A Nobel Cause10/10/18
The Nobel Prize in Economics was announced this week. Publications Officer Heath Gabbett discusses the recipients, their award-winning work and why sustainable economic growth is a noble cause worth celebrating, in this week’s edition of The Take:
The Nobel Memorial Prize in Economic Sciences was this year awarded to American economists William Nordhaus and Paul Romer for their individual work on sustainable economic growth. This article will look at the economists’ work that won them the Nobel Prize and the impact their research has had more broadly.
William Nordhaus, a professor at Yale University, was awarded the prize for creating the world’s first quantitative model capable of describing the interaction between the economy and the environment. Prior to Nordhaus’ work, models of growth were very mechanical and merely considered target growth rates. These models neglected that many natural resources are near impossible to reproduce. Nordhaus built complex models that integrated climate and economic indicators as a better measure of sustainable economic growth. These models have reached widespread use in mainstream policy, including in the Kyoto Protocol and the US government’s environmental policy.
Paul Romer, who was formerly a chief economist for the World Bank, showed that long-term economic growth depends substantially on the generation of new ideas. Romer suggested that new ideas are different to other factors of production in that, if you share with me your idea, you do not lose your idea. Further, if we all produce more ideas we all benefit from them, not just the people who thought of the idea. His over-arching recommendation was that for society to grow sustainably long term we need people dedicated to creating ideas, not just producing goods and services. He thus suggested that governments need to invest in promoting idea generation across society.
The work of these two men may at first glance appear quite distinct and indeed the shared award warranted some explanation. But the key component between the works of both recipients is the focus on creating sustainable, long-term economic growth. They have both focussed on fundamental contradictions in capitalism – market failure. Without government intervention, markets will generate too much pollution and too few ideas. The award winners’ works sought to further explore these two market failures and began to recommend policy to address it.
Many have suggested that climate change and sustainability is one of the biggest challenges for the economy today, so it’s fitting that the Nobel laureates have dedicated their careers to that issue. As we move forward as a society it’s important that we have long-term horizons and appreciate all the costs of our actions – both monetary and non-monetary. The first step in a journey towards sustainability is better theories that incorporate the reality of climate change and the dynamics of idea generation into its models. As the Nobel committee said, the works of these economists has not yet delivered conclusive answers, but has certainly brought us closer to solving the mystery of sustainable economic growth.
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