Choose Progress, Choose Romer

By Dylan Grice.


In 2018, Paul Romer won the Nobel Memorial Prize in Economics for his contribution to economic growth theory. His essential insight, first formalised in his 1990 paper – Endogenous Technical Change[1] – was the role of the nonrivalry of knowledge in stimulating growth. That is, the use of knowledge by one individual does not disqualify its use by another, where knowledge is something tangible and written down.

A key consequence of the nonrivalry of knowledge is the increasing returns to scale in production that it creates. An idea that is twice as good can double production without doubling the resources required for that production. Ever since the publication of Thomas Malthus’ Essay on the Principle of Population,[2] the common notion that humanity faces an inexorable and immovable resource constraint has been widely proliferated. As Romer noted in his Nobel Prize lecture, his 1990 paper finally formalised the possibility of progress for humanity by identifying the true source of growth at the economic frontier – ideas.[3]

As Charles Jones shows in his 2005 article in the Handbook of Economic Growth, in a system in which ideas are the fundamental driver of growth, the possibilities for progress created by different combinations of the current resources available to us are vast. If one takes 20 elements, and an idea represents a different combination of these elements, the number of possible combinations is 20! (20 x 19 x 18 x … x 2 x 1). As Jones emphasises, if we had one new idea every second from the beginning of time, we would have only exhausted below 20% of these possible combinations[4]. This is all to show the fact that a truly great innovation need not require more resources, but can use the same resources more efficiently, and economic growth and the progress of humanity will ensue.

There are limits to the extent that the above calculation is representative of the possibility of human progress – a key one being the fact that some proportion of the combinations that remain undiscovered are likely useless. When another Nobel Prize-winning economist, George Akerlof, heard of this line of reasoning, he asked how many of these ideas were “like chicken ice cream”.[5] Nevertheless, it is useful for emphasising the extent of possible future innovations that we are at present unaware of.

Consistent with this logic, it follows that solving the climate crisis and working within our current resource constraint – the amount of carbon that we can safely emit into the atmosphere – does not necessarily require us to permanently reduce our incomes and hinder our quality of life. Nor does it require that we (rather immorally, in my view) seek to limit the population growth and industrialisation of developing countries. Instead, solving the carbon crisis requires us to innovate in such a way that the resources that we do use produce a larger economic growth-carbon ratio in the combinations that we use them. This is not to suggest that it would not be beneficial for people to change their consumption habits, for example by moving to a meat-and-dairy-free diet. It is simply to suggest that we can consume the same volumes, and obtain the same improved welfare of all individuals, by consuming and producing in different combinations. Nor is it to suggest that we do not face a severe and urgent climate crisis. Indeed, we must reduce the volumes of carbon that we emit through our present production and consumption habits immediately. But this does not necessitate that we consume less in the long-run, just that we consume and produce differently. It requires instead that we innovate, have better ideas, and therefore consume and grow as one with the carbon-emission constraints that humanity faces.

Governments, producers and consumers all have a role to play in this. Governments can guide and promote innovation in green technologies. In a 2012 paper in the American Economic Review, Daron Acemoglu and co-authors separated energy sources into categories marked ‘clean’ and ‘dirty’. If government subsidises the production of clean energy, such that the returns to clean energy producers are higher, firms will be more likely move into the clean energy industry and thus drive clean innovation. As this innovation occurs, the price of clean energy falls below that of the dirty source, until the point at which clean energy will still be cheaper absent the subsidy. Then, government can remove the subsidy, and consumers will continue to prefer the cheap, clean energy source, with firms continuing to innovate in this industry as a result.[6] Of course, consumers with the means to do so can speed up this process by choosing to purchase clean fuels at a premium, increasing the returns to clean fuel firms and so encouraging some innovation absent government intervention. But for true, large-scale, directed technical change, it is inevitable that government intervention is required.

