On 8 October, the Royal Swedish Academy of Sciences named Yale’s professor William D. Nordhaus and NYU School of Business’ professor Paul M. Romer as this year’s winners of the 50th Sveriges Riksbank Prize in Economic Sciences, in Memory of Alfred Nobel. The official press release states that it was awarded to Prof Nordhaus “for integrating climate change into long-run macroeconomic analysis” and to Prof Romer “for integrating technological innovations into long-run macroeconomic analysis.”
The two economists did not work directly together over the years, but they have both had a tremendous impact on the models used by macroeconomists to predict the future of our global economy.
Prof Nordhaus began his study of the impact of the climate on the economy in the 1970s, and in 1994 he published a full version of his Dynamic Integrated model of Climate and the Economy (DICE), a version that is still one of the main integrated assessment models used by the U.S. Environmental Protection Agency.
According to Prof P. Krusell, Member of the Prize Committee, the DICE model has three components: the economy, the carbon cycle, and the climate. The model shows how fossil fuels, which are important for the running of most modern economies, contribute carbon dioxide to the atmosphere and, through the carbon cycle, result in a continued worsening of climate change (which can then, in turn, affect the economy through damages caused by the worse climate).
Prof Nordhaus’ model shows that it will be very hard to avoid a damaging rise in global temperature, especially as time has gone by and changes have not been made. However, he remains ultimately optimistic that we still have a chance (slim though it may be) to set things right, and advocates carbon taxes to disincentivise carbon consumption.
As for Prof Romer, his research since the late 1980s has focused on the impact of technological progress on the global economy. In 1990, Prof Romer published his endogenous technological change theory, which he used to further study the effect of innovation on the economy throughout his career. Prof Romer compared the growth of different countries and concluded that those with the fastest growth implemented the most new ideas.
To understand Prof Romer’s work, it is important to first understand the definition of goods that the ideas he studies fall under. Goods can be sorted into rival and non-rival goods, as follows: rival goods are those which can only be consumed once, while nonrival goods, such as the ideas that Prof Romer found to be so important for economic growth, can be used by many people without being degraded.
Non-rival goods are important, because they are the ideas and innovations which drive economic advancement. Nonetheless, only excludable non-rival goods are generated without government intervention because it is only lucrative to create a valuable idea if it is also possible to exclude other parties from accessing and benefiting from it. This is important, for example, when pharmaceuticals are developing a new drug: without patent laws protecting their new discoveries, they would never invest in drug development because as soon as they had a new drug their competitors would know how to develop it as well and compete with them for sales.
Non-excludable non-rival goods, such as economic theories which very quickly become readily available and thus non-profitable, are much more rare than excludable non-rival goods. Prof Romer’s research focused on the ideas which were non-rival and at least partly excludable, and incorporated them into his model.
While both of these economists have done ground-breaking work advancing macroeconomic modelling, they have not actually worked together and so some were surprised when they were announced as joint laureates. However, their works parallel each other in many ways. Both study the long-run macroeconomic implications of factors which are very prevalent in today’s society (climate change issues and technological advancements, respectively).
When asked for a link between Prof Nordhaus and Prof Romer, Prof Krusell said that “they are part of the same agenda: to think about the long run and to think about global issues… they built these tools that are very much alike. They built simulation tools that the rest of us can use and look at and study and improve.” In the press conference as well as in an interview afterwards, he emphasised the fact that the models developed by both Prof Nordhaus and Prof Romer are not the end of the research process, but just the beginning: the models are tools which can be used to pursue answers to hard questions about policy-making and the future of our global economy.
The work of both 2018 Economics Memorial Prize-winners has been crucial in the development of more well-rounded and accurate modelling of potential economic futures. Neither Prof Nordhaus nor Prof Romer professes to have all of the answers to our most pressing questions about these topics, but through their models they have provided the tools our policymakers need to examine potential actions and come up with the best answers available.