Read the full story
And finally, here’s our news story on today’s Nobel prize in economics.
That’s the end of the Nobel season for another year. Thanks for following our coverage. Congratulations to all the winners, and better luck next time to everyone else.
Former UK prime minister Gordon Brown may have smiled at Romer’s success.
Back in the 1990s, Labour’s Brown gave a famous speech on “Post Neo-classical Endogenous Growth Theory”. It was cowritten with Ed Balls, then his youngish assistant (later shadow chancellor, then Strictly Come Dancing star).
The speech was later mocked by right-winger Michael Heseltine, with the side-splitting pun that ‘it wasn’t Brown’s, it was Balls’.
Ho ho ho. But Brown and Balls’ point, that growth relies on investment, technological progress, and innovation, remains true and important today.
Gordon Brown being sneered at when he gave a speech as shadow chancellor mentioning endogenous growth theory.
Paul Romer’s success comes nine months after he quit the World Bank, where he was chief economist, under a dark cloud.
Romer had clashed with World Bank staff on several issues, including the worthiness of the methodology used in its reports. At one point, he demanded they use the word ‘and’ less frequently, saying it was a lever to get political points across.
His term ended abruptly after he claimed that Bank staff had manipulated the data in its “Doing Business” rankings, suggesting that Chile had been unfairly pushed down the rankings.
PSA: If you’re a world expert, and your phone rings early one October morning, try picking up the receiver....
Here’s a clip of Paul Romer talking about his award, and the work behind it.
Tyler Cowen: Why Nordhaus and Romer won
Economics professor Tyler Cowen is doing a great job collating information about the winners, and explaining their work is influential and important.
Here’s a flavour of his work on William Nordhaus:
Nordhaus is professor at Yale, and most of all he is known for his work on climate change models, and his connection to various concepts of “green accounting.” To the best of my knowledge, Nordhaus started working on green accounting in 1972, when he published with James Tobin (also a Laureate) “Is Growth Obsolete?“, which raised the key question of sustainability. Green accounting attempts to outline how environmental degradation can be measured against economic growth. This endeavor is not so easy, however, as environmental damage can be hard to measure and furthermore gdp is a “flow” and the environment is (often, not always) best thought of as a “stock.”
Nordhaus developed (with co-authors) the Dynamic Integrated Climate-Economy Model, a pioneering effort to develop a general approach to estimating the costs of climate change. Subsequent efforts, such as the London IPCC group, have built directly on Nordhaus’s work in this area. The EPA still uses a variant of this model. The model was based on earlier work by Nordhaus himself in the 1970s, and he refined it over time in a series of books and articles, culminating in several books in the 1990s. Here is his well-cited piece, with Mendelsohn and Shaw, on how climate change will affect global agriculture.
Nordhaus also was an early advocate of a carbon tax and furthermore he wrote part of the Clean Air Act, the part that gave the government the right to regulate hitherto-unmentioned pollutants in the future. The Obama administration, in its later attempts to regulate climate, cited this provision.
And on Paul Romer, Tyler explains:
Romer has been a central figure behind the notion of “charter cities,” namely an economic region but with external or possibly foreign governance, so as to enforce the rule of law and spur economic growth. The charter cities idea comes rather naturally out of Romer’s work on the economics of growth. Think of Romer as asking “which is the non-rival public good which can be extended at very low cost?”, and wondering if that might be law. Here is his famous TED talk on charter cities. Here is an interview with Romer on charter cities. He was originally slated to work with the Honduran government on charter cities, though he dropped out of the project in 2012. Here is Paul’s account of what happened.
Amihai Glazer and I once wrote a comment on Romer, on his article with Barro on ski-lift pricing, which Glazer and I saw as closely connected to Buchanan’s theory of clubs. Romer later credited this comment with inducing him to rethink what the notion of rivalry really means in economics, and leading to his two best-known pieces on economic growth; see the David Warsh book for more detail.
