What this year’s Nobel Prize in economics teaches about climate policy.Bret Swanson:
On Tuesday, the Swedish Academy awarded the 2018 Nobel Prize in economic sciences to two American economists, William Nordhaus of Yale University and Paul Romer of New York University’s Stern School of Business. Romer is well-known for his work on innovation, and although the committee focused on Nordhaus’ research on climate change, this year’s prize is really all about technology and its central role in economic growth. […]
Romer argued that technology — or more generally, ideas — aren’t some automatic or magical force outside our control, as the Solow model assumed. No, technology is the result of focused effort, often by for-profit firms and entrepreneurs, operating in dynamic but not perfectly competitive markets. Technology isn’t some unseen governor on the game of growth. No, technology is the whole game. Unlike capital and labor, which exhibit diminishing returns, ideas could generate increasing returns. Or as David Warsh summarized: “The more you learn, the faster you learn new things.” […]
Climate hawks correctly cite Nordhaus as one of their own. And yet if one looks closely at his latest and most-detailed models, they suggest today’s aggressive policy proposals would be highly counterproductive. As Bjorn Lomborg wrote in The Wall Street Journal this week:
Mr. Nordhaus’s most recent estimate, published in August, is that the “optimal” outcome with a moderate carbon tax is a rise of about 6.3 degrees Fahrenheit by the end of the century. Reducing temperature rises by more would result in higher costs than benefits, potentially causing the world a $50 trillion loss. It’s past time to stop pushing so hard for carbon cuts before alternative energy sources are ready to take over.
The real solution, therefore, is not severe limitations on existing efficient energy sources and subsidies for today’s inefficient sources. It is instead the invention of new technologies, the economic potency of which, as Romer and Nordhaus brilliantly described, will likely surprise us.
[Bret Swanson, “This Year’s Nobel for Economics Is a Technology Prize,” American Enterprise Institute, October 12]
