The Nobel Prize for economics this year went to three economists who together developed an economic concept known as creative destruction. Creative destruction describes the economic impact that occurs when new technologies displace old ones.

Joel Mokyr is an economic historian. He identified the prerequisites for sustained growth through technological progress. His work pointed out that economic growth requires that a society must value the accumulation of useful knowledge, have the capability to transform ideas into tangible production, and have the cultural willingness to embrace change. He highlighted periods in history that were full of innovations, like ancient China, the Islamic world, and ancient Greece and Rome. But these societies never saw sustained economic growth. He contrasted this with the Enlightenment era, starting in 1750, when Western Europe began to institutionalize curiosity and reward experimentation. As an example, Britain’s Industrial Revolution celebrated innovation as a virtue rather than a threat.

Philippe Aghion and Peter Howitt shared the prize for developing a dynamic mathematical economic model that can quantify the impact of new technologies, products, and business models emerging to replace old ones. In the Aghion-Howitt model, firms invest in research and development in the hope of discovering better technologies. Innovators hope to be rewarded for breakthroughs with a temporary monopoly as their breakthrough renders existing technologies obsolete.

The dynamic economy created by creative destruction forces companies to constantly reinvent themselves or exit the market if they can’t keep up. The team argues that this is not a flaw and that continual renewal is the engine of economic progress. Creative destruction is not destruction for its own sake but is a way to constantly replace inferior technologies with better ones. Their theory explains why individual industries can be experiencing high turbulence while the overall sector continues to grow steadily.

Their models also warn against policies that shield incumbents from competition or attempt to “pick winners.” Governments that try to protect existing firms misunderstand the nature of growth. The process of creative destruction requires openness and freedom for new market entrants to challenge incumbents. Government policy must embrace entrepreneurship and allow for failure.

It’s interesting to look at the telecom industry from the perspective of creative destruction. From a pure technology standpoint, we’ve constantly embraced new technologies. Since 2000, when broadband emerged as in industry there has been a non-stop stream of new and faster broadband technologies that have displaced slower ones. It’s hard to think of a broadband technology that wasn’t given a chance to sink or swim on its merits in the market.

We’ve also seen a lot of companies reinvent themselves. AT&T went from a traditional telco to become a dominant cellular carrier, and is back investing again in wired fiber networks. The last twenty years have seen dozens of vendors thrive and then disappear as others made a better product.

However, at the same time, we’ve had a regulatory and legislative environment that has favored incumbents over new firms. Much of the regulation in our industry for the last thirty years has been intended to shield the giant telcos and cable companies from competition. For example, the large ISPs have been successful for years in demonizing municipal broadband as a way to preempt new competition. The big cell companies gobbled up all available spectrum to keep competitors out of the market.

But competition still finds a way to win against incumbents. Witness the recent success of FWA wireless and satellite technology. We’re starting to see historic incumbents that are stumbling and even failing, like the steady downhill trajectory of CenturyLink.