A Landmark Prize in Economics

The Nobel committee likes to couple special prizes with anniversaries. Thus Milton Friedman received a medal in 1976, the two hundredth anniversary of the appearance of An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith, the book considered to have given birth to modern economics. The first award in game theory, to John Nash, John Harsanyi, and Reinhard Selten, came in 1994, fifty years after the publication of The Theory of Games and Economic Behavior, by Oskar Morgenstern and John von Neumann. And on the hundredth anniversary of the very first Nobel prizes, in 2001, the committee showcased the advent of information economics, widely deemed to be the most significant development of the second half of the twentieth century (the launching of macroeconomics having dominated the first), by citing George Akerlof, Michael Spence and Joseph Stiglitz. To celebrate the fiftieth anniversary of the economics prize itself – technically the Swedish Central Bank Prize in Memory of Alfred Nobel, first awarded in 1969 – the Royal Swedish Academy of Sciences yesterday recognized William Nordhaus, of Yale University, and Paul Romer, of New York University, “for integrating climate change and technological innovation into long-run macroeconomic analysis.”

The same day, the Intergovernmental Panel on Climate Change, issued a stern warning. Incorporating elements of  a model developed by Nordhaus and collaborating scientists in many other fields, the IPCC forecast that, if carbon emissions continue to rise at their current rate, warming could reach the crisis proportions associated with a 2.7 degree increase in average temperature, in the form of food shortages, wildfires, mass migrations, and species loss, as early as 2040 – considerably sooner than had been expected.

Nordhaus and Romer, working separately, on apparently different problems, were seldom mentioned together. They nevertheless combine to make a compelling point. Having led the effort to plausibly model the interaction of atmospheric carbon, climate change, and economic growth, Nordhaus made it possible to estimate damages caused by rising temperature. A carbon tax (which he and many other economists consider preferable to the emissions-trading system enshrined in the Paris Agreement) might prevent the most serious damage, starting experimentally low, then rising as necessary to meet the damage.Romer, in turn, created an analytic framework in which such a tax could plausibly be expected to produce a wave of innovations whose effect would be to lower carbon emissions.

As Per Krussell, of Stockholm University, explained in the committee’s lengthy report on the scientific background,

“Romer’s and Nordhaus’s findings regarding the possibilities for, and restrictions on, future long-run welfare each put the spotlight on a specific market failure. Both laureates thus point to fundamental externalities that – absent well-designed government intervention – will lead to sub-optimal outcomes. In Romer’s work these externalities are predominately positive through knowledge spillovers. New ideas can be used by others to produce new goods and other ideas. In Nordhaus’s work they are predominately negative through greenhouse gas emissions that adversely change the climate…. Qualitatively the idea goes back to [A.C.] Pigou, but to devise the right dose of the right medicine requires models of the sorts that the laureates pioneered.”

The ingenuity of the prize is striking, but Economic Principals is traveling and in no position to give it proper attention. More on the weekend, when EP has returned to the office.

(A day late, due to cache problems.)



Leave a Reply

Your email address will not be published. Required fields are marked *