The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018 to William D. Nordhaus, Yale University, New Haven, USA “for integrating climate change into long-run macroeconomic analysis” and Paul M. Romer, NYU Stern School of Business, New York, USA “for integrating technological innovations into long-run macroeconomic analysis.”
Integrating innovation and climate with economic growth
William D. Nordhaus and Paul M. Romer have designed methods for addressing some of our time’s most basic and pressing questions about how we create long-term sustained and sustainable economic growth.
At its heart, economics deals with the management of scarce resources. Nature dictates the main constraints on economic growth and our knowledge determines how well we deal with these constraints. This year’s Laureates William Nordhaus and Paul Romer have significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge.
Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.
Romer’s solution, which was published in 1990, laid the foundation of what is now called endogenous growth theory. The theory is both conceptual and practical, as it explains how ideas are different to other goods and require specific conditions to thrive in a market. Romer’s theory has generated vast amounts of new research into the regulations and policies that encourage new ideas and long-term prosperity.
Read more at Nobel Foundation