Paul Romer: How the Economics Nobel Prize Winner Unlocked World Innovation

The two winners of the 2018 Nobel Memorial Prize in Economic Sciences have even more in common than first meets the eye.

One of the two is the Yale professor William Nordhaus, the designer of the carbon tax now adopted by over 30 countries. The eerily timed announcement came shortly before the release of a freshly terrifying and authoritative new study saying that climate change’s effects could become catastrophic as soon as the year 2040.

The other is the New York University professor Paul Romer, an economist who studies what makes economies innovate and thrive during phases of rapid growth like the Industrial Revolution.

But while they’re not formally connected through research, the two are actually tied together by the foresight to think through future challenges of long-term growth as well as their wisdom for emphasizing the international cooperation which is needed now more than ever. In particular, Romer’s insights into the relationship between economics and innovation offer some much needed optimism regarding how and whether society can rise to meet the daunting challenges that await us.

How are Technology and Economies Connected?

Technology doesn’t fall from the sky, though if you asked an economist from the 1950s, they might say so. But in his doctoral thesis from the University of Chicago, Romer unpacked the intersection of technology and economic growth and demonstrated that there’s a connection which seems obvious to us today: Investing in technological ideas bolsters economies.

It’s not that technological ideas were seen as useless before, but rather that these innovations were something that happened irregardless of the law or what the government was doing. This has big ramifications for policy: If ideas simply arrive, countries would play on an even field run by chance, and shouldn’t get into the business of deciding which technologies are more worth pursuing.

But from space travel to the internet, we know now that actually the opposite is true, and that lots of the most world-shattering change tends to happen when countries themselves invest in researching and developing new technologies. Romer’s observations about the power of public research has led to the explosive growth of new patents, from a paltry 48,971 in 1963 to the 325,979 patents granted in 2015.

Why R&D and Patents Make the Perfect Pair

Another crux of Romer’s system is sufficient reward for the grueling research you need actually discover meaningful new knowledge. Right now, game-changing inventors are typically rewarded by being able to monopolize their idea through intellectual property law.

“If we had a field, a pasture, and we let everybody use it for free, we know what happens. You get the tragedy of the common pasture. It gets overused. You get congestion. You get waste,” says Romer in a 2007 interview to EconTalk. “But there’s no tragedy of the intellectual commons. There’s no overuse or congestion from having everybody use an idea once it’s discovered.”

In other words, lofty goals tend to be expensive ones to research as well. But once these discoveries are made, to help the most people, they are also ideally low cost. By now you can probably see the conundrum: In a market-driven society, high-investment at a low price doesn’t sound like the most attractive, sustainable or profitable route for a company.

To motivate people to toward these tough issues, a temporary monopoly — created via patent — helps fuel interest and profitability.

How the Profitability of a Patent Pays Off

The promise of a patent makes the high investment of R&D worth it.

The patent system, passed into law on April 10, 1790, awarded a 14-year protected time span for “sufficiently useful and important” inventions where their innovation could not be copied by others, according to the US Constitution. The lifespan of a patent fluctuated over the years, but settled in 1995 to 20 years from filing.

This system can sound unfair, but while a company celebrates and sits on its royalties collected by the patent, the systems to topple this temporary monopoly are already at work. Romer points out that a society never runs out of ideas. Someone will inevitably leapfrog over the sitting king, pushing the boundaries of technology forward while resetting the monopoly. So with more money invested and more frogs preparing to jump, the pace of discovery and economic progress quickens.

Romer’s critics worry that pushing public policy to invest in R&D is a slippery slope to an overexpansive government. Others point out the US performs a massive 44 percent of the world’s total R&D, with an annual rate of only 2.5 percent. But it’s easy to forget how we got here, and the role that government funding and effective monopolies played.

In short, Romer’s work empowered governments — and future economists — to take research and technology into their own hands, charting paths to economic success fueled by science.