When Joseph Schumpeter coined the phrase “creative destruction,” he described capitalism’s uncomfortable but vital churn: new ideas sweep away old firms, reallocating resources to their most productive uses. The 2025 Nobel Prize in Economic Sciences — awarded to Joel Mokyr, and to Philippe Aghion and Peter Howitt — reaffirms that innovation-driven churn is not an unfortunate side effect of growth but its engine. Their combined work teaches a blunt lesson for policymakers and insolvency practitioners: to harvest the benefits of innovation a country needs both incentives for creative new entrants and a legal framework that disposes without delay of economically hopeless incumbents.
Aghion and Howitt gave formal teeth to Schumpeter’s intuition. In their influential model of “growth through creative destruction,” firms innovate to climb above incumbents, but each fresh invention shortens the effective life of earlier technologies — creating both incentives for innovation and risks of underinvestment if future obsolescence looms too large. The model yields a policy pivot that is familiar to insolvency reformers: competition, market openness and predictable rules for exit and entry are key to sustaining innovation. Where incumbents are shielded from competition, innovation slows and growth stalls. This was exactly what happened in India till 1991 reforms where many Public Sector and some private sector zombie enterprises were sustained through monopolistic licenses and budgetary and policy support. It led to a general lack of interest in research, development and innovation. Even our positions for PHDs and research in our Universities became a job creation tool rather than contributing to any innovative research and development.
Joel Mokyr’s historical work adds texture: innovation requires not just markets but a culture and institutions that make knowledge cumulative — education, open exchange, scientific norms and incentives for applied research. In short, growth does not happen automatically because someone discovers a new technology; the broader system must let that technology flourish. The history provides many examples right from genesis of Industrial revolution in Great Britain to the recent rise of China as a formidable competitor to USA in scientific research, defence technology and technologically advanced industrial products. India appears to have missed the innovation bus by ignoring the importance of education and placing research under Public sector enterprises away from Universities. Our socialistic mindset of initial 45 years of control over everything, restricting many products for small enterprises and disallowing market forces left a large deficit in research and development in key areas of emerging technological advances in areas like defence technologies, Electric vehicles, solar cells, chip design and construction, aircraft engines, robotics and communication technologies. While many of the biggest technological breakthrough like internet, Nuclear power, Semiconductor, Wireless telephony happened due to western Government investments in defence sector research, our inclination and dependence on imported defence equipment and arms was so prevalent that India could not even design and manufacture good quality guns and rifles for our armed forces. I think the current Government’s focus on developing local arms industry and promoting startups and MSMEs for defence production if a right step for developing a culture of innovation and research.
Yet theory and law are only as good as implementation. The insights of these three economists illuminate one of the core purpose of Insolvency & Bankruptcy Code (IBC) — to be the operational tool that implements creative destruction in a fair, time-bound and value-maximizing way. The Code aims to “maximize the value of assets,” promote entrepreneurship and ensure time-bound resolutions — three objectives that track closely with the welfare economics of innovation-led churn. A practical insolvency regime is the legal complement to R&D grants, competition law and industrial policy: it decides which firms get a second chance and which must make way.
The creative-destruction ideal demands that the insolvency system do three things well: vet commercial feasibility quickly; preserve going-concern value where revival is realistic; and commit credibly to liquidation where it’s not. Failures on any of those points yield two perverse outcomes:
(1) premature liquidation of potentially viable firms that sours entrepreneurship; or
(2) the emergence of “zombie” firms kept alive by restructuring games or patient credit — firms that consume scarce capital and retard reallocation to more productive challengers.
But the real policy frontier now is refinement. The Nobel laureates’ work suggests several practical priorities for Indian policymakers and practitioners:
• Faster, evidence-based triage. Early, expert-driven financial and operational triage — anchored in sector benchmarks — will reduce type I and type II errors (saving phoenixes; accelerating exit for zombies).
• Clear viability thresholds. Codify objective standards for “technical and economic feasibility” so that the Committees of Creditors (CoCs) can more consistently approve plans that genuinely preserve going-concern value.
• Disciplined timelines with flexibility for restructure complexity. The Code’s time bound resolution is essential; allow narrowly tailored, transparent extensions only where evidence shows genuine rescue positives.
• Prevent perverse creditor incentives. Strengthen rules that dissuade financial creditors from taking viable firms to liquidation; and align lender incentives for preferring resolution plans over recovery maximization.
• Market for corporate control. Encourage open auctions and bidder-friendly rules to promote competitive bids — a core Schumpeterian mechanism. If government can do successful auction of mining assets through new models, why can’t same be applied to CIRP matters.
• Support for displaced workers and re-employment. Creative destruction is humane only if social safety nets and retraining are part of the bargain. Government and IBBI must use Insolvency Fund to provide safety net for workers/employees of firms going under liquidation.
The Nobel prize for economics is a reminder that growth is not a tautology; it depends on systems that allow ideas to win and obsolescence to proceed with minimal friction. IBC was designed with precisely that philosophy. The challenge ahead is operational: to sharpen tools, improve incentives, and make the legal machinery more surgical. If we succeed, the Code will be more than a creditor remedy — it will be an institutional engine to channel creative destruction into more productive firms, better jobs, and higher living standards.
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