Greener pastures

LafayetteBis · Oct 31, 2018

From the Economist, here: Paul Romer and William Nordhaus win the economics Nobel

Economists used to think that sustained long-run growth depended on technological progress, which in turn relied on the creation of new ideas. They struggled, however, to explain convincingly how markets generated and propagated those ideas. When Mr Romer came into economics, most prominent models of growth relied on “exogenous” technological progress: it was simply assumed, rather than generated by the models’ equations.

Dissatisfied by this state of affairs, he sought answers by probing the non-rivalrous nature of knowledge: the fact that ideas, once created, can be endlessly exploited. The firms or individuals that come up with new ideas can only ever capture a small share of the benefits arising from them; before long, competitors copy the original brainwave and whittle away innovators’ profits. In Mr Romer’s work, markets are capable of generating new ideas. But the pace at which they are generated, and the way in which they are translated into growth, depends on other factors—such as state support for research and development, or the protection of intellectual property.

The “endogenous” growth models produced by Mr Romer, and by others influenced by him, were once hailed as a critical step towards understanding patterns of economic growth across the globe. They have not quite fulfilled that promise: knowledge may be necessary for growth, but it is clearly not sufficient. But their shortcomings have themselves raised important questions about the stubborn disparities in growth rates. Why are some countries able to exploit existing ideas and grow, while others are not? Should policymakers who want to boost growth focus on policies that support the creation of knowledge or on those that break down barriers to the exploitation of existing knowledge? Or does it make most sense to shift people and resources from the parts of the world that struggle to grow to those that do not? By provoking such questions, Mr Romer’s work identified a rich vein for other researchers to mine.

Mr Nordhaus, for his part, has been a towering figure in the debate about how to respond to one of the biggest challenges that humanity faces. When he was beginning his career in the early 1970s, awareness of the dangers of environmental damage and the threat posed by climate change was just starting to grow. Understanding the economic costs such damage imposes is essential to answering the question of how much society should be willing to pay to avert it.

Mr Nordhaus applied himself to solving this problem. That meant working out the complex interactions between carbon emissions, global temperature and economic growth. He combined mathematical descriptions of both climate and economic activity into “integrated assessment models”. This allowed him to project how different trajectories for the world’s carbon emissions would produce different global temperatures. That, in turn, allowed him to estimate the likely costs of these different scenarios—and thus what level of reduction in emissions would be economically optimal. He was the first to suggest that warming should be limited to no more than 2°C higher than the world’s pre-industrial temperature. Models like his have become the linchpin of most analysis of the cost of climate change.
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Like lotsa things that change in this Brave New World of the Internet Economy, so do economic theories/notions.

Lesson to be learned: Keep an open mind - what you learned today could be no longer appropriate to economic change tomorrow.

Not all pastures stay green over time ...

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Greener pastures

LafayetteBis Well-Known Member Past Donor

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