Indeed, we can already see such innovation occurring. The price of a photovoltaic unit of solar power, for example, has fallen by 89% since the Global Financial Crisis.[7] If renewable, clean energy sources are the cheapest and most efficient energy sources, it will be in the interests of all consumers and all countries (including developing countries) to utilise them as their primary energy source. We are not yet at that point, and there are far wider issues than simply discussing how we generate electricity – notably, it is unclear how far innovation might deal with issues such as electrification, biodiversity, and carbon capture and storage. But a recognition of Romerian endogenous growth theory, whereby the nonrivalry of ideas drives economic growth, ought to encourage governments to promote innovation in such directions.

To accept that increased global incomes are incompatible with the Earth’s atmospheric resource constraints is either to condemn those currently living in poverty to doing so perpetually, or to decrease the income of around 80% of the global population, such that everyone receives an income somewhere close to the global mean. Of course, governments and wealthy consumers alike should do everything in their power to encourage an increase in the rate of green innovation. But new ideas, driving down the cost of renewables until they are the cheapest available energy source globally, is the only way to allow all countries to develop and grow wealthy without destroying the planet or impinging upon the freedoms of billions of individuals in some way.

Furthermore, the population growth that can currently be seen in many developing countries will be, in the long run, actively beneficial for humanity and the planet that houses us. For many developing countries, capital accumulation is a key source of growth. However, as countries develop and move closer to the economic growth frontier, the role of ideas and innovation in driving growth becomes increasingly important. Good ideas, and therefore socially beneficial innovations and their proliferation, are an increasing function of the population partaking in their production. To return to Jones’ article in the Handbook of Economic Growth and invoke the spirit of Edmund Phelps,[8]cutting the population in half throughout all of history may have lost the world the ideas of Mozart, Beethoven, Einstein, or perhaps even Paul Romer himself.[9] If ideas are the fundamental source of economic growth at the frontier, and innovation is the key to driving down the prices of renewable energy sources – such that we can develop sustainably – humanity will be more productive in the long-run and may see economic growth at a lower climatic cost for having a larger human population.

To condemn the pursuit of growth and development is to diminish the hardship created by poverty. To adopt the Malthusian view that the Earth’s resource constraint will inevitably win out over the power of human innovation is to accept that there is an upper limit on human wealth. If this upper limit exists, substantial societal conflict about how to distribute wealth globally, with all the complications this entails, will inevitably ensue. Instead, I believe in the power of human ingenuity and the alleviation of suffering that it can create. None of this is to suggest that we should not alter our consumption and production habits. Indeed, governments the world over ought to be far more forceful in directing technical change and innovation towards green technologies. But with global support for tackling climate change, and a recognition that ideas are the fundamental source of human progress, it is possible to believe that these ideas might protect humanity from yet another resource constraint.


[1] Romer, P.M., 1990. Endogenous technological change. Journal of political Economy98(5, Part 2), pp.S71-S102.

[2] Malthus, T.R., 1986. An essay on the principle of population (1798). The Works of Thomas Robert Malthus, London, Pickering & Chatto Publishers1, pp.1-139.

[3] https://www.nobelprize.org/prizes/economic-sciences/2018/romer/lecture/

[4] Jones, C.I., 2005. Growth and ideas. In Handbook of economic growth (Vol. 1, pp. 1063-1111). Elsevier.

[5] ibid

[6] Acemoglu, D., Aghion, P., Bursztyn, L. and Hemous, D., 2012. The environment and directed technical change. American economic review102(1), pp.131-66.

[7] https://ourworldindata.org/grapher/solar-pv-prices?tab=chart&yScale=log&stackMode=absolute&time=1976..latest&region=World

[8] Phelps, E. S. (1968). Population increase. The Canadian Journal of Economics/Revue canadienne d’Economique1(3), 497-518.

[9] Romer, P.M., 1990. Endogenous technological change. Journal of political Economy98(5, Part 2), pp.S71-S102.

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