There will be more than the usual five links today (that’s an understatement). Here we go:
Thinking about Growth
I often begin introductory classes in macroeconomics by saying that there’s two reasons you might want to take your child to a doctor. I should know, I have a five year old daughter.
The first reason is because the child has a cold say, or a fever. A temporary problem, that can hopefully be fixed in the “short run”. The other reason that you might want to take your child to a doctor is to figure out if your child is doing well on parameters such as height, weight etc. Any parent who has agonized over what percentile their child is on that accursed chart which shows “normal” height and weight knows what I’m talking about. These are “long run” parameters.
The economy is the same! We worry about short run problems, such as the deficit, or the annual budget, and well we should. But we should also be thinking long and hard about the long term growth prospects of our
This year’s Nobel Prize for economics celebrates two economists who have spent literally their entire careers thinking about the long run growth prospects of our planet
The Long Run Car
Think of the global economy as a car that is moving forward on a road called Development. As with any car, this car is also equipped with an accelerator and a brake.
Paul Romer won the Nobel prize for having spent a lifetime thinking about the accelerator on this car. William Nordhaus has won the Nobel prize for having spent a lifetime thinking about the brakes on this car. There is much more to it than that, of course, but that’s a useful way to start thinking about this year’s Nobel prize.
What I mean by that is that Romer is perhaps best known for his work on economic growth and the power of ideas. Nordhaus is best known for his work on environmental economics. Think of Romer as saying “Well, how can we get this car to move faster?”. Think of Nordhaus as saying “Ah, but hang on. Are we going too fast for our own good?” This is not to suggest that they haven’t thought about each other’s questions – they have!
Both are excellent questions to ask. They are both crucial aspects of long run growth. In my opinion we do not think often enough about them in the context of both national economies as well as the global economy. That is one reason why this year’s Nobel Prize is such great news.
Matt Ridley, author of the excellent book “The Rational Optimist” has a must watch video over on Ted Talks, called “When Ideas Have Sex“. Do watch the whole video, but at around the ten minute mark, Ridley asks how long it would take for you to earn an hour of reading light. Today, the answer is about half a second. Two hundred years ago, the answer was about six hours.
Why do I bring this up? Because it was William Nordhaus who thought of asking this question. Why did he want to ask this question? Because it is hard to measure growth. The title of his paper was “Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not“. You can read that paper, if you like, or you could read this piece by Tim Harford – a more entertaining version of the same paper.
This is a great way to get acquainted with not just Nordhaus’ line of thinking, but about long run growth in general. How much better are our lives compared to the lives of our great grandparents? Why? Are they uniformly better, or did our great-grandparents do better in some regards? Is there a payoff involved here? Have we gotten better in some regards by being worse in other regards?
It’s the “being worse in other regards” bit that Nordhaus focuses upon. Specifically, how sustainable is our long term growth? Do we measure it well enough? Do we think about it hard enough? For an excellent overview of his work, you might want to try the MR summary by Tyler Cowen.
In particular, these links from that post are must reads:
- The DICE (the dynamic integrated climate-economy) model
- The Impact of Global Warming on Agriculture: A Ricardian Analysis.
- A Paul Krugman review of a book by Nordhaus that is well worth reading. The book is also worth reading!
Look no further than this video.
We should, Paul Romer says, think long and hard about ideas. Growth without ideas is well nigh impossible, and ideas are therefore central to thinking about growth. How can we can make sure that as many people as possible have the opportunity to “ideate”? How can we make sure that people have the opportunity to do something about their “ideation”?
Those are simple questions to frame, but unpacking them takes a very long time. Paul Romer’s career has mostly been about unpacking these questions, and all of the questions that come up as a consequence of thinking about these questions. Again, the video is more than self-sufficient.
Additional links that are must reads about Paul Romer:
- His TED Talk on charter cities.
- The Trouble with Macroeconomics
- His hatred for “turgid” writing (amen!)
Note that there are ten instances of the word “and” in this post, ignoring the circular reference in this particular sentence. I honestly don’t think these ought to be edited out.
Additional Links about this year’s Nobel Prize
- The Nobel citation. I love the title: Integrating nature and knowledge into economics
- Tyler Cowen on Romer.
- Timothy Taylor on his blog.
- Tyler Cowen’s Bloomberg column.
- Jeffrey Frankel (on Econbrowser)
- A Fine Theorem’s post.
- Joshu Gans’ post.
- Arnold Kling’s post.
- Amol Agarwal’s post.
Congratulations to both the winners!