Like myself, Romer is an avid fan of the guitarist Clarence White, and several times we have traded favorite Clarence White videos by email. Romer believes (correctly) that the role of Clarence White in the success of the Byrds is very much underrated, and furthermore he is a big fan of White’s early work with the Kentucky Colonels.
Here’s a handy explanation of Paul Romer’s work on endogenous growth:
Associated Press agrees that today’s award is timely, as the UN calls for fresh action on climate change:
William Nordhaus in the 1990s became the first person to create a model that “describes the global interplay between the economy and the climate,” the academy said. He showed that “the most efficient remedy for problems caused by greenhouse gases is a global scheme of universally imposed carbon taxes.”
The prize comes just a day after an international panel of scientists issued a report detailing how Earth’s weather, health and ecosystems would be in better shape if the world’s leaders could somehow limit future human-caused warming to just 0.9 degrees Fahrenheit (a half degree Celsius) from now, instead of the globally agreed-upon goal of 1.8 degrees F (1 degree C)
Nordhaus has argued that climate change should be considered a “global public good,” like public health and international trade, and regulated accordingly, but not through a command-and-control approach. Instead, by agreeing on a global price for burning carbon that reflects its whole cost, this primary cause of rising temperatures could be traded and taxed, putting market forces to work on the problem.
Harvard economist Gernot Wagner says that both winners have made huge strides towards tackling climate change.
Nordhaus’s pioneering cost-benefit models for global warming, and Romer’s work on how well-regulated markets can spur technological development and sustainable economic progress, and ultimately faster growth.
Paul Romer’s website is creaking under the strain!
The Nobel Prize committee have created a ‘Popular Science’ backgrounder, for anyone trying to get up to speed on today’s winners.
It explains how Bill Nordhaus and Paul Romer developed tools to show how market economy affects nature and knowledge, dating back several decades.
Here’s a flavour:
Nordhaus became the first person to design simple, but dynamic and quantitative models of the global economic-climate system, now called integrated assessment models (IAMs).
His tools allow us to simulate how the economy and climate would co-evolve in the future under alternative assumptions about the workings of nature and the market economy, including relevant policies. His models address questions about the desirability of different global scenarios and specific policy interventions.
And on market imperfections..
Romer showed that unregulated markets will produce technological change, but tend to underprovide R&D and the new goods created by it. Addressing this under-provision requires well-designed government interventions, such as R&D subsidies and patent regulation. His analysis says that such policies are vital to long-run growth, not just within a country but globally.
Romer: Read this!
Nobel laureate Paul Romer has been tweeting.
He’s flagged up an article explaining why he is optimistic that climate change can be tackled, with firm action.
The practical insight is that there are two very different types of optimism. Complacent optimism is the feeling of a child waiting for presents. Conditional optimism is the feeling of a child who is thinking about building a treehouse. “If I get some wood and nails and persuade some other kids to help do the work, we can end up with something really cool.”
What the theory of endogenous technological progress supports is conditional optimism, not complacent optimism. Instead of suggesting that we can relax because policy choices don’t matter, it suggests to the contrary that policy choices are even more important than traditional theory suggests.
He’s also flagged up a second article, that explains how small changes in economic growth can have a powerful long-term impact.
A rough guide to the doubling time for any rate of growth is to divide it into 70. For example, if something grows at 7% per year, you can infer that it doubles every 10 years because 70 / 7 = 10. If it grows at 3.5% per year, it takes 20 years to double. Taking twice as long to double may not sound so bad, but remember the difference between using just the white squares or all the squares on the chessboard. Or consider what happens over the course of a century. A doubling time of 20 years means doubling 5 times in a century, which produces an increase by a factor of 32. Doubling 10 times produces an increase by a factor of 1024.
David Pendelbury, scientific manager at Clarivate Analytics (who draw up the list of Nobel frontrunners based on academic citations), agrees that these are worthy winners:
“It is a crowning achievement for William D. Nordhaus, Sterling Professor of Economics, Yale University, New Haven, CT, USA, and Paul Michael Romer, New York University Stern School of Business, and Hoover Institution, Stanford, California, to be recognized by 2018 Nobel Prize in Economics.
