There is worldwide concern about climate change, and it is reflected in the awarding of this year’s Nobel Prize in Economics to two Americans whose work has a direct application to the issue.
William D. Nordhaus, a at Yale, and Paul M. Romer, a at New York University, received the award for their work on two very different, but related, aspects of a complex economic problem. According to the awards committee, one, to Romer, is “for integrating technological innovations into long-run macroeconomic analysis.” The other, to Nordhaus, is “for integrating climate change into long-run macroeconomic analysis.”
At 77, Nordhaus is the oldest recipient of the award, and it is not surprising, then, that his primary work on the relationship between temperature and economic development was published 28 years ago.
Romer’s work is an outlier in the “dismal science” of economics. He believes that “we can do anything we put our minds to” — a refreshing theory in a science consumed by limitations and by “cant’s.”
His research into the relationship between economics and technology is the first serious and worthwhile effort in that area since Karl Marx explored its long-term effects on employment in “Das Kapital.” Significantly, Romer’s work integrated technology into a macroeconomic model — and, more broadly, information — which allows economists to examine the impact of changes.
In Romer’s work, the source of economic growth is not as much physical resources themselves but what we do with them. This, in his theory, explains why a country rich in resources can remain imprisoned by poverty while a country less richly endowed can enjoy a very high standard of living. Japan is often cited as an example of the latter, while the so-called “Third World” contains many examples of impoverished countries possessing natural resources of great value.
The work of Nordhaus is very different in concept. It is based on the idea that economic growth is determined by climate. Of course, he is not the first person to focus on the relationship between temperature and economic activity. It was first noted in the later stages of the Age of Exploration. And the idea came to the fore not long after that in the initial attempts to superimpose Northern European economic models on more tropical areas. Unfortunately, this effort eventually ushered in a dependence on slavery and its cruelties.
The relationship that Nordhaus found between temperature and economic output is key to the relevance of that model to global warming. The existence of the relationship centuries before evidence of global warming emerged, then, raises the caution flag in the race to intervene in an environmental change. If, for example, the temperature-economics relationship were the result of temperature’s effect on humans, or even something as mundane as the length of the work day, our efforts to reduce carbon burning might not have as much impact as we expect.
Although the work of the two laureates are very different, they share a key characteristic: an economic model rooted in the workings of free markets but subject to real-world outside forces — including government actions. That characteristic may allow us to put the work of both economists to good use.
Romer’s conclusion was that government investment in technology can result in sustained economic growth. Major technology advances today are now largely in the hands of proprietary interests. This is not inherently a bad thing, but sustained national economic growth is not inherently a goal of private business, either. So, Romer’s work would entail substantial government investments in technology and information development but includes offers a way to evaluate them.
The history of government’s feckless efforts at direct investment in technology reveals that the government is simply not very good at managing these programs. And, as taxpayers and voters well know, just throwing money at a problem rarely solves it. The government should consider a mix of tax incentives and disincentives to ensure a steady supply of technology improvements, especially those which enter the public domain.
Nordhaus’ work is even more readily adaptable to global warming, but, perhaps ironically, because of the market-based economic model at its heart its conclusions may not always be to everyone’s liking. Markets take costs as well as benefits into account, and that can be a challenge to some proposals.
No critical issue is more in need of technology, information and investment than global warming. We have had decades of purpose-driven data, and all that it has produced is scientific proof that science can be as politically polarized as any other area of mankind’s activities.
The works of Nordhaus and Romer have opened the door to a way out of our present impasse. We should take advantage of the opportunity.
James McCusker is a Bothell economist, educator and consultant.
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