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

TL;DR

Sustained progress is possible because ideas are codified knowledge that can be copied, shared, and used simultaneously by people everywhere. Unlike finite natural resources, accumulated ideas can generate new technologies and offset scarcity, although innovation can also create harmful side effects. Human outcomes therefore depend on balancing resource constraints with discovery and directing technology toward broad benefits.

Transcript

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 k... Read More

Key Insights

• Economic progress is governed by a tension between the restraining force of scarce resources and the positive force of discovery and innovation. Romer argues that humanity's fate depends on how these two forces are balanced rather than on scarcity or technology considered separately.
• Confidence in progress had weakened by 1980 because apparently beneficial discoveries produced unexpected harms. Chlorofluorocarbons threatened the ozone layer, DDT caused problems, leaded gasoline damaged human health, and cigarettes caused cancer, showing that technological change does not automatically deliver exclusively positive results.
• Public confidence in government declined during the 1970s as inflation increased and recessions caused unemployment without restoring low inflation. The resulting experience was called stagflation, and the underlying inflation rate generally rose from one recession to the next, undermining faith in effective economic management.
• Malthusian growth theory begins with the finite quantity of every natural resource. If progress requires increasing amounts of a resource such as copper per person, simple arithmetic implies that sustained progress is impossible and that apparent gains may merely reflect depletion before a wall or possible collapse.
• A larger population has a grim scale effect under a purely Malthusian model. Twice as many people means half as much copper per person, encouraging the human tendency to divide people into us and them because outsiders appear to threaten, share, or become targets for taking scarce resources.
• Light poverty demonstrates that technical knowledge can exist without reaching everyone. Students in Conakry, Guinea, studied beneath streetlights outside an airport because they could not do homework with adequate light at home, even though existing technology already made household illumination possible.
• Ideas are codified knowledge represented through symbols on paper or through bits. Because codified knowledge can be copied, everyone can use the same idea simultaneously, as with the Pythagorean theorem, instead of sharing it by taking turns as people must do with scarce objects.
• Illumination measured in lumen hours provides physical evidence of progress. William Nordhaus's experiments indicated that an hour of work today could buy 350,000 times as much illumination as in early Babylonia, with most of the improvement occurring after the Scientific Revolution and Industrial Revolution.

Questions & Answers

Q: How can ideas make sustained economic progress possible?

Ideas can support sustained progress because they differ fundamentally from scarce physical objects. An idea is codified knowledge represented in symbols or bits, which means it can be copied and shared. Everyone can use the same idea simultaneously, as people do with the Pythagorean theorem. Accumulating such ideas creates technological change that can offset the restrictions imposed by finite natural resources.

Q: Why does Malthusian theory cast doubt on continued progress?

Malthusian theory begins with the incontrovertible premise that every natural resource has a finite quantity. The mass of copper in Earth's crust, for example, cannot keep increasing, so copper available per person falls when population rises. If progress requires more copper or another finite resource per person, continued growth eventually reaches a wall, and apparent progress may represent temporary depletion rather than a sustainable trend.

Q: What is the difference between an idea and a scarce resource?

A scarce resource such as copper has a finite physical quantity that must be divided among uses and people. An idea is codified knowledge stored in symbols on paper or in bits. It can be copied and used by everyone at the same time. Sharing an idea therefore does not mean taking turns, which makes ideas capable of supporting progress in a way finite objects cannot.

Q: Why had confidence in technological progress weakened by 1980?

Confidence had weakened because several apparently positive discoveries produced serious, unanticipated side effects. Chlorofluorocarbons could destroy the ozone layer, while DDT created problems, leaded gasoline damaged human health, and cigarettes caused cancer. These cases suggested that discovery was not necessarily a purely positive force. Technology might improve living conditions while also producing harms that were not recognized when it was introduced.

Q: How did stagflation weaken confidence in government?

During the 1970s, inflation rose steadily while recessions caused unemployment and reduced inflation only to levels that remained relatively high. This combination became known as stagflation. More disturbing, the underlying inflation rate generally increased from one recession to the next. The pattern made people lose faith in government's ability to perform basic economic management and reinforced broader doubts about the possibility of continuing progress.

Q: What does light poverty reveal about technology and inequality?

Light poverty shows that knowing how to provide a useful service does not ensure that everyone receives it. Students in Conakry, Guinea, studied under streetlights outside an airport because they could not do homework with adequate lighting at home. Existing technology could provide household light, but extending the same electricity access enjoyed elsewhere could raise carbon emissions, creating a conflict between inclusion and environmental constraints.

