US economist and co-laureate of the 2018 Nobel Prize in Economic Sciences Paul Romer poses with his Nobel Prize during the Award ceremony 2018 on December 10, 2018 at the Concert Hall in Stockholm, Sweden. (Photo by Jonathan NACKSTRAND / AFP)JONATHAN NACKSTRAND/AFP/Getty Images
Paul Romer at the Nobel Prize award ceremony in Stockholm earlier this week © AFP

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Paul Romer’s Nobel lecture on “the possibility of progress” was an elegant match for his co-laureate William Nordhaus, whose lecture we covered in the previous Free Lunch.

The research for which Romer was awarded the prize is on the economics of ideas: his theories of how and when knowledge can overcome the restraint of resource scarcity that is the central focus of the economics discipline. His lecture, an overview of his own body of work, was a paean to illumination — not just metaphorically, but literally, too.

In a nice tribute to his co-laureate, Romer takes Nordhaus’s research on the development of lighting technology (also read Tim Harford’s charming write-up) to demonstrate the possibility of real progress as illustrated by a 850,000-fold increase over time in the illumination that can be bought for one hour’s work. He then points out that the absence of these technologies in some poorer countries today holds back another kind of illumination: the ability of children and youths to study, and therefore to invest in human capital that, in turn, might generate new ideas for further technological progress.

Romer also uses lighting technology as an example of how ideas can overcome the constraints of scarcity that normally mean investment and effort have diminishing returns. The idea of using a metal mesh for a gas lantern mantle greatly increased the light output of a given amount of oil or gas; just as importantly, this was “codified knowledge” — instructions that could be written down and shared without limits. That, Romer argues, is how ideas become sources of broad-based productivity growth, which let us do more with the same or fewer resources.

This bears obvious links to Nordhaus’s research on climate change, the ultimate resource scarcity — links that the Nobel prize committee used to highlight the double award. The challenge of global warming, Romer insists, is not one of physics or nature, but of discovering and then implementing carbon-saving technologies. It is, in other words, part of the even bigger goal of “illumination”, of increasing productivity through ideas, knowledge and technology.

This leads to the policy imperative of, in Romer’s words, increasing “the total fraction of the population engaged in discovery, and research, and science”, and people’s productivity in those activities. And the good news is that opportunities for doing so exist all around us.

Romer highlights cities — incubators of knowledge — and the opportunity when constructing new cities to plan them rationally so as to make the human interaction in which knowledge creation thrives as easy and costless as possible.

Romer also highlights the dominance of US researchers in Nobel prizes after the second world war (but not when the prizes began being awarded, at the start of the 20th century). This dominance, he argues, was no fluke, but the long-term result of great US investments in its university system from the 1860s.

Knowledge, then, is a very special resource — but it has in common with other resources the fact that you can invest in it, and that your investment brings a return of more knowledge. As Romer notes at the end of his lecture, the great function of the Nobel prizes and others like them is that their inspiration helps encourage just such investments.

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