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Prize lecture: Paul M. Romer, Prize in Economic Sciences 2018
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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]
[Applause] [Music]
[Music]
I I too will rely on technology and and
as that there's a designated advocate
for technology you can count on it
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
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
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
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
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
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
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
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
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
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