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Why Nobel Prize winner Paul Romer sees the economy as a "huge innovation discovery machine"

David Brancaccio and Jonaki Mehta Oct 26, 2018
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New York University professor Paul Romer speaks at a news conference after being named a winner of the 2018 Nobel Memorial Prize in Economics with professor William D. Nordhaus of Yale University on Oct. 8, 2018 in New York City.

Paul Romer, a recent winner of the Nobel Memorial Prize in Economic Sciences, sees the economy as a “huge innovation discovery machine,” which if steered in the right direction through government policies can promote technological innovation for everyone’s benefit. 

One of his most influential economic concepts is called “conditional optimism,” which is the opposite of complacency. It’s the idea that if we are proactive about finding solutions to our problems, we can make things better for everyone.

Romer spoke to host David Brancaccio about his research and why an economist’s place isn’t in politics. Below are excerpts from their conversation.

David Brancaccio: You often address things that governments can do to boost technological innovation. Spend money on research, create intellectual property laws that reward innovation, but don’t go too far. How would you say we’re doing here in 2018 on those two counts?

Paul Romer: I think instead of just focusing on stepping on the gas, we need to think about steering. The economy is this huge innovation discovery machine. What the government can do usefully is to focus some of that effort where things turn out better for everyone. So yeah, we could probably do with a little more innovation total. But right now, the real challenge is to steer it in the right direction.

Brancaccio: It’s to figure out what we’d like to see in some outcomes. And what, use public policy to guide it?

Romer: I could give you an example. Fracking is an amazing instance of discovery of many things that come together to make it much cheaper to extract oil and gas. In a world where burning oil and gas puts more and more carbon into the atmosphere, it’s not actually the most important kind of innovation to have. It’s actually got some real negative side effects. If that same innovation and effort was devoted to photovoltaics we’d continue these price falls we’ve seen in, you know in solar power. But right now, the big challenge is to find better ways to store these variables sources like solar and wind.

Brancaccio: Can you give me a sense of what the nature of conditional optimism is?

Romer: Let me give you another context. If you think about the fears people had a century ago about mechanization and the way this was going to destroy jobs, the complacent attitude would have been to say, “it’ll all work itself out everybody, will be fine.” That would have been the wrong attitude. What we had was this sense of “we’ve got to do the right thing.” In the 20th century there was a high school movement that said we’ve got to get everybody up to the level of high school education to be able to do the new kinds of jobs that are coming. So, if conditional on doing the right thing, in that case a big investment in education, everything can turn out better for everybody. But if you just are complacent, say “it’ll work itself out,” you’re not going to be happy with the outcome.

Brancaccio: A crucial story we continue to follow here is what technology will do for but also do to the labor force. Does your notion of conditional optimism help us with what tech will do to the workforce this time around?

Romer: Absolutely. And there’s a cautionary message here because people can look at the past and say “hey, you know the 20th century turned out fine. So, there’s no problem.” It turned out fine because we did things to make sure it turned out fine. And so there’s no basis for complacency in the success record that we can see when we look back. There are new things we need to do in the labor market, in education, and in thinking about the future of energy sources. As long as we do those things everything really can turn out fine. But if we don’t do them, we’re going to be disappointed.

Brancaccio: Many of our listeners will know that your dad Roy Romer was the governor of Colorado for more than a decade. You don’t think that economists like yourself should be out there actually lobbying for the policies that they believe in?

Romer: One of the most powerful insights in economics is this idea of a division of labor. You do the thing you’re good at. Other people do something else that they’re good at. The net effect is better for everybody. There’s a process that involves a kind of political entrepreneurship, where someone like my dad or any other politician builds coalitions they try to make a case for some kind of decision. That’s something that I could see he was very good at, but I didn’t want to compete with him because he was so good at it. I wanted to go off and do something else. What we can do as economists and scientists more generally is say “we’ll give you the facts, we’re not going to join in the fight between the different sides.” That’s got to play out. But all sides will be better off if you start from an accurate sense of what’s true.

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