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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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