to modern capitalism. Once productivity rises, the logic dictates here that labour will move from low-productivity informal work to formal, high-wage employment.
But reality refuses to cooperate. Informality in the Global South is not a leftover, it is systemic. It is the mechanism through which firms outsource, subcontract, and casualise labour to cut costs and remain globally competitive. Informality allows capital to externalise reproduction costs, such as social security, healthcare, housing, all while maintaining a disposable workforce.
The gig economy exemplifies this contradiction. Digital platforms like Swiggy, Ola, and Uber represent Schumpeterian “innovation,” yet they thrive precisely by formalising informality, using technology to decentralise employment relations. Innovation becomes a vehicle for algorithmic precarisation, not transformation. The workers in this new age digital economy may be treated as ‘entrepreneurs’ or ‘partners’, however their working conditions are far from formal and decent.
A critical reading thus reverses the causal story: informality is not the enemy of innovation but the innovation and formal capital continues to depend on informal labour markets to supply cheap, flexible inputs. Informality and wealth accumulation reinforce each other: the growth of one intensifies the other.
In this light, policy narratives that promise to “formalise” through innovation or digitalisation miss the point. Without altering the underlying power structure, innovation tends to expand, not eliminate, informality.
The state as a political field
Aghion’s later work highlights the role of the state as a sort of neutral coordinator that invests in education, fosters competition, and protects intellectual property. But in post-colonial economies, the state is never neutral. It is an arena where class, caste, and capital intersect, and where innovation policy becomes a site of contestation.
In India, state-led initiatives like Startup India, Digital India, and production-linked incentive (PLI) schemes are celebrated as innovation boosters. Yet their benefits accrue disproportionately to capital-intensive sectors such as electronics, defence, fintech, that create few jobs. Meanwhile, sectors that absorb the most workers such as textiles, construction, and small manufacturing face declining support.
This reflects the case of post-colonial state, where welfare and innovation policies operate as mechanisms of containment, not transformation. Subsidies to the corporate sector coexist with fragmented welfare schemes that merely sustain surplus populations. From a critical standpoint, the state functions as an “innovation broker” for capital. By underwriting infrastructure, tax concessions, and digital public goods, it socialises risk while privatising returns. Informality persists because it is politically convenient, it keeps wages low, avoids labour unrest, and enables flexible accumulation.
A truly inclusive innovation policy would need to invert these priorities. As Tassos Papaioannou argues, building an innovation state for social justice requires redistributing not only income but also knowledge, participation, and decision-making, embedding innovation in communities rather than corporations.
The state’s challenge in surplus-labour contexts is not simply to “foster innovation,” but to steer innovation toward labour absorption and public good creation. Otherwise, it remains the midwife of inequality.
Whose needs and whose technologies?
Even when innovation occurs, the question rarely asked is, innovation for whom? We can no more treat innovation as a homogenous good, more is always better. But in economies marked by poverty, precarity, and ecological stress, the direction of innovation matters as much as its pace.
Most innovation today is capital-biased, it substitutes labour, automates production and concentrates rents. In a surplus-labour economy, such innovation exacerbates inequality instead of reducing it. The push toward AI and automation in manufacturing or service delivery, for instance, can intensify exclusion by shrinking labour demand.
Moreover, the global structure of innovation is hierarchical. High-value R&D, design, and IP ownership are concentrated in the North, where the South performs low-value assembly and service functions. This global division of labour channels profits and intellectual rents upward, a pattern dependency theorists identified decades ago.
Philippe Aghion and Peter Howitt’s contribution to economics is undeniable. Their models offered a coherent explanation of how innovation fuels long-term growth, a theoretical milestone after decades of treating technology as exogenous. But when transplanted onto the terrain of the Global South, the elegance of the equations collides with the messiness of reality. In practice, what Aghion calls "endogenous growth" (growth generated from within) still depends on external factors for peripheral economies. Domestic innovation systems are constrained by global regimes, capital mobility, and technology dependence. A critical re-direction would democratise innovation, open access to knowledge, public investment in local technologies, and participatory design with workers and communities. Innovation should not merely raise productivity; it should raise dignity.
In societies where surplus labour, informal work, and social stratification define the economy, innovation does not automatically translate into welfare or inclusion. To make creative destruction genuinely “creative,” we must reclaim its social content. Innovation policy should ask not only how much we innovate, but who participates, who benefits, and whose labour bears the cost. That means embedding innovation in a broader political project, one that recognises informality as structural, treats the state as a contested field, and re-orients technology toward social justice.
Otherwise, in much of the Global South, the promise of creative destruction will remain what it has too often been, as creative exclusion.
(Dr Boddu Srujana (srujanaboddu@gmail.com) works with the Department of Economics, Easwari School of Liberal Arts, SRM University - Andhra Pradesh. Views expressed are author’s own)