Paul Romer & William Nordhaus Win Richly Deserved Nobel Prize In Economics

Jan 2016
39,596
35,380
Colorado
#1
"Just a day after a United Nations panel called for urgent action on climate change, the Nobel Prize in Economics was awarded Monday to one American researcher for his work on the economics of a warming planet and to another whose study of innovation raises hope that people can do something about it."

That was the first paragraph from the front-page story in The Denver Post regarding the Nobel Prize won by Paul Romer of New York University and William Nordhaus of Yale University.

As a recently retired economist, I am tremendously pleased by this selection, and cannot think of two more deserving honorees.

Paul Romer is a native of Denver, Colorado, the son of former Colorado Governor Roy Romer, who served two terms from 1987 to 1999 and also served as Democratic national chairman. Paul Romer previously taught at Stanford for many years. Not only is he a brilliant economist, he is also a brilliant mathematician, and a leading figure in the development of the new growth theory. William Nordhaus has been called 'the father of climate change economics' and "has developed models that have suggested how governments can combat global warming. He has endorsed a universal tax on carbon, which would require polluters to pay for the costs that their emissions impose on society." [From the Denver Post article.]

Of both of them, the Nobel Committee said this: They have "significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge."

From an article in The Wall Street Journal: "Dr. Nordhaus built models to measure the impacts of climate change on the economy and the costs of addressing it. Dr. Romer examined how ideas and knowledge fuel economic growth, and how to foster environments in which knowledge and growth can flourish....Although their work took them down different paths, they had in common a view that government and public policy had a role to play in fostering prosperity in the long run. In the process, their work pushed back against free-market thinkers in academia who see a hands-off role for government."

Another paragraph from the same article: "Dr. Romer, a former chief economist at the World Bank, laid the foundations for so-called endogenous growth theory [another name for 'new growth theory'----LeRoy], which underscores the importance of policies that promote research, development, and access to better education for driving technological innovation and, consequently, [economic] growth. Before his work in the early 1990s, economists had accepted that technology was a key driver of growth, but didn't believe that much could be done to accelerate the pace of innovation."
 
Jan 2016
39,596
35,380
Colorado
#2
A bit more on this: The fundamental claim of 'the new growth theory' is that knowledge is the prime mover of economic growth. By 'knowledge', we generally mean scientific, technological, and organization knowledge. Viewed as a separate 'factor of production', distinct from land, labor, and capital, knowledge has characteristics that make it radically different: it does not depreciate, and does not dissipate, and therefore may not obey the Law of Diminishing Marginal Returns that affects each of those other factors of production.

The journalist David Warsh specializes in writing about matters economic, and wrote a truly superlative book about the advent of the new growth theory in the 1980s, and the argument that ensued with the proponents of the older neoclassical theory of growth developed by Professor Robert Solow of MIT in the 1950s. The title of Warsh's book was Knowledge and the Wealth of Nations, which you can think of as a kind of much more readable 21st century updating of Adam Smiths' Wealth of Nations. I recommend that book to ANYONE who has ANY interest in economics. It is EASY to read, and you would learn an amazing amount about the kind of arguments that economists get into.

One of the topics that Warsh discusses is a memorable paper by William Nordhaus in which he discusses the costs of lighting over the centuries. I remember that paper well. It is discussed in an op-ed that was in today's issue of The Wall Street Journal, written by David R. Henderson of the rather conservative Hoover Institution at Stanford University, who is also the editor of The Concise Encyclopedia of Economics (a very valuable reference work). Here is the paragraph of interest:

"Mr. Nordhaus also has made multiple contributions to economic literature on growth. In the citation for his award, the Nobel committee didn't mention his demonstration that the price of light has fallen by many orders of magnitude over the last 200 years. He showed that the price of light in 1992, adjusted for inflation, was less than 0.1% of its price in 1800. The failure of government analysts to account fully for this and similar price reductions, he argued, led them to underestimate the real growth rate of the economy and wages...."
 

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