We named both as Citation Laureates in 2009 and 2005 respectively, due to an exceptionally high level of citations to their works by the research community.
Nordhaus and Romer win for 'big ideas'
Professor Justin Wolfers of the University of Michigan says Romer and Nordhaus are worthy winners, for asking the ‘big questions’ about economics and the world we live in.
Reaction is starting to flood in.
Oxford University researcher Max Roser says Nordhaus and Romer are a great choice:
Two researchers who dedicated their lives to study the big transitions in human history by taking a very long run view on how we got to now and where we are heading. Congratulations to both of them.
You probably wouldn’t put William Nordhaus’s climate change work in the same boat as Paul Romer’s work on heathy, sustainable economic growth.
But the committee at the Royal Swedish Academy of Sciences insist that these two macroeconomists have more in common than first appears.
Committee member Per Krusell, a Swedish macroeconomist, says that both men are really part of the same agenda, thinking about ‘long-run, global’ issues.
Krussell adds that Romer and Nordhaus have a similar view about economic policy, and market failure, even though superficially they may look different.
Q: Did you expect to win the award?
Apparently not! Paul Romer reveals that he ignored two phone calls today because he assumed they were spam calls. Fortunately the committee got through in the end....
Paul Romer adds that optimism is a vital ingredient to tackling hard problems such as climate change.
“One problem today is that people think protecting the environment will be so costly and so hard that they want to ignore the problem and pretend it doesn’t exist.
Humans are capable of amazing accomplishments if we set our minds to it.
Romer: We can fix climate change
Paul Romer is on the phone now, sounding understandably bouncy.
Asked about the IPCC’s warning on climate change, Romer says that the world can fix the problem, if we start now.
He also argues that dire warnings that the future of the planet is in doubt don’t help.
As Romer puts it:
Once we start to try to reduce carbon emissions, we’ll be surprised that it wasn’t as hard as we anticipated.
The danger with very alarming forecasts is that it will make people feel apathetic and hopeless.
It is “totally doable”, even now, to start bringing down carbon emissions...while also improving standards of living and sustaining growth, Romer says.
If we do the right thing, everything can keep going better. but it is time to do the right thing, Romer adds.
Here's the official announcement
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”
Paul M. Romer, NYU Stern School of Business, New York, USA
“for integrating technological innovations into long-run macroeconomic analysis”.
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.
Technological change – 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.
Climate change – Nordhaus’ findings deal with interactions between society and nature. Nordhaus decided to work on this topic in the 1970s, as scientists had become increasingly worried about the combustion of fossil fuel resulting in a warmer climate. In the mid-1990s, he became the first person to create an integrated assessment model, i.e. a quantitative model that describes the global interplay between the economy and the climate. His model integrates theories and empirical results from physics, chemistry and economics. Nordhaus’ model is now widely spread and is used to simulate how the economy and the climate co-evolve. It is used to examine the consequences of climate policy interventions, for example carbon taxes.
The contributions of Paul Romer and William Nordhaus are methodological, providing us with fundamental insights into the causes and consequences of technological innovation and climate change. This year’s Laureates do not deliver conclusive answers, but their findings have brought us considerably closer to answering the question of how we can achieve sustained and sustainable global economic growth.
Nordhaus and Romer feel like worthy winners.
As mentioned earlier, William Nordhaus has been a pioneer on the vital issue of climate change - using models to show that policymakers are failing to measure the true impact of global warming.
Nordhaus’s DICE computer model has made a huge difference. It:
“integrates in an end-to-end fashion the economics, carbon cycle, climate science, and impacts in a highly aggregated model that allows a weighing of the costs and benefits of taking steps to slow greenhouse warming.
That’s both important and urgent, on a day when the UN is warning there is just 12 years to limit climate change catastrophe.
