Prize lecture: Paul M. Romer, Prize in Economic Sciences 2018

Paul Romer was born in 1955 in Denver Colorado he received his PhD from University of Chicago but unlike professor nor house Paul moved around quite a bit University of Rochester back to University of Chicago University of California Berkeley Stanford University New York University where you are currently the research question there as we already know now was about this other resource knowledge and in particular knowledge how its ever advanced in market economies not in at universities obviously it's advanced here as well but in market economies and I said that knowledge accumulation in the form of new technologies is absolutely crucial for us and we've heard it's crucial in this particular area as well so the key step here was the development of what is now ubiquitous Lee called endogenous growth theory please ladies and gentlemen Paul Romer [Applause] [Music] I I too will rely on technology and and as that there's a designated advocate for technology you can count on it failing me at some point during the talk so thank you pair for framing the work that bill and I have been engaged in in such I think an appropriate way it really is the global macro economics of the tension between the restraining force of scarce resources and the positive force that can come from discovery and innovation let me ask you to thank all the members of the committee for highlighting the connection between these two forces the restraining and the positive and it's the balance of these two that will determine our fate thanks as well to the many friends and colleagues and to the members of my family who can all be here today I let me save my appreciation for the vision of Alfred Nobel and for the foundation that continues to keep his vision alive let me save that for my conclusion so lately lots of people have been asking me why exactly I won the Nobel Prize in Economics my task once again is to try to explain and I'll do my best but one of the things I learned from my father who's here in the front row as who spent his life as a politician is that the key to success is to manage expectations so let me warn you that I have trouble explaining why I think technological change is so compelling and so subtle when my son Jeff was seven or eight he asked me what kind of work I did as a professor I told him well I'm trying to understand why your grandparents when they were children didn't have access to the kinds of things that you have like a video cassette recorder Jeff looked at me and said dad that's obvious when nanny and granddad were kids the video cassette recorder hadn't been invented yet is there anything else from your work that I can help you with so today I'll start by trying to describe this notion of the possibility of progress and explain why when I was in graduate school in 1980 there were so many doubts about whether progress was possible whether this positive force of discovery could offset the tension the restraining force of the the scarce resources then I'll describe the theory I developed the trans show that progress is indeed possible at least in principle I'll turn after that to the description of two practical suggestions that emerge from this theory analogous to Bill's suggestion about the carbon tax mindful as I am that Alfred Nobel stipulated that prizewinners be judged on the benefit they confer to humankind not just on the scientific merit of their discoveries so when I was in graduate school in 1980 I think there were at least three distinct forces that were undermining confidence about the possibility of progress one was a growing list of negative side effects from unanticipated negative side effects from what seemed like positive technological discoveries one of the most interesting was a discovery by sherlyn Rowand and Mario Molina that chlorofluorocarbons could be destroying the ozone layer a discovery for which they received the Prize in Chemistry in 1995 but there were this was their paper on this was in 74 but at this point we had also seen problems with DDT the damage that was done to human health by leaded gasoline even the cancer that was caused by cigarettes so it seemed plausible that that positive force of discovery might not turn out even on its own to be so positive because of the unexpected negatives effects it was also the case in 1980 that people had lost faith in the government to do the very basic jobs that we expected of the government the throughout the 70s there had been this steadily increasing rate of inflation we'd had recessions that caused unemployment and moved inflation down but still to a relatively high level so we referred to the new experience is that of stagflation but the really disturbing fact was that from one recession to the next the general trend was for a steady increase in the underlying rate of inflation now finally my undergraduate degree was in physics and from economic theory the only theory of growth that made any sense to a physicist was the one developed by Thomas Malthus it starts from an invertible incontrovertible premise that there's a finite quantity of every natural resource using only simple arithmetic it then follows that there is no possibility of sustained progress let me use copper as an example of a natural resource the total mass of copper on earth and the Earth's crust is finite think of measuring that in kilograms for every person in the earth the total number of people you divide kilograms of copper by people you get a certain amount of copper per person even if we don't use copper up because we transform it but it still exists there's no way to increase the total supply of copper available per person that we can use to do things like provide electricity so there's no possibility of progress if it takes more of something like copper per person to make progress and if we see a pattern of progress it's it's very easy to reconcile that with this scarcity because it could be a sign that we're depleting the untransformed stock of copper and Earth's crust we're depleting that using more and more per person but were soon headed to a of the wall we won't be able to keep extracting more and more copper and when we hit that wall it was equally