Paul Romer, an American economist, has been awarded the 2018 Nobel Prize in Economic Sciences for his work on sustainable growth. He will share the prize of nine million Swedish kronor ($1.44 M) with William Nordhaus. Romer is being recognized for highlighting the role of technological innovation in macroeconomics, while Nordhaus’ research integrates climate change into long-term macroeconomic analysis.
After identifying a sharp increase in innovation, Romer became interested in developing a theory of long-run growth that incorporated technological change. His research in the 1980s and 1990s did just that; however, they also created a theoretical underpinning for the idea that governments should take an active role in encouraging innovation.
Romer’s most influential publications include:
- “Increasing Returns and Long-Run Growth” – The traditional economic model of long-run growth holds that per capita output will eventually reach a steady state due to diminishing returns to capital. However, Romer offers an alternative model that includes the accumulation of knowledge as a driver of long-run growth. He argues that the marginal productivity of knowledge, unlike that of capital, increases with accumulation; therefore, knowledge “will grow without bound” instead of reaching a steady state (Romer, 1986, 1003). This model posits that the accumulation of knowledge is the key to long-term economic growth. Therefore, it offers a robust theoretical justification for policies that stimulate research and development.
- ‘Endogenous Technological Change’ – Here, Romer presents a model in which endogenous technological change is a key driver of growth; however, technological change is a non-rival good, meaning that it can be used multiple times at no additional cost. Therefore, firms devote a less than optimal amount of human capital to the activity that creates it – research. In his conclusion, Romer explicitly advocates for policies that subsidize R&D in order to correct this market failure (Romer, 1990, 898).
Both of these articles argue that knowledge accumulation and production are crucial to long-term economic growth. They also identify a worrying fact – economic incentives do not reward private actors enough for engaging in these activities. They corroborate a view that we at Global Advantage Consulting Group have held for years – if Canada wants to remain prosperous at home and competitive in the international marketplace, we must increase funding for science, research, innovation and technology. R&D in areas like artificial intelligence, cybersecurity, and advanced manufacturing is the key to Canada’s future growth, and we must ensure that it is supported.