The Endogenous Growth Theory, meanwhile, shows how growth is generated by internal rather than external factors.
That’s important - it means that governments can make a real difference to the lives of their people through economic policy - from investment and education to fighting monopolies and protecting IP rights - rather than throwing their hands up and blaming factors beyond their control.
Once again, none of the world’s leading female economists have been recognised.
Commiserations to Esther Duflo, Anne Osborn Krueger, Claudia Goldin, Janet Currie, et al, and good luck for next year.
Why Nordhaus and Romer have won
William Nordhaus is being recognised for his work on the damage caused by climate change.
Paul Romer has examined how economists can achieve a healthy rate of economic growth.
The models that Nordhaus and Romer have created have helped with the development of economic growth, and with combatting climate change, we’re hearing.
They have taken macroeconomics to a global scale, to tackle some of the world’s biggest problems, the Nobel Prize committee say.
AND THE WINNERS ARE
NORDHAUS AND ROMER WIN THE NOBEL
The winners are William Nordhaus for his work on climate economics, and Paul Romer for his work on the endogenous growth theory.
Today’s prize is be awarded for innovation, climate and economic growth......
Here we go....
Usually the committee try to contact the winner (s) before the official announcement, so maybe they’re struggling to get through.
This can be a problem if the prize is going to someone in America, for example, where it’s still rather early (approaching 3am in California).
Sounds like there’s a small delay....
The live feed is now working, so you can hear the scraping of chairs and nervous coughing in the Royal Swedish Academy.
(I’ve embedded it in the top of this blog too).
Here are some facts about today’s prize:
Number of Laureates in Economic Sciences
79 individuals have been awarded 1969-2017 (List of all Laureates in Economic Sciences)
The average age of all Laureates* in Economic Sciences between 1969 and 2017 is 67 years. All Nobel Laureates listed by age
Youngest Laureate in Economic Sciences
To date, the youngest Laureate in Economic Sciences is Kenneth J. Arrow, who was 51 years old when he was awarded in 1972.
Oldest Laureate in Economic Sciences
The oldest Laureate in Economic Sciences to date is Leonid Hurwicz, who was 90 years old when he was awarded in 2007. He is also the oldest Laureate to be awarded in all Prize categories.
Female Laureates in Economic Sciences
Elinor Ostrom was the first female Laureate in Economic Sciences. Elinor Ostrom was awarded the Prize in 2009.
Tension is rising in Stockholm as journalists await the news....
As well as the glory, today’s winner will also receive a financial windfall of 9 million Swedish kronor. That’s roughly £750,000, or $1m.
If there are two or three laureates, they share the cash.
Just half an hour to go...
Those of us who propped up the bottom of the class can take heart from these words from last year’s winner, Richard Thaler:
This (unscientific) Twitter poll suggests Esther Duflo would be a popular choice, if they’re going to double the number of female winners to two.
Andreas Wallström of Sweden’s Nordea Markets also believes she’s in the running....
Her’s another prediction, from Francesco Trebbi, professor of economics at the University of British Columbia:
The endogenous growth theory argue that most economic growth is generated from within a system as a direct result of internal processes, such as capital investment, investing in human capital, protecting intellectual property rights.
US economics professor Tyler Cowen has predicted that it might be Duflo and Banerjee’s year.....
But given his forecasting record is as bad as mine, that’s not a given.
I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!). Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.
Maybe they are too young, as Tim Harford points out, so my back-up pick remains an environmental prize for Bill Nordhaus, Partha Dasgupta, and Marty Weitzman.
Could it be a climate economist?
Perhaps a climate economist, such as William Nordhaus, could win this year’s award.
Nordhaus, a Yale University professor, has conducted key research into the economics of climate change, showing that mankind is ignoring the catastrophic cost of inaction.
His Dynamic Integrated Climate-Economy (DICE) model showed the costs and benefits of taking steps to slow greenhouse warming.
Four women economists who deserve this year's Nobel Prize
Shamefully, only one woman has ever won the Nobel prize for economics – Elinor Ostrom back in 2009.
