Guest Contribution: “Bill Nordhaus & Paul Romer, Nobel Prize winners”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.

Congratulations to Bill Nordhaus and Paul Romer on winning the ultimate prize in Economics. When I first heard, I wondered what the two have in common, beyond both doing path-breaking Nobel-worthy research. Then I remembered: they are originally from neighboring Rocky Mountain states, New Mexico and Colorado (but then went to elite New England prep schools).

Actually, I think the Nobel Committee might have had in mind a symmetric pairing, as it has occasionally done in the past:
* Myrdal and Hayek (1974) had different views on socialism;
* Lewis and Schultz (1979) differed on whether peasants optimized;
* Fama and Shiller (2013) differed on whether financial markets were rational.
How do Romer and Nordhaus fit the pattern? Whereas traditional growth theory assumed constant returns to scale, Paul developed growth theory with increasing returns to scale and Bill is the father of modern environmental economics, which can be interpreted as growth with diminishing returns to scale.

But both are amazingly varied in the range of their intellectual interests. Besides growth theory and endogenous technology, Paul also wrote on financial bubbles as looting and has been an entrepreneurial maverick in the two areas of cities and on-line learning. Bill, besides the economics of global climate change (particularly DICE, a landmark Integrated Assessment Model), also pioneered the election-year theory of the business cycle, the Measure of Economic Welfare, energy economics, long-term measurement of productivity, a forecast of the cost of the war in Iraq, and much more.

Congratulations to both!

This post written by Jeffrey Frankel.

6 thoughts on “Guest Contribution: “Bill Nordhaus & Paul Romer, Nobel Prize winners”

  1. pgl

    Paul Romer won a well deserved Nobel Prize for his work on economic growth. He also has a blog where the latest entry is called Economic Growth:

    He details real growth in Shenzhen which is a must read for those of us who lament the usual uninformed China bashing from PeakTrader:

    “Is growth at 7% per year even possible? For a country that starts at a low level of income, we now know that growth this fast can be sustained for decades. Figure 1 shows GDP per capita in Shenzhen, a new city that the national government in China started as a reform zone where it could pilot controversial new policies such as letting foreign firms enter and hire Chinese workers. When a graph has a ratio scale on the vertical axis, as this figure does, the slope of a plotted line is equal to the growth rate. The steeper slope from 1980 to 1985 shows that growth was higher then. In this exceptional initial period, it grew at an exponential rate of 23% per year. In the subsequent interval from 1985 to 2011, it grew at more than 7% per year. Growth at this pace lifted GDP per capita (measured in the purchasing power of a dollar in 2005) from about \$2500 in 1985 to about \$17,000 in 2011.”

    Real income per capita was less than $100o before 1980 so this improvement in real income per person is outstanding. Of course Peaky has told us people are fleeing China. Dr. Romer continues:

    “Figure 2 shows that Shenzhen’s population also grew rapidly, at an average at the rate of 11% per year, increasing from about 300,000 in 1980 to more than 10 million in 2011. Figure 3 plots total GDP, which is the product of GDP per capita and population. Over these 26 years, it grew at an average rate of 21% per year, increasing by a factor of about 750. Taken together, these graphs vividly demonstrate that growth can take place at a faster pace than we realize, and faster growth cumulates quickly into big changes in standards of living for large numbers of people.”

    There is a lot more from this interesting discussion on the role of economic growth.

    1. Moses Herzog

      @ pgl
      The common underlying problem here is some Chinese people (I am speaking generalities here, but it’s my personal experience that it’s an overwhelming majority) cannot decipher the difference between criticism of the Chinese Government leaders, criticism of Chinese government policy, and an insult to Chinese people themselves as human beings. Frankly pgl I suspect you fall into this large sub-group.

      If, as a white American, I sympathize and empathize with Chinese citizens being crapped on by their own government how does that make me “anti-Chinese”?!?!?!?! I wish somewhere north of 3 living Chinese could explain that one to me. Seemingly zero mainland Chinese have ever been able to explain this odd logic to me, and I can tabulate the American Chinese who could explain that oddball “logic” to me on one hand. Let’s say Medicare gets wiped out tomorrow, and a Chinese person comes up to me and says “Man that’s complete bullcrap that the U.S. government took away the social safety net of Medicare from Americans. That Trump and his party are just a bunch of bastards!!!” Or let’s say A Chinese person came up to me and said “Man it’s complete bull crap that large portions of the U.S tax system are in fact regressive, such as your comparatively low capital gains tax. That policy is a very dumb policy by Americans and punishes those who engage in honest labor” would my face turn red and then I tell hypothetical Chinese person that he is “anti-American” or “anti-European blood people” because he told me he thought the American government was full of crap??? No I would not. And yet, this is how a large portion of Chinese work out the logic in their mind.

      I guess the “proper solution” in order for an Americans of European blood to show/”prove” he/she “loves” Chinese is to watch the Chinese government treat people like Liu Xiaobo and his wife, Ai Weiwei, and thousands (millions) of others as sub-human and then just go “Cool man!!! Great work!!! Keep it up!!!” Then, everyone can go to bed at night feeling so good about themselves.

