This morning the Royal Swedish Academy of Sciences announced that it has awarded the 2018 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to U.S. economists Paul Romer and William Nordhaus. The Academy noted Professor Nordhaus's contributions to the economics of climate change in particular, stating in its press release:
Nordhaus’ findings deal with interactions between society and nature. Nordhaus decided to work on this topic in the 1970s, as scientists had become increasingly worried about the combustion of fossil fuel resulting in a warmer climate. In the mid-1990s, he became the first person to create an integrated assessment model, i.e. a quantitative model that describes the global interplay between the economy and the climate. His model integrates theories and empirical results from physics, chemistry and economics. Nordhaus’ model is now widely spread and is used to simulate how the economy and the climate co-evolve. It is used to examine the consequences of climate policy interventions, for example carbon taxes.
In my view it's hard to think of a more timely award, given that the United Nations Intergovenmental Panel on Climate Change now predicts that severe consequences of climate change will be felt as early as 2040. (See discussion here.) For a good popular discussion of the topic by Professor Nordhaus himself, see his 2012 article Why the Global Warming Skeptics Are Wrong in the New York Review of Books.
As for Professor Romer, his contributions to economics are more closely related to the subject of this blog, in that they model how technology drives economic growth. Again, from the press release:
Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.
Romer’s solution, which was published in 1990, laid the foundation of what is now called endogenous growth theory. The theory is both conceptual and practical, as it explains how ideas are different to other goods and require specific conditions to thrive in a market. Romer’s theory has generated vast amounts of new research into the regulations and policies that encourage new ideas and long-term prosperity.
If any of my current or former students are reading this, if you take a look at the Swedish Academy's further discussion of Professor Romer's work in its Popular science background: Integrating nature and knowledge into economics, you'll find a discussion that (I hope) will sound familiar: how ideas, unlike real or personal property, are nonrivalrous and nonexcludable; how new ideas and technologies tend to require large upfront costs, after which they can be duplicated at marginal cost, thus giving rise to a potential market failure; how investments in basic research, and the creation of patent laws, can be viewed as efforts to overcome this problem; and how "patent laws should strike the right balance between the motivation to create new ideas, by giving some monopoly rights to developers, and the ability of others to use them, by limiting these rights in time and space."
For further reading, see also the Swedish Academy's more detailed Scientific Background: Economic growth, technological change, and climate change. For a good popular account of the work of Romer and others in endogenous growth theory, see David Warsh's 2006 book Knowledge and the Wealth of Nations: A Story of Economic Discovery (W.W. Norton & Co. 2006).
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