Economist Paul Romer, SB’77, PhD’83, wins share of Nobel Prize

Paul Romer, a University of Chicago alumnus and former faculty member, was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018.

The Royal Swedish Academy of Sciences in presenting the award on Oct. 8 cited Romer, a professor at New York University, “for integrating technological innovation into long-run macroeconomic analysis.” Romer shared the year’s prize with Yale University’s William Nordhaus, with the Academy noting their work to create models that address the relationship between climate change and economic growth.

Romer, SB’77, PhD’83, made a point to credit Nordhaus’ earlier work, especially when asked specifically about climate change.

“I hope the prize today could help everyone see that humans are capable of amazing accomplishments when we set about trying to do something,” Romer said during a news conference with the Swedish Academy. “If we set about trying to make the policy changes that are required here, we can absolutely make substantial progress towards protecting the environment—and do it without giving up the chance to sustain growth.”

Romer is among the 91 scholars associated with the University of Chicago to receive Nobel Prizes, and among the 30 who have been honored for work in economics. Six current UChicago faculty members are Nobel laureates in economics: Profs. Richard Thaler (2017), Eugene Fama and Lars Hansen (2013), Roger Myerson (2007), James Heckman (2000) and Robert E. Lucas Jr. (1995).

“Paul Romer’s PhD thesis in economics at the University of Chicago developed the key insight for which he received the Nobel Prize: That ideas are nonrival, meaning an idea one person develops can be used by many people without encountering diminishing returns," said Robert Shimer, chair of UChicago’s Kenneth C. Griffin Department of Economics and the Alvin H. Baum Professor in Economics and the College.

“Building on that insight, Romer showed that ideas are a critical engine of economic growth,” Shimer said. “An important implication of the nonrivalry of ideas is that innovators typically cannot reap the full return to their innovative activities, which gives a role for subsidies to innovation through universities and government-subsidized research.”

Romer received a bachelor of science in mathematics and doctorate in economics from UChicago, where he also served as a professor of economics from 1988-90. The 62-year-old later taught at the University of California-Berkeley and Stanford University before joining NYU in 2011, and briefly served as chief economist at the World Bank, from which he stepped down in January.

Need for policy change

Despite long being regarded as a Nobel Prize contender, the news caught Romer off guard on Monday. “I got two phone calls this morning,” he said, “and I didn’t answer either one of them because I thought it was a spam call.”

The two newly minted Nobel winners approached similar questions from different directions. Whereas Nordhaus specifically examined the interplay between climate change and the economy, Romer’s contributions focused on technological growth.

The Swedish Academy pointed out how Nordhaus highlighted negative spillover effects related to climate change: That is, businesses and households pay for the production of fossil fuels, but not the damage that the emissions cause. That methodology led to research into carbon taxes.

Romer, on the other hand, analyzed positive spillover effects: Someone who comes up with an innovative idea might profit, but not reap the full benefits of how that knowledge helps others. That built a case for how government intervention can stimulate such development with R&D subsidies and patent regulation.

“The danger with the very alarmist portraits that people are giving—for which there’s real basis—is that it will make people feel apathetic and hopeless,” Romer said, when asked about climate change. “It’s entirely doable for us, even now, to start bringing down the path of emissions and to protect a better future in climate. It’s entirely possible for us to have better standards of living as far into the future as we can see.”

“I said once I was a conditional optimist: If we do the right thing, everything can keep going better. But it is time we start doing the right thing.”