The Nobel Prize in economics was awarded Monday to Americans William D. Nordhaus and Paul M. Romer, two top economists of their generation, for work on climate change and innovation.
The pair of economics professors, Dr. Nordhaus of Yale University and Dr. Romer of New York University, have “significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge,” the Royal Swedish Academy of Sciences said in granting them the prize.
Dr. Nordhaus built models to measure the impacts of climate change on the economy and the costs of addressing it. Dr. Romer examined how ideas and knowledge fuel economic growth, and how to foster environments in which knowledge and growth can flourish.
Although their work took them down different paths, they had in common a view that government and public policy had a role to play in fostering prosperity in the long run. In the process, their work pushed back against free-market thinkers in academia who see a hands-off role for government.
“[Nordhaus] and I are actually much more cognizant of the power of the market, all you have to do is create the right incentives to, like, turn the market loose on a problem,” Dr. Romer said in an interview.
Dr. Romer, a former chief economist at the World Bank, laid the foundation for so-called endogenous growth theory, which underscores the importance of policies that promote research, development and access to better education for driving technological innovation and, consequently, growth. Before his work in the early 1990s, economists had accepted that technology was a key driver of growth, but didn’t believe that much could be done to accelerate the pace of innovation.
The 2018 Winners of the Nobel Awards
“The question that I first asked was, why was progress—measured in, say, the rate of growth of GDP, but measured in lots of other ways—why was progress speeding up over time?” Dr. Romer said. “It arises because of this special characteristic of an idea, which is if you’ve got, like, a million people trying to discover something, if any one person finds it, everybody can use the idea.”
Dr. Nordhaus’s work began in the 1970s when scientists were growing concerned about global warming. His methods, now called integrated assessment models, have become widely used to examine the consequences of different policy interventions targeting climate change, the Nobel committee said.
Each laureate advocates for public policies to overcome a “market failure,” the Nobel committee said. Dr. Romer’s work recommends government support for knowledge creation, while Dr. Nordhaus argues for the implementation of global carbon taxes to reduce long-term greenhouse-gas emissions.
“There are billions of individuals, millions of firms, thousands of governments, hundreds of nations, and for them to take action, they’re going to have to have incentives,” Dr. Nordhaus said in a press conference. “We can raise the prices of goods and services that are carbon intensive and lower the ones that are less carbon intensive.”
Dr. Romer said his work on the compounding effects of technological change suggest that the solutions proposed by Dr. Nordhaus will be effective.
“I think people are grossly underestimating how rapidly we’ll start to de-carbonize once we put our minds to it,” he said. “But the problem is, it’s going to take the government to create the incentives and the framework to get that to happen. We need governments to step up and seize this as an opportunity.”
Dr. Romer, 62 years old, the son of former Colorado Gov. Roy Romer, earned a bachelor’s degree in mathematics from the University of Chicago, where he completed his doctorate in economics in 1983.
More recently, he served as chief economist of the World Bank, where he resigned earlier this year after raising a stir about the methodology behind the institution’s competitiveness rankings for countries. The methodology, he said, had weighed down Chile’s ranking during a left-leaning president’s administration and boosted it under a conservative regime.
Since leaving the World Bank, he has swapped his former hobby as an amateur airplane pilot for a newfound love of coding in the Python language.
“I just think it’s a kick,” Dr. Romer said. “There’s nothing as fun as actually mastering something new, especially when it takes some hard work.”
Dr. Nordhaus, 77, was born in Albuquerque, N.M. He graduated from Yale in 1963 and received his Ph.D. in economics in 1967 from the Massachusetts Institute of Technology. He lives in New Haven, Conn., with his wife, Barbara.
At his press conference, which at his request was held only after he had finished teaching a class on intermediate macroeconomics, colleagues at Yale lauded his commitment to teaching.
Tamar Gendler, dean of the Faculty of Arts and Sciences at Yale, said Dr. Nordhaus has taught 74 courses to 3,799 students in the last 20 years. She read evaluations by students who took his course.
“Overall, he tries to be funny and occasionally succeeds,” one read.
“Brilliant lecturer. Excellent knowledge. Give this man a prize,” said another.
Formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the economics prize was established on the 300th anniversary of the Swedish central bank in 1968—67 years after the first Nobel prizes for medicine, physics, chemistry, literature and peace were bestowed in accordance with scientist Alfred Nobel’s will.
—Paul Hannon contributed to this article.
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