Mehrab Kiarsi
Nearly five months have passed since the unlawful and unprovoked attacks on Iran by Israel and the United States. The threat of renewed confrontation still looms large. National security is, of course, the prerequisite for prosperity. As Adam Smith famously wrote in “The Wealth of Nations”, “Defense is of much more importance than opulence.” Yet, enduring military strength itself depends on sustainable economic growth. In that sense, prosperity and defense are two sides of the same coin.
Among the many measures of economic progress, real GDP per capita remains the most telling indicator of a nation’s overall health. Its long-term driver is productivity growth—what Nobel laureate Paul Krugman once called “almost everything in the long run.” Without steady productivity gains, no country can sustain higher living standards or maintain competitiveness.
The 2025 Nobel Prize in Economics—awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt—recognizes decades of research explaining the origins of modern economic growth and the escape from centuries of stagnation. Their work, together with Paul Romer’s pioneering 1990 model of endogenous growth, transformed how economists understand innovation, knowledge diffusion, and the forces that sustain prosperity.
For Iran, the central question remains: what drives or hinders sustainable growth? Many Iranians blame Western sanctions for the economy’s underperformance. Sanctions have indeed imposed real costs, but the deeper problem lies elsewhere. The data tell a clearer story. Using the “Penn World Table”—a comprehensive dataset covering more than 180 countries—development accounting reveals that physical capital accumulation explains almost none of the vast income gap between Iran and the United States. Human capital accounts for roughly 30–40 percent, while total factor productivity (TFP) explains the remaining 60–70 percent, a share that has grown even larger over the past decade.
This gap in productivity stems from systemic misallocation—the inefficient use of labor and capital due to distorted incentives, weak institutions, and poor policymaking. As economist Charles Jones noted, misallocation at the micro level aggregates into productivity losses at the macro level. It is, in his words, “the best answer we have to why some nations are so much richer than others.” Iran’s economic challenges exemplify this dynamic.
Two areas make the issue painfully clear. First is the banking system, long constrained by irresponsible fiscal and monetary policies. Banks are forced to channel credit toward inefficient and politically driven activities, rather than productive investment. In contrast, China’s economic ascent has shown how targeted, performance-based lending can accelerate growth and industrial transformation.
The second is Iran’s energy pricing. Measured in global currency terms, domestic fuel prices are virtually zero. Such severe underpricing distorts every other aspect of the economy, from investment decisions to public finances. It encourages waste, undermines fiscal reform, and disconnects prices from the real scarcity that defines economic life. As Krugman wrote, productivity matters because humanity must “produce more with less.” Persistently ignoring this principle leads to stagnation.
Efficient prices are the foundation of rational economic behavior. Without them, as economist Peter Boettke argues, societies lose the ability to distinguish between what is desirable, feasible, and sustainable. Amartya Sen, in “Development as Freedom”, likened markets to dialogue: imperfect, sometimes uncomfortable, but indispensable for cooperation and progress.
Iran’s path to prosperity therefore runs not merely through resistance or reform, but through the systematic improvement of productivity—by building stronger institutions, restoring rational policymaking, and allowing markets to function. Security and sovereignty rest on these same foundations: the ability to do more, and do it better, with what we have.
A longer version of this article was first published in Farsi by Donya-e Eqtesad daily.