That could change today.
Esther Duflo, the French-American economist, is in the running for her work on developing economies, including using randomized control trials to discover which anti-poverty initiatives work, and why.
Duflo is professor of Poverty Alleviation and Development Economics at MIT. With her partner Abhijit Banerjee, she has argued for a “radical rethinking” of how people in the poorest parts of the world actually live and act.
Duflo and Banerjee are students of detail. Is it better to give people mosquito nets or make them pay? What is the best method of getting children into schools, and ensuring that they learn?
Should you encourage immunisation by dispatching clinics to villages or reward parents with bags of rice? Or both? Or neither?
Duflo has already won a clutch of awards, including The John Bates Clark Medal (known as the ‘mini Nobel’). She’s only 45, though, so this year’s award could be too soon for her (but you never know…)
Another option is Anne Osborn Krueger -- the US economist who coined the term ‘rent-seeking’ to describe the act of manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.
Or how about Harvard economist Claudia Goldin, for her work studying the gender pay gap? She has argued that women are paid less than men because they seek jobs with more flexible hours or remote-work options, and in some professions there is a high penalty for taking any time out of the labour market.
Or Princeton’s Janet Currie? She’s an expert on healthcare issues such as early intervention programs, programs to expand health insurance and improve health care, public housing, and food and nutrition programs.
Who might win this year's prize?
Predicting Nobel winners is a tricky task, but that’s no reason not to give it a go.
Every year, researchers at Clarivate Analytics chew their way though the Web of Science citation index to calculate whose work has been cited particularly often, making them good candidates for a Nobel.
Here are their top predictions for this year:
- Manuel Arellano, CEMFI, Madrid, Spain, and Stephen R. Bond, Oxford University, UK, for contributions to panel data analysis, especially the Arellano-Bond estimator. This method exploits time patterns in panel data to estimate the economic response to a change in a policy or other variable, while controlling for permanent unobserved confounding variation.
- Wesley M. Cohen, Duke University, Durham, NC, and Daniel A. Levinthal, University of Pennsylvania, Philadelphia, PA, for their introduction and development of the concept of absorptive capacity (i.e., the ability of firms to evaluate, assimilate, and apply external knowledge) and its contribution to advancing our understanding of the innovative performance of firms, industries and nations.
- David M. Kreps, Stanford University, Stanford, CA, for contributions to dynamic economic phenomena, in choice theory, finance, game theory, and organization theory.
Introduction: Nobel Prize for economics (sort of) awarded today
Good morning. Top economists across the globe will be watching their phones nervously today, or setting their alarm clocks a little earlier than usual.
Because, around 10.45am UK time, someone’s going to win the biggest prize in economics science.
The Nobel Memorial Prize in Economic Sciences isn’t one of the original ones, of course. The money doesn’t come from the Nobel family profits from armaments trade, nor is it one of the original awards endowed by Alfred Nobel.
Instead, it’s the creation of the Swedish central bank, designed to bring some glamour and recognition to the oft-criticised sphere of economics.
So, anyone complaining that it’s ‘not a real Nobel’ can stay behind after class and clean the erasers.
The prize has recognised some of the biggest names and brightest ideas, since Ragnar Frisch and Jan Tinbergen shared the first award in 1969.
Since then, John Hicks, Friedrich Hayek, James Tobin, John Nash, Joe Stiglitz and Paul Krugman have all received that precious phone call from Sweden.
Last year the prize went to U.S. academic Richard Thaler, who helped popularise the idea of “nudging” people towards doing what was best for them. Other recent winners include Angus Deaton, for his work on inequality, and Jean Tirole for his analysis of monopolies and how to fight them.
Personally, I’ve never quite got over 2013, when Eugene Fama (father of the efficient market hypothesis) shared the award with Robert Shiller (who proved that markets aren’t very efficient after all).
This year’s winner, or winners, will be announced sometime after 10.45am UK time (11.45am in Stockholm).