Recently, I was telling a colleague that I hoped Paul Romer would finally win the Nobel Prize in economics. And then he did.
I’ve been a Paul Romer fan since I started teaching intermediate macroeconomics more than a decade ago. Because most economics teaching involves good storytelling, I’ve thought a lot about how Romer fits into the story of how economic thinking about economic growth has evolved and changed. Professor Romer’s theory of long-term growth fits the facts, and also helps us understand that individuals motivate lasting, perpetual growth.
In Nobel laureate, economist Robert Solow’s growth model, new technologies “happen.” Solow doesn’t explain what causes technological change; he merely assumes it, which is what makes Romer’s contribution to growth theory meritorious, elegant, and clever. Romer’s class of models that endogenize technological advances are alternatively referred to as “new growth theory” or “endogenous growth theory.”
And where does Romer say new technology comes from? It comes from you and me. People -- motivated by profit, inquisitiveness, and necessity -- are the drivers of the discoveries that lead to long-term growth. These discoveries can be replicated and extended, and their work never ends. Whether people value professional achievement, fame and fortune, or the feeling of solving a very tough problem, they keep discovering. So according to Romer’s growth theories, an economy is like a perpetual motion machine: The ride is rarely smooth, but boy is it thrilling!
This article is excerpted from an Acton Commentary by Victor V. Claar.