  2. pgl

    Paul Romer’s “Conditional Optimism about Progress and Climate” was posted back in July 2016:

    His reaction to the awarding of the Nobel Prize to him and Bill Nordaus:

    “In light of the announcement today by the Nobel Committee, let me say what an honor is it to be awarded the prize jointly with William Nordhaus. The committee highlighted his work on climate, but it is also worth mentioning that his early work, starting with his Ph.D. thesis, made a very important contribution to our understanding about the economics of discovery, the area that I explored about one decade later.It also might make sense for me to push this post the potential for technology to help us protect the natural environment.”
    A must read!

  3. Ben Arownd

    Besides being brilliant Bill Nordhaus brings out the best in those working with him and is an enjoyable colleague. I had the privilege of helping him to understand the intricacies of U.S. economic statistics when he was developing alternative methods for measuring productivity growth in the late ’90s and early ’00s.

  4. Lepetit Michel

    Here is a personal translation of Antonin Pottier’s tribune in Le Monde about Nordhaus Nobel Prize.

    Tribune. “The Nobel Prize winner William Nordhaus has always promoted a very measured reduction in emissions”, Le Monde, 11/10/18, 09:16
    By Antonin Pottier, Maître de conférence at EHESS and author of Comment les économistes réchauffent la planète (Seuil, 2016)

    The Bank of Sweden’s award for the American economist rewards a dated vision, while global warming requires an intellectual renewal of the discipline, warns economist Antonin Pottier in a tribune in the Le Monde.

    Tribune. On Monday, October 9, the Royal Swedish Academy of Sciences announced the winners of the Bank of Sweden Prize in honour of Alfred Nobel, on the same day that the Intergovernmental Panel on Climate Change (IPCC) submitted its special report on the impacts of a 1.5°C global warming and ways to limit warming to this level.

    In this context, the award of this prize, incorrectly described as the “Nobel Prize for Economics”, to William Nordhaus (in association with Paul Romer), a pioneer in economic research on climate change, seems to be good news. This is obviously an economist who is dealing with one of the most serious problems of our time and who is proposing solutions to protect the planet.

    Before we welcome this alliance of action and reflection, let us look in more detail at Dr. Nordhaus’ work on modelling the links between the economy and climate. Published in 1992, its DICE model, for Dynamic Integrated Climate Economy, consists of two components: a climate module and an economic module. The simplified climate module describes how CO2 emissions affect global temperature increases ; the economic module represents the growth path of the global economy.
    These modules are doubly linked, on the one hand because economic activity produces CO2 emissions, and on the other hand because global warming causes damage that reduces global GDP. Finally, it is possible to reduce emissions at the cost of restricting current consumption.

    Dr. Nordhaus’ stroke of genius was to publish the code of this model and make it usable by all. Easily programmable on a personal computer, downloadable from its web page, and even available on a simple Excel spreadsheet, the DICE model was quickly adopted by economists in their work on climate. The simple structure of the economic-climate interactions proposed by the model thus became, during the 2000s, the reference for a field of study then in the process of developing, the economics of climate change.

    A tool that is not neutral
    However, it would be a mistake to consider the DICE model as a neutral tool because it conveys the assumptions that guided its design. Nordhaus is based on a very specific approach, that of a cost-benefit analysis of climate change. He is interested in the optimal trajectory of emissions, the one that, by judiciously balancing the reduction costs incurred today with the future damage avoided, maximizes the flow of consumption over time.
    In this search for an optimal strategy to transmit wealth in the future, climate policies are considered as an investment, whose profitability is assessed in the light of competing alternatives, such as investment in manufactured capital or in the intangible capital of knowledge. By determining what level of global warming to tolerate, Mr. Nordhaus endorses the position of arbitrator between societal choices ; he replaces political deliberation and decision with economic calculation.

    Where does the optimal warming actively studied by Mr. Nordhaus lead us? Those who follow the climate issue know that it has always promoted a very measured reduction in emissions. A trace of this can be found in the Royal Academy document, which presents the scientific pedigree of the winners. Figure 3 shows the optimal emission trajectory calculated by Dr. Nordhaus with the latest version of the DICE model: from 35 Gt of CO2 today, it passes through 40 Gt in 2050 and drops to 15 Gt in 2100.
    We have to go back to the 2016 working document from which the graph was taken to realize that this optimal trajectory leads to a warming of 3.5°C, barely less than the laissez-faire scenario. It takes a madman… or a potential noble-prize winner economist to recommend 3.5°C as the optimal warming, only a few months after the international community, after years of negotiations, agreed at COP21 to keep global warming well below 2°C.
    By awarding the prize to William Nordhaus, the Royal Academy once again recognized the dissemination capacity of an economic analysis tool – DICE’s “virality”, to speak the language of social networks – more than the relevance of the questions asked or the quality of the answers provided. If this is the best that economics can bring to the understanding of the climate problem, it is not surprising that the ruling classes, for whom economics has become the natural language, find themselves so helpless. To limit global warming to 1.5°C, the IPCC calls for unprecedented transitions in all aspects of society. This also applies to the intellectual aspect. A new economic science will be needed to support the transition to a new economy.


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