Nobel Roundup 2018

Drs. William Nordhaus (Yale) and Paul Romer (NYU) were named the winners of the 2018 Nobel Memorial Prize for Economic Sciences early Sunday, October 7th. The signature work of both economists deals with integrating additional considerations into endogenous theories of long-term economic growth: Nordhaus with modeling and integrating the costs of climate change, Romer’s with the impact of sharing ideas that foster long-term factor productivity.

The two mutually conclude that markets are insufficient. To Nordhaus, that failure takes the form of externalities – specifically, pollution – which he has spent the better part of forty years urging an international effort against. To Romer, the potentially rivalrous nature of unprotected intellectual property can result in diminished incentives for creating and sharing innovation. Temporary monopoly rents provided by states, he argues, can protect those incentives.

Needless to say, these arguments made by both men are not without opponents. Nordhaus’ DICE and RICE models have been questioned for their dependence upon estimated values, as well as for embodying a model-based approach to policy making. Romer, as well, has faced criticism for the alleged empirical insufficiency of his theories on endogenous growth. Paul Krugman, 2008 Nobel laureate, has summarized Romer’s views as interesting, but impossible to confirm empirically.

The Political Implications

There is a degree of political context to the Royal Swedish Academy of Science’s choices this year. The current U.S. President has called global warming a “creat[ion] by and for the Chinese in order to make U.S. manufacturing non-competitive”, and in fulfillment of a campaign promise announced his intention to withdraw the United States from the Paris Agreement. Perhaps, the logic may go, Mr. Trump will have a more difficult time doing so with the heft of a newly-minted Nobel laureate, Dr. Nordhaus, enlisted on the opposing side.

Outside of the cited area, the two have a number of eclectic research contributions as well. Romer has been a vocal advocate for charter cities, and on several occasions taken the economic discipline to task for what terms excessive ‘mathiness’: the use of quantification not to clarify analysis but in some cases to obscure or mislead. Relatedly, he has asserted that owing to an increasing tendency among economists to defer to authority rather than objective facts, macroeconomics has been in decline for three decades.

Nordhaus is the originator of the concept of the “political business cycle”, describing the phenomenon whereby economic policymaking in democracies tends to be oriented toward maximizing election outcomes. He is also the author of a much heralded 1994 article tracing the price of lighting from the Paleolithic Era (campfires) to lightbulbs to demonstrate the insufficiency of real wage and real output measures.

It was, in summary, a year heralding big ideas: inter-governmental solutions for climate change, national and international laws protecting ideas from infringement. Yet it would be remiss not to mention that evidence exists that intellectual property rights hinder innovation, and that the same governments which many individuals are looking to for solutions are the most flagrant polluters. Perhaps markets do not fail so much as courage and imaginations do.

 

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Peter C. Earle

Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.