Q: How does resource scarcity encourage an us-versus-them mentality?

Under Malthusian conditions, more people mean fewer finite resources for each person. Twice as many people, for example, means half as much copper per person. Romer connects this arithmetic to a human predisposition shaped during the Pleistocene: outsiders can appear to threaten existing resources, offer resources that might be taken, or reduce everyone's share even when resources are distributed peacefully.

Q: How can illumination measure long-term economic progress?

Illumination can be measured in lumen hours, a physical unit that avoids relying on contemporary dollars or euros. William Nordhaus compared how much light an average person could obtain from an hour of work across history. His experiments indicated that an hour of work today buys 350,000 times as much illumination as in early Babylonia, with most gains arriving after the Scientific Revolution and Industrial Revolution.

Summary

In this video, Paul Romer, a Nobel laureate in Economics, discusses the concept of progress and how it is driven by the accumulation of ideas. He explores the tension between scarce resources and the positive force of discovery and innovation. Romer also emphasizes the importance of technological change and the role of cities in fostering interaction and learning. He suggests that human progress, which involves treating others as allies rather than rivals, is crucial for global development. Romer concludes by urging young people to pursue careers in science and economics to further explore the broader notions of progress.

Questions & Answers

Q: How did Paul Romer explain why progress was doubted in the past?

Paul Romer explained that in the past, progress was doubted due to several factors. One of them was the negative side effects of technological discoveries, such as the harmful effects of chlorofluorocarbons on the ozone layer. Other examples include the negative effects of DDT, leaded gasoline, and cigarette smoking. These unintended consequences raised concerns about the true positivity of technological progress.

Q: How did Paul Romer challenge Thomas Malthus' theory of growth?

Paul Romer challenged Thomas Malthus' theory of growth by focusing on the accumulation of ideas as a source of progress. Malthus' theory suggested that there is a finite quantity of every natural resource, which would limit the possibility of sustained progress. However, Romer argued that ideas, represented as codified knowledge, can be copied and shared, allowing for the discovery of new technologies and solutions. This accumulation of ideas offsets the scarcity implied by Malthusian analysis and opens up the possibility of sustained progress.

Q: How did Paul Romer describe the concept of human progress?

Paul Romer described human progress as progress in who we are, rather than just progress in what we have. He emphasized the importance of seeing other people, even animals, as part of "us" rather than "them." This broader notion of progress involves treating others as allies and expanding the circle of "us" to include more people. Romer argued that this type of progress is necessary for moral reasons and can lead to a more harmonious and prosperous society.

Q: What are the two practical policy applications that Paul Romer outlined?

Paul Romer outlined two practical policy applications. The first one is to think of cities as opportunities for people, especially in the developing world, to benefit from interaction and learning from others. He suggested that laying out cities with a plan that includes public spaces and connectivity can contribute to successful urbanization and the spread of ideas. The second application is related to raising productivity and attracting more people to science. Romer discussed the importance of investing in scientific research and creating an environment that encourages more individuals to pursue careers in science.

Q: How did Paul Romer address the challenge of global warming?

Paul Romer acknowledged the seriousness of the challenge posed by global warming but emphasized that it is ultimately a decision-making challenge rather than a physical or resource-related one. He compared it to other decisions, such as switching to daylight savings or changing traffic rules, that require a collective agreement. Romer emphasized the need to appeal to different parts of human nature and to find ways to motivate individuals and societies to make the necessary decisions to address global warming effectively.

Summary & Key Takeaways

• Paul Romer frames global macroeconomics as a tension between scarce resources and the positive force of discovery. Doubts about progress grew from harmful technological side effects, declining confidence in government during stagflation, and Malthusian arithmetic showing that finite resources, such as copper, cannot continually increase on a per-person basis.

• Romer argues that Malthusian theory correctly describes scarce objects but omits ideas. An idea is codified knowledge represented in symbols or bits, so it can be copied and shared without requiring people to take turns. This simultaneous usability makes accumulated ideas a plausible source of technological change and sustained material progress.

• Access to light illustrates both technological progress and its unresolved distribution. Students in Conakry studied beneath streetlights even though technology could provide household lighting. Providing existing electricity technology more widely could increase carbon emissions, so progress requires discoveries that expand access while addressing environmental limits rather than dividing humanity into opposing groups.