No­bel re­wards the right kind of eco­nomics

The Progress-Index - - OPINION -

At its best, eco­nomics poses a sim­ple ques­tion: What makes peo­ple bet­ter off, and how can we have more of it? This year, the No­bel com­mit­tee has rightly cho­sen to honor two aca­demics, William Nord­haus and Paul Romer, who have demon­strated a rare ded­i­ca­tion to find­ing an­swers - and to mak­ing the case for ac­tion.

Eco­nomic growth can be a pow­er­ful gen­er­a­tor of hu­man well-be­ing, but there’s al­ways de­bate over the ex­tent to which govern­ments can or should try to shape it.

Some ar­gue that it’s al­ways best to trust mar­kets: Let peo­ple and com­pa­nies pur­sue their self-in­ter­est, and they’ll gen­er­ally pro­duce the best pos­si­ble re­sult for so­ci­ety. In dif­fer­ent ways, Nord­haus and Romer showed that the right kind of gov­ern­ment ac­tion is some­times im­per­a­tive.

Nord­haus brought eco­nomics to cli­mate change. Long af­ter sci­en­tists had es­tab­lished that fos­sil fu­els risked de­stroy­ing the en­vi­ron­ment, rea­son­able peo­ple could dif­fer on what should be done. Nord­haus built mod­els that quan­ti­fied the costs of ac­tion and in­ac­tion, mak­ing an ir­re­sistible case for ef­fec­tive cli­mate-change pol­icy. This opened the way to con­tem­plate so­lu­tions such as a car­bon tax - a pol­icy that Nord­haus has long ad­vo­cated.

Romer’s prize-win­ning work fo­cused on in­no­va­tion. He helped de­fine the cru­cial role it plays in long-term eco­nomic growth, and pointed out a prob­lem: Left to their own de­vices, peo­ple and com­pa­nies won’t pro­duce enough new ideas, be­cause they don’t get paid for all the so­ci­ety-wide ben­e­fits they gen­er­ate.

That’s why govern­ments should en­cour­age their creation and dis­sem­i­na­tion - with poli­cies rang­ing from pub­lic in­vest­ment in fun­da­men­tal re­search to anti-trust en­force­ment de­signed to re­duce bar­ri­ers to eco­nomic change.

The com­mit­ment of both econ­o­mists to ev­i­dence and ap­pli­ca­tion is all too un­com­mon.

Many aca­demics have fo­cused in re­cent years on build­ing math­e­mat­i­cally el­e­gant, in­ter­nally con­sis­tent mod­els that bear lit­tle or no re­la­tion to what hap­pens in the real world - a ten­dency that Romer has forthrightly at­tacked. Main­stream eco­nomics had lit­tle to say about the fi­nan­cial and eco­nomic crises of 2008, for in­stance.

In recognizing Nord­haus and Romer, the No­bel com­mit­tee has re­warded eco­nomics as it should be done. Study the ev­i­dence, em­ploy it to build testable the­o­ries of how the world works, then use them to in­form ac­tual pol­icy - and al­ways be ready to change the­o­ries that don’t match the facts.

It’s an ap­proach that the pro­fes­sion as a whole would do well to emu­late.

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