- NYU Stern School of Business/Handout via REUTERS
- Economist Paul Romer won the 2018 Nobel Prize in Economics on Monday.
- Romer’s endogenous growth theory proposes that there’s a snowball effect in the market of ideas: ‘The more we know, the easier it gets to discover,’ he’s said.
- The theory goes along with what Bill Gates thinks about human capital and how he spends money at his foundation.
Two Americans won the Nobel Prize in Economics on Monday for their work suggesting robust, long-term economic growth can go hand in hand with a healthier, happier planet – if the rules of business and government are set up the right way.
William Nordhaus, an economist at Yale, was awarded half of the roughly $1 million prize for his work on pioneering carbon taxes, putting a price on burning fossil fuels that warm up the Earth.
Paul Romer, an economist at NYU, won the other half of the award for his life’s work, which is centered around how new ideas – born through technology, encouraged by patents, and spurred on by some healthy competition – can drive sustainable, long-term economic growth.
Romer is one of the pioneers of the “endogenous growth theory,” or the idea that economic growth is best driven by some of the most organic forces in a market: its people.
“At the most basic level, an economy grows… whenever people take resources and rearrange them in a way that makes them more valuable,” Romer wrote in a 2015 blog post that he resurfaced, after he won the Nobel Monday.
It’s a wrinkle of the productivity equation that many economists in the past (and even some present-day scholars) neglect to take into consideration, perhaps because it’s much easier to count up things like physical capital and labor than the invaluable contributions of human minds to global progress.
“I think part of why this question attracted me was because of my background in physics, and to a physicist, the whole notion of a production function sounds wrong,” Romer said in a 2007 interview with Stanford economist Russell Roberts. “We don’t really produce anything. Everything was already here, so all we can ever do is rearrange things. Think of conservation of mass. We’ve got the same amount of stuff we’ve always had, but the world is a nicer place to live in because we’ve rearranged it.”
Through endogenous growth theory, people can be given more incentives to “rearrange” the world, and discover new ideas, instead of toiling away in factories or on computers, repeating the same motions over and over again.
“The more we know, the easier it gets to discover,” as Romer put it.
Whether it’s improving communication systems, developing new drugs, or coming up with potentially planet-saving environmental proposals, Romer argues that we can solve the world’s most pressing problems with increasing speed using the principles of endogenous growth theory.
Take climate change, for example.
“People think protecting the environment will be so costly and so hard that they want to ignore the problem and pretend it doesn’t exist,” Romer said at a news conference after the Nobel announcement. “Once we start to try to reduce carbon emissions, we’ll be surprised that it wasn’t as hard as we anticipated.”
But a “eureka” moment doesn’t happen automatically. It needs to be backed up by policies that champion research and development, pay people for good ideas, provide decent education for all, and maintain well-regulated, competitive markets for goods and services.
“It takes some collective action, some support for research, or some provision of patent protection, or a mixture of the two, and some focused energy,” Romer said when reached by phone from NobelPrize.org early Monday.
It’s a theory that goes hand in hand with what The Bill and Melinda Gates Foundation often touts as a reason for its investment in some of the poorest countries around the world. Armed with modern innovations including vaccines, family planning, and education, the Gates Foundation argues again and again that things need not be as bleak as they may seem.
Developing countries can lift themselves out of poverty with investments in education and family planning, which give people more time for thinking, saving, and generating new ideas. Some are trying, with support from the Gates Foundation, to invent new ways of growing and selling tomatoes and corn in Ghana, while others research life-saving waterless toilets that could stop some of the one million diarrhea deaths that happen around the world every year.
Just like Romer, Gates believes that we can solve the most pressing problems of the world with new ideas, if we move quickly.
(Perhaps ironically, Romer testified against Gates‘ Microsoft Corporation in a 2000 antitrust case that hinged on whether Microsoft making it’s Windows OS unworkable on Palm Pilots was effectively stifling creative innovation in the market.)
But according to Romer’s calculations, we can only achieve this better future if we agree to pay people with good ideas, communicate what they’ve discovered with the world, and then improve upon it, without a small crowd of monopolistic interests running the show.