Creative Destruction in the Age of Artificial Intelligence: How Endogenous Growth Theory Explains Today’s AI Stock Market Bubble

by Daniel Brouse
October 13, 2025

The Theory: Innovation, Growth, and Creative Destruction

Joel Mokyr, Philippe Aghion, and Peter Howitt Nobel Prize winning work advanced what’s known as endogenous growth theory, which emphasizes that technological progress is not something that just happens outside the economy (“exogenously”) but rather emerges from within it — from incentives, competition, and human ingenuity.

1. Aghion & Howitt – The Schumpeterian Model of Creative Destruction

Their core idea builds on Joseph Schumpeter’s notion of creative destruction:

• Economic growth results from new innovations that make old technologies obsolete.

• Entrepreneurs and firms invest in research and development (R&D) to gain temporary monopoly profits.

• But those profits are eroded as new innovations arise, replacing the old technologies in a perpetual cycle.

This process is inherently disruptive — some firms and workers lose out while the economy as a whole advances.  Aghion and Howitt’s mathematical framework formalized this dynamic, showing how policies that encourage innovation — such as intellectual property rights, education, and competition — can accelerate long-run growth.

2. Joel Mokyr – Technological Revolutions and the “Culture of Growth”

Mokyr provided the historical and cultural context. He argued that the Industrial Revolution wasn’t a random event, but the result of a cultural shift toward experimentation, curiosity, and tolerance for failure.
In other words, progress comes not only from inventions themselves, but from societies that reward innovation and permit “creative destruction” to play out.

Connection to Today’s AI Stock Market Bubble

Now let’s apply this to today’s markets, especially the so-called “AI boom” or “AI bubble” of the 2020s.

1. Innovation-Driven Expectations

AI represents the next major general-purpose technology, much like the steam engine, electricity, or the internet. According to the Aghion–Howitt model, such technologies can trigger long periods of high growth by spawning new industries, raising productivity, and replacing outdated methods.

However — as with every technological revolution — the market tends to overprice the early promise. Investors project rapid and universal adoption long before the productivity gains materialize.
This is classic in early phases of creative destruction: massive capital pours into the “new thing,” often faster than the real economy can absorb it.

2. Creative Destruction in Real Time

AI is already destroying and creating value:

• Winners: chip manufacturers (NVIDIA, AMD), cloud providers, and leading AI platforms.

• Losers: traditional software firms, smaller labor-intensive industries, and certain white-collar sectors vulnerable to automation.

This mirrors the mechanism Aghion and Howitt described — innovation shifts profits and productivity across the economy, while creative destruction eliminates older structures.

3. The Bubble Mechanism

The AI stock bubble arises when:

• Investors focus on potential future monopoly rents of innovation leaders (e.g., OpenAI, Microsoft, NVIDIA).

• They overestimate the speed and scale of productivity spillovers.

• The expectation of continuous innovation feeds speculative growth loops — firms are valued not on present earnings but on anticipated technological dominance.

This speculative behavior has historical precedent:

• Railroad boom (1840s)

• Electricity and radio bubbles (1920s)

• Dot-com bubble (1990s–2000s)

Each reflected a genuine technological breakthrough, but financial markets priced in decades of progress almost overnight.

4. Mokyr’s Cultural Insight

Mokyr’s emphasis on cultural attitudes toward innovation helps explain why the bubble exists at all.
Modern tech culture — particularly in Silicon Valley — celebrates disruption and treats exponential growth as inevitable. The “AI hype” is as much cultural and psychological as it is economic:

• The belief that “if we don’t invest now, we’ll miss the revolution” drives valuations higher.

• Social narratives around AI (from AGI dreams to existential risk) amplify both fear and greed, core emotional drivers in financial bubbles.

5. The Long-Term Payoff

Despite the bubble, endogenous growth theory predicts that the underlying innovation cycle will eventually justify much of the investment — just not as fast or evenly as markets expect.
After each crash, the surviving technologies and firms lay the foundation for the next era of sustained productivity growth.

Thus, while the AI stock market bubble may burst, the AI technological revolution will likely continue reshaping the economy — improving productivity, transforming industries, and generating new waves of creative destruction.

It would not be unreasonable to suggest that as much as 90% of today’s companies could face creative destruction within the next decade, including members of the so-called “Magnificent Seven” tech giants. History shows that no company—no matter how dominant—remains immune to technological upheaval.

Artificial intelligence represents a general-purpose technology capable of reshaping nearly every industry, from manufacturing and finance to entertainment and healthcare. As automation, machine learning, and generative AI continue to advance, they are likely to collapse traditional cost structures, eliminate redundant business models, and redistribute profits toward entirely new players.

The “Mag 7” firms—Apple, Microsoft, Alphabet, Amazon, Meta, NVIDIA, and Tesla—currently appear invincible, much like IBM in the 1980s or Yahoo in the early 2000s. Yet their dominance depends on maintaining proprietary advantages in algorithms, data, and computing infrastructure. As AI becomes more open-source, decentralized, and commoditized, those moats could shrink quickly. A new generation of innovators may rise on more efficient models, more agile platforms, or disruptive uses of AI that make even the current leaders look obsolete.

In short, creative destruction doesn’t spare its own champions. The same technological forces that built the modern tech giants could dismantle them—proving once again that in an age of accelerating innovation, staying dominant is harder than becoming dominant.

In Summary