This year’s
Nobel laureates for economic sciences,
Paul Romer and
William Nordhaus, both from the US, have shown how nature and knowledge are affected by human actions or, more specifically, by markets and economic behaviour. The study of the factors of climate and ideas by Romer and Nordhaus provides convincing arguments for government intervention for achieving “sustained and sustainable global economic growth”.
.
PAUL ROMER MAPS THE MYSTERY OF GROWTH
What explains when and where growth occurs? While conventional answers credit technological change, Paul Romer, winner of half of the 2018 Economics Nobel and professor at the NYU Stern School of Business, through his theory of endogenous growth, proposed that innovation does not just flow in from outside — i.e. exogenously — but is caused by particular activities in the marketplace, or endogenously.
Before Romer, growth theories were not good at explaining the persistent gap in growth rates around the world. It was understood that technological advances drive growth, but it was not clear how such innovation arrives. Romer’s biggest achievement was to show how ideas for new goods and services produced by new technologies can be created in the market economy, or endogenously.
IDEAS ARE TIME PROOF
Romer showed that unregulated markets will produce technological change, but not be willing to pour huge resources into R&D. To address this underprovision requires welldesigned government interventions, such as R&D subsidies and patent regulation. For example, patent laws should strike the right balance between the motivation to create new ideas, by giving some monopoly rights to developers, and the ability of others to use them, by limiting these rights in time and space. Romer showed that ideas-driven growth can be sustained over time, unlike growth driven by the accumulation of physical capital, which has to experience decreasing returns.
WILLIAM NORDHAUS LINKS CLIMATE TO ECONOMY
William Nordhaus, the recipient of the other half of the prize and the Sterling professor of economics at Yale University, studied the impact of human activity on nature as concern grew about fossil fuels adding to global warming. He was the first to design quantitative models of the global economic-climate system, now called integrated assessment models (IAMs), by employing results from physics, chemistry, and economics.
Calculating The Cost Of Climate Change
Nordhaus wanted to develop a framework that allowed climate change to be analysed in terms of costs and benefits. His IAMs can be used to simulate the consequences of business-as-usual policies or those of various policy interventions.
Batting For A Carbon Tax
According to Nordhaus’s research, the most efficient remedy for greenhouse gas emissions would be a global scheme of carbon taxes. Not only qualitative results; IAMs also allow us to calculate quantitative paths for the best carbon tax. Take for example, the graphic on CO2 emissions vis-a-vis two climate policies which shows the drastic results that can be achieved with a suitable carbon tax.
Not an “original” Nobel
The Nobel for Economics isn’t one of the original ones endowed by Alfred Nobel; the money for the prize doesn’t come from Nobel family profits from armaments trade. The prize was created by the Swedish central bank and first awarded in 1969. Amartya Sen won the Economics Nobel in 1998 for his “contributions to welfare economics”.