plausible that we might not just slow down but we could really face a collapse now I was focused primarily on the trend I was looking at history and saw this progress over 10,000 years that seemed hard to justify is just a temporary phenomenon that would soon come to the end but the Malthusian theory has another implication not about the trend but what about what economists refer to as a scale effect what's the effect of having more people say at a point in time suppose you have twice as many people here to the the the conclusion is very grim twice as many people means half as much copper per person it's just arithmetic now Homo sapiens emerged during the Pleistocene in an era when this Malthusian Theory applied with full force and key elements of human nature were shaped by this experience the one I want to emphasize is the pre-decision predisposition we have to group people into us and them them is a group that poses an existential threat to us they might steal our resources there and also an opportunity we might be able to steal their resources from them and even if all we do is share there's less for us when there's more of them now Donna Strickland who was one of this year's prize recipients in physics told me that when she was president of the optical society she was part of the planning for the International Year of light one of the goals they emphasized was the eradication of light poverty now this is a figure that a picture that I've never forgotten once since I've saw it many more than a decade ago what it shows is some students studying under streetlights outside the airport in Conakry Guinea now this conveys just instantly that the human consequences of light poverty they can't do their homework at home it also suggests this obvious fact about technology we know how to provide light in homes why don't we use that technology to provide light in the homes of these these students but there's an emotion that can be invoked by this picture which also relates to this Malthusian fear about us in them with existing technology if we were to provide them the same access to electricity that we have this would lead to more emissions of carbon and could threaten the planet so although it's not always voiced there is a realistic perception seemingly realistic perception that we have to retreat to a notion of us in them we can't let them have what we have because we'll destroy the planet now the problem as I saw it in my development of this third theory of the economics of ideas was not what Malthusian Theory suggested about scarce objects but it was what it emitted which was this possibility of discovering new ideas this had been referred to the process of the accumulation of ideas was often referred to as technological change and just like my son Jeff my colleagues recognized that this could be the offsetting force but to have a theory that could satisfy a physicist I needed to dig down into what was the meaning of an idea how could we be priced be precise about an idea and then use the accumulation of ideas as a way to understand technological progress now one of the key elements of an idea is that it represents codified knowledge it's knowledge represented in symbols on a piece of paper or in bits these days because it's codified it can be copied and shared and then used by everybody on earth and by shared I don't mean the kind of sharing where we take turns this is the sharing where everybody can use something like the Pythagorean theorem at the same time if we want for example create the kinds of right angles that we use in construction now the best way I know to illustrate a single idea comes from a truly remarkable paper that my co-recipient bill wrote in the nineteen the 1990s his insight was that we could measure progress by using not the conventional units of a dollars worth of purchasing power today or a euros worth of purchasing power we could measure output per person in the kind of units that a physicist would recognize lumen hours now think of a lumen is the light that's produced by a candle and going all the way back to the pleistocene bill measured the amount of light that the average person could get from an hour of work there's no way for me to improve on his words from this paper I have performed a number of experiments with sesame oil and lamps purportedly dating from Roman times see the appendix these experiments provide evidence that an hour's work today will buy three hundred and fifty thousand times as much illumination as could be bought in early Babylonia that's real progress and when you look at the pattern of progress most of it comes in the very recent period the period since the Industrial Revolution and since the the Scientific Revolution now in this paper there's one data point which represents the roughly tenfold increase in the amount of light that we could extract from a gas flame that was the result of burning that flame inside what was called a mantle now my reaction to that was what in the world is a mantle and what's the physics behind the process whereby it cokes ten times as much light out of a gas flame this picture illustrates the difference between an open gas flame and a mantle and it's hard to see but if you look at a physical mantle what you notice is that it's a metal cage and burning flame inside the cage heats up the metal to the point of incandescent which means the metal glows with this bright white light that you see in the picture now the man who discovered this welsbach could take that insight and then put it to use in street lights all over the world long before Edison discovered how to make a wire incandescent by running electricity through it but welsbach could share this idea with everybody in the world who had access to a gas streetlight because it was codified knowledge which could then be spread and was copied all throughout the world now there's another concept that I need to flesh out about related to ideas which is what computer scientists refer to as combinatorial explosion if you have a number of elements that you can combine you have ten elements and combine them we can calculate how many combinations can you make if you have 20 we can calculate again combinatorial explosion is a summary of the fact that