A Nobel Prize in Honor of Economic GrowthPaul Romer
This year’s Nobel Prize in Economics went to William Nordhaus and Paul Romer, both very deserving and indeed anticipated picks. Nordhaus is best known for his models of the cost of climate change, and Romer for his work on the dynamics of ideas and economic growth. These might seem like disparate contributions, but there are common strands in their work.
Both Nordhaus and Romer are doers, not just thinkers. Nordhaus hasn’t restricted his activities to academia, but rather has spent most of his career pushing for better environmental policy. He was an early promoter of the carbon tax, and he built models to estimate the cost of climate change. He constructed those models so they could be used by actual policymakers, not to impress his fellow academicians with his technical prowess.
Romer’s research focuses on the notion that ideas, once produced, can be spread widely and readily at low additional cost. But if that is an important idea itself, why not put it into practice? Well, he did. Romer created an instructional portal, known as Aplia, in 2000. Rather than just viewing a static supply-and-demand graph in a paper text, students could now shift the curves around for themselves, and receive feedback on whether they were solving problems correctly. This revolutionized education, not just in economics, and led to many spin-off products. These techniques now educate millions of people around the world every day. Romer himself later sold the company for a profit, to Cengage.
Romer also has worked as chief economist for the World Bank, and has promoted the policy idea of “charter cities,” namely that some relatively poor economic regions might look to external or perhaps foreign governing boards to limit corruption and bad policy. For instance, Hong Kong, which was handed back to China in 1997, probably did better under British rule than it would have under Chairman Mao.
Some of Nordhaus’s influence comes from his role as teacher. Paul Krugman describes Nordhaus as his original mentor, getting him excited about economics in that critical period between his junior and senior years of college. Judith Chevalier, a well-known economist at Yale, also credits Nordhaus with inspiring her.
The careers of both Nordhaus and Romer show the importance and possible influence of family connections. Nordhaus’s brother, Bob, is an environmental lawyer who wrote parts of the Clean Air Act of 1970, in particular the section giving the government the right to regulate hitherto-unmentioned pollutants. The Obama administration later cited this part of the law in its attempts to regulate carbon.
Romer’s father is Roy Romer, the former governor of Colorado and an architect of Colorado’s economic growth. In Paul’s biographical statement, he writes that as an undergraduate he studied mathematics and cosmology in part to limit the influence of his father. Later, he switched: “Graduate work in economics (first at MIT, then Queens University, and the University of Chicago) was a compromise that brought me back toward the policy concerns I had been exposed to as a youth.”
Like most great economists, Nordhaus and Romer have contributions that run much deeper than their most commonly cited articles. Nordhaus is a central figure behind what is called “political business cycle theory,” namely the notion that elected officials will manipulate the macroeconomy to help their own re-election prospects. For many years, the data did not seem to support this theory. But in a time when President Donald Trump attacks and jawbones the Fed, and proclaims his love of low interest rates, I believe political business cycle theory is due for a comeback.
Romer has been a critic of mainstream macroeconomics for its overly abstract nature. He has written about how ski lifts, and indeed business more generally, should adjust prices to periods of high and low demand, and has argued for the regularization of spelling within the English language, to make it more phonetic and easier to learn. That could increase the world’s scientific and indeed business integration.
Both Nordhaus and Romer are united by a firm belief in the importance of economic growth. It is the centerpiece of Romer’s career. Nordhaus, meanwhile, once wrote an article arguing that the price of lighting a room — a fundamental human need — has fallen so rapidly that we have been underestimating just how powerful economic growth and progress can be.
It might sound weird that the Royal Swedish Academy of Sciences has awarded a dual prize for work on economic growth and on the environment, but in fact it is a brilliant move. Both Nordhaus and Romer are concerned with the total size of the economic pie — growing it as well as sustaining it. Bravo to all involved.