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October 10, 2018 Reading Time: 2 minutes

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.

 

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist and writer who joined AIER in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area, as well as running a gaming and cryptocurrency consultancy. His research focuses on financial markets, monetary policy, the economics of games, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and 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.

Selected Publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-Authored with David M. Waugh in The Emerald Handbook on Cryptoassets: Investment Opportunities and Challenges (forthcoming), edited by Baker, Benedetti, Nikbakht, and Smith (2022)

“Operation Warp Speed” Co-authored with Edwar Escalante in Pandemics and Liberty, edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Games, edited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” Co-authored with Phillip W. Magness, Wall Street Journal (December 2021)

“How Does a Well-Functioning Gold Standard Function?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” in Financial History (Summer 2021)

“Boston’s Forgotten Lockdowns” in The American Conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“’Federal Jobs Guarantee’ Idea Is Costly, Misguided, And Increasingly Popular With Democrats” in Investor’s Business Daily (December 2018)

Books by Peter C. Earle

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