the number of combinations explodes as you take more and more raw different elements that you can use to combine them so when for example we think about all the possible peptides you can make out of amino acids the there's just immense just unbelievably large set of peptides that are the peptides that you can create out of 50 amino acid pair or the amino acid units and this year's chemistry prize is about methods for creating libraries of all of these peptides and exploring them using new new kind of methods including those motivated by evolution when Wells back was trying to find the right mix of metals for his mantle he tried a number of different metals and mixtures and again the number of possible mixtures explodes as you think of more and more metals so an idea is codified knowledge about the properties of one from an almost infinite set of possibilities and when you define an idea that way it's immediately obvious that the discovery of new ideas from these almost infinite sets of possibilities could offset the scarce resources implied by the Malthusian analysis so to understand the difference this makes look again at this picture if more light gives these students the chance to study to go work in science they may discover something like the mantle and they may provide a benefit to us that could more than offset the costs of additional mitigation of or avoidance of carbon emissions so ideas mean that people are no longer our rivals they can be our allies and this suggests a very important possibility that we can take the set of us and expand it we can draw a bigger circle include more people inside us and treat them with at least the indifference or the small appreciation that comes from membership and the set of at the set of us now this benefit of other people was a possibility that bill wrote discovered in a model he published in 1969 ken arrow another Nobel prize-winning economist wrote a model with that same property in 1962 I in the 90s after working out a theory of growth based on ideas and along with other economists worked on results showing that integrating different regions of the world into a unified global system where we traded goods but particularly importantly we traded ideas this could speed up the worldwide rate of growth but in a conversation I had with Bill he said that he was uncomfortable about this result that more people could actually beneficial be beneficial because it was a theoretical possibility but how did we know it was true and when I looked at combining different regions letting them work with each other i skirted this issue because in effect what I was saying is we can let more people come to this party but they got to bring their own resources so there wasn't the same effect of more people meant less natural resources for each of us what was astonishing was that work that emerged around this time including work by Chad Jones who's here somewhere but also Ron Lee from demography Michael creamer another young economist work showing that from the period of roughly the Neolithic Revolution to at least the Scientific Revolution the actual evolution of humans as a species was driven by a process of more discoveries leading to the production of more food which led to more people who in turn developed more and more discoveries and so there was this explosive process of growth that was in the population that was proceeding at a rate that was growing exponentially so this is not exponential growth this is exponential growth in the rate of exponential growth which is the best way to characterize the behavior of humans through about the Industrial Revolution and as Michael creamer showed and and as was also implicit in analysis by a diamond in his book Guns Germs and Steel that the evolution of at least the carrying capacity of the number of people varied across regions that had started from initial that differences in stocks of people and differences in the initial intrinsic carrying capacity so some regions could take off in terms of technology and then have this more rapid growth of people and more growth of technology others like Australia after the ice of the ice had melted and there was no longer a land bridge that connected them to other people where technological progress was very limited but but notice this is an unusual notion of progress its progress in carrying capacity but it's not progress in standards of living because for most of this period as we got more and more capacity for producing food what it led to was more and more people so rapidly growing people rapidly growing technology and increases in carrying capacity but not much improvement in standards of living and it's really after the Industrial Revolution at about the same time as we started to limit our own fertility in the growth of the population that we see what I would call material progress which is growth in standards of living growth in how much we have like how much light we can have now the key point I want to make is that there's a third notion of progress what I want to call human progress progress not in what we have but in who we are and it's the kind of progress that comes from seeing other people even perhaps starting to see other sentient beings like the the animals we interact with seeing them as part of us treating them with at least in difference rather than malevolence and treating them as objects of predation this type of progress in who we are is even more important than the Tyrael progress and I know that the moral reasoning suggests that we should be capable of that kind of moral progress human progress even if in some sense it works to our disadvantage but let's be honest people are people it's a lot easier to get people to think of others as allies if in fact those others actually help them and this is what the the period of explosive population growth shows on balance it's better to have more people they are our allies they are part of us now am I being Pollyanna ish something I get accused of in saying that we're capable of this kind of deep human progress I don't think so for example we live in cities with millions of people most of whom were strangers and we're not threatened by them and we don't try to attack them and this is something