Americans William D. Nordhaus and Paul M. Romer have been awarded the Nobel Prize in Economics 2018. The first to integrate climate change into economic analysis by determining the costs and benefits of reducing polluting emissions. And the second to do the same but with technological innovations, explaining what makes an economy innovate and, therefore, grow more than others. “Their findings have significantly broadened the scope of economic analysis by building models that explain how the market economy interacts with nature and knowledge,” said the Swedish academy.
William D. Nordhaus, born in 1941 in Albuquerque (United States), is a professor at Yale University. Its main contribution is to create economic models that also integrate climate change, the damage it causes and the corrective policies that can be used. In Nordhaus’s opinion, economic agents do not pay a price for carbon emissions. So he is in favor of correcting these so-called negative externalities by applying CO2 taxes. And these must be implemented globally, to avoid the free ryder phenomenon, that is, some countries do not fight climate change because others are doing it.
“Governments, companies and households pay practically nothing today,” he said this year when he received the BBVA Frontiers of Knowledge award. Their research allows us to put a price on emissions as we try to do in the European market of CO2 emission rights. If it were to do so, it would invest more in other technologies such as renewables, says the new Nobel laureate.
In the mid-nineties, he became the first person to create an integrated assessment model on climate change that includes the population, how carbon dioxide is concentrated, how it affects global temperature, the effects of responses with different policies as the carbon tax and the evolution of the damage caused and its negative consequences for the economy. That is, according to how much the emissions rise, it quantifies the increase in temperature and its possible impacts on the economy. “In this way we can calculate the carbon taxes capable of correcting the damage of climate change in an optimal way”, explains Xavier Labandeira, Professor of Economics at the University of Vigo.
“His quantitative model describes the global interaction between economics and climate and integrates theories and empirical results of physics, chemistry and economics,” the award statement said. He adds: “The Nordhaus model is now widely disseminated and used to simulate how the economy and climate evolve together, and is used to examine the consequences of climate policy interventions, for example, carbon taxes.”
Recently, Nordhaus has suggested creating clubs from countries that are willing to put a carbon price together and set trade tariffs for the rest that do not.
Paul M. Romer, born in 1955 in Denver (United States), is a professor at the NYU Stern business school and a former chief economist at the World Bank. According to the Bank of Sweden, Romer has shown how knowledge can function as a motor for long-term economic growth.
Until Romer’s studies, the technological progress that drives economic growth was a kind of black box of which nothing was known. In the models of the economists it was like a manna fallen from the sky, an exogenous and unpredictable element. However, Romer proves that technological progress is something that occurs in a market economy and that there is a context in which it can be fostered.
While growth based on the accumulation of productive factors has diminishing returns, growth based on ideas and innovations is sustainable in the long term and can happen in two ways: either a company can have a sufficiently monopolistic position to be able to recover the costs of innovating. Hence, the balanced use of patents to promote innovation is justified: with sufficient rights to recover the investment but limited in time so that others can also take advantage of them.
Either the market does not usually reward the creators of new knowledge and, consequently, it does not generate enough technological change. So to compensate for this problem, research and development with subsidies must be encouraged. These ideas also explain the long-term differences in the growth of countries. “Romer’s theory has generated large amounts of new research on regulations and policies that foster new ideas and long-term prosperity,” the Swedish academy emphasizes.
The investigations of the two winners “provide convincing arguments for the intervention of governments” correcting problems caused by markets, defends the jury of the award.
Romer’s polemics
Romer is a character not without controversy. On the one hand, he has criticized the abuse of mathematics in today’s economy. In his opinion, economics is a social science that can not be subjected to the precision of mathematics. Its use often hides ideological positions, has argued the now Nobel prize.
On the other hand, when he worked as chief economist of the World Bank, Romer starred in a polemic by denouncing the manipulation for political reasons of the ranking of Chile in the Doing Business, the report prepared by the international organization and measuring the ease of doing business in a country . As he himself explained, Chile’s position worsened under the Bachelet government and improved with that of Piñera without being justified. After that denunciation denied by the World Bank, he left the institution.
Another controversial proposal by Romer has been that the less developed countries create city-states with a regulation set by a country or group of foreign countries, in a sort of consensual neocolonialism that would favor development and direct investment.
50 years of the Nobel Prize in Economics
The Nobel Prize for Economics this year marks 50 years. The popularly known as Nobel Prize for Economics, awarded for the first time in 1969, is not really one of the original nobels, but an award different from the rest, in honor of Alfred Nobel and awarded by the Bank of Sweden and not the Nobel Foundation .
The profile of the laureate has been very homogeneous over the years: male, American and with a long professional career. The average age of the winners is 67 years. Since its creation, the prize has recognized established figures such as Friedman, Hayek, Samuelson and Stiglitz, among others. To date, only one woman, the American Elinor Ostrom, has been distinguished with this award, which she obtained in 2009 along with her compatriot Oliver E. Williamson for her work in economic governance.