Scientists will be awarded for their work on how technology and climate change have affected the economy

Nobel Prize in economics 2018, or why are some countries richer than others. Source: shutterstock.com

On October 8, it was reported that The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to William D. Nordhaus and Paul M. Romer both of the United States. The scientists were awarded for their academic writings on “integrating climate change into long-run macroeconomic analysis” and “integrating technological innovations into long-run macroeconomic analysis” respectively.

PaySpace Magazine made an attempt to work things out, and understand why these two researchers were awarded this prize and what their theory/solution is about.

In short

Romer and Nordhaus have advanced the cause of science with their theories and research. Thanks to that, humanity is one step closer to resolving the particular issue: why does the economy grow, and how do we make this growth stable? It might help to eradicate poverty and inequality.

@paulmromer cautions economists that “If we’re going to be umpires in the fact business we can’t get on the playing field and try to score a goal” at his post-Nobel Prize news press conference pic.twitter.com/wGoUnVx3rq

— Alister Bull (@alisterbull1) October 8, 2018

Romer has theorised that economic growth relies heavily on technological progress. Furthermore, he has proven that a partly state-regulated market economy is the best environment for the birth and development of new technologies and related solutions.

Nordhaus explained how greenhouse gas emissions are related to economic development. Moreover, he has suggested how to evaluate responses to the environmental consequences of economic activity.

William Nordhaus. Source: flickr.com

The global economic growth mystery is still far from being resolved. Nevertheless, Paul Romer and William Nordhaus have put together a puzzle and laid the groundwork for policy decisions aimed at the improvement of living standards and making this process continuous and irreversible.

Extended version

Professors Romer and Nordhaus analyse long-term economic trends. In other words, they are concerned about centuries and decades, not about transient changes. They define whether accumulated problems are beneficial or detrimental. Thus, they suggest patterns, which help authorities to adjust policy before it is too late.

“Savage” capitalism and the free market were proven to be an undesirable environment for wealth and well-being growth back in 1920 by the British economist Arthur Pigou in his publication “The Economics of Welfare”. Imbalances must be regulated by the government through subsidies and concessions to encourage useful indicators of anomalies and taxes, and prohibitions to discourage harmful ones.

Professor Nordhaus specialises in detrimental natural occurrences affecting the economy and standard of living. Source: unsplash.com

But it is one thing to diagnose the issue and prevent its turning into a severe problem; it is quite another to pinpoint treatment methods. It is exactly the thing that made Nordhaus and Romer famous.

Both of them, each in their own field, have built scientific models that enable economists to make the most accurate calculations to measure the problem. This, in turn, delivers solutions that are used by authorities to address economic problems and imbalances which are not regulated by the market.

Professor Nordhaus specialises in detrimental natural occurrences affecting the economy and standard of living. He has created models, which assess how greenhouse gas emissions and climate change hinder economic development. Now, these models are commonly used.

Professor Romer, on the contrary, studies favourable factors. He addresses the question, of what conditions facilitate the development of new ideas and technologies and how they encourage economic growth.

Robert Solow, a famous American economist and Nobel laureate in economic sciences, already proved that technological progress served as a source of economic growth, back in the 1950s. Romer has filled the gaps in Solow’s theory. He explained why not all countries gained equal benefits. The professor also proved that market economies promote technological advances and breakthroughs.

At the same time, he has actually shown that new technologies are beneficial for everybody (not just for the developers of the technologies). However, Romer added some major caveats.

Professor Romer studies what conditions facilitate the development of new ideas and technologies and how they encourage economic growth. Source: shutterstock.com

In particular, any breakthrough needs financial power. However, big companies and monopolies are the only ones who have the latter. Furthermore, basic research is not profitable, therefore educational institutions do research way better than market-based firms.

The key finding stands out of in the results of this research: technological progress is ineffective in a free market, therefore it must be regulated globally at the state level. Restricting monopolies, protecting copyrights, promoting universities, and providing tax incentives for research and development investors are the key instruments for regulation.

Paul Romer has proven that economic growth, based on ideas and technology, is more sustainable than that propelled by capital accumulation.

Here is why we can understand now “why the best-performing economies continue to proliferate even when capital is already at an optimum level, and the population does not expand.”

The bottom line

Economists always overlooked the impact of economic activity and markets on the environment and knowledge. This year’s laureates Paul Romer and William Nordhaus have expanded the limits of economic analysis and provided professionals with viable instruments, which will allow the determining of the long-term impact of a ?market economy on the environment and knowledge.

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