that our our ancestors in the Pleistocene could never have understand could never have understood but but even more importantly us used to mean the way that men thought about other men and we're in the process of a fundamental change in our human nature and our fundamental improvement along the lines of human progress because we now recognize that women belong as full members of us we're a long way from full equality in terms of respect and dignity but the production is unambiguous we've made some progress on this dimension and the direction is unambiguous and again this shouldn't have required any personal benefit it shouldn't required shouldn't have required self-interest to to demand this kind of human progress but again it helps when people understand that the discoveries of Marie Curie or Donna Strickland or Francis Arnold can actually make our lives better and that there's a huge advantage in doubling the number of people who can contribute to the production of the ideas from which we all benefit so my my time is coming to an end let me just hint at to two practical policy applications that emerge from this economics of ideas one is to think of cities as chances for people especially in the developing world to get the benefits of interaction with other people other people are beneficial on net in the words of my colleague ed Glaeser cities make us smarter now in the coming century we will build more urban area than we've built we humans will build more human area than we've built since the Neolithic Revolution it'll take only about a hundred years and then when the pop as the population stabilizes in this century this project what my colleague Saul angel calls the urbanization project will be done we'll have the layouts of the cities that people will live with forever and if we lay out the city from the beginning if a government lays out the city with a plan that protects some public space that allows the kind of connectivity you get when you've got a street that's wide enough for a bus to drive down and to make sure that nobody's more than about a half a kilometre from a bus route that they could use home to work if you lay out that space in advance it costs almost nothing if you try to get it after completely disorganized unplanned development it's almost infinitely costly to get that space I don't think we'll ever see anywhere in the future the kind of experience that Paris went through under Houseman where it was possible to just destroy large numbers of buildings move people and build broad avenues where they didn't exist before so we have a chance in the next hundred years at very low cost to lay the foundation for successful urbanization that can help everyone enjoy the benefits of learning from others but if we take a pass on this that the opportunity will be gone and the the entire future will be less well will generate less material progress for all the people who could so much benefit from it the other point I need to make is that because the population won't grow at after this century to get to keep getting more and more ideas we need more people to go into science and we need to raise the productivity in science one of the interesting things that I looked at in the data about Nobel Prize winners is in the 1910 the the 1900s the first decade in the second decade of the 20th century something like 6% only 6% of the recipients were from the United States no I think I think even 3% in the first 20 years then and from 19 the 1930s and 40s it increases to 15% after World War two it approaches more than 50% that early development is a sign of investments the United States made in a university system that started in the 1860s and it takes time for a commitment to science to progress to the point where you have people doing nobel prize quality science but it's possible and we could do now new things that helped spur the same kind of both increase in the total fraction of the population that is engaged in discovery and research and science and we can raise the productivity of all of those people there is evidence right now that productivity in science hasn't been has been falling as more and people have gone into it but this is something that we can correct finally it is true that we face a very serious challenge with addressing global warming but it's important to remember this is a challenge not of the physics not of nature not of scarce resources this is a challenge of making a decision it's like deciding to stick switch to daylight savings it's like deciding in Sweden to shift to driving on the right it's not hard to do it once you decide what's hard is deciding and that's what Bill's idea of the club is about but even within a country we need to find ways to appeal to other parts of the human spirit to persuade us all to make those kinds of decisions so let me close with encouragement to young people about what a fantastic life can come from science and encouragement to young economists at a time when the economics profession has gotten a lot more competitive it's much tougher to start out as a young person than it was when I was a graduate student or bill was but remember that there is an enormous opportunity in economics to start to explore these broader notions of progress the broader side of human nature that includes the kind of things that William Faulkner talked about in his Nobel speech love and honor pity and pride and compassion and sacrifice economics will be much more relevant when we can take account of all those and we'll have a better idea about why is it that we can sometimes appeal to sacrifice and people respond because this is what we'll need so let me close by expressing my deep appreciation for the system of prizes that Alfred Nobel established and that the Nobel Foundation has sustained a system for celebrating all the types of intellectual inquiry that emerged from the period we call the Enlightenment and remember there's a reason we call it the Enlightenment so yes let there be light let there be light in daily life let there be light - in our spirits and our souls thank you

Channel: Nobel Prize

Views: 42,934

Rating: 4.8899083 out of 5

Keywords:

Id: vZmgZGIZtiM

Length: 33min 43sec (2023 seconds)

Published: Sat Dec 08 2018