Why Nordhaus and Romer won Nobel Prize in economics

Nobel Committee has recently declared the world's most prestigious prize, Nobel Prize which is awarded to those persons and institutions who contribute to development of the society by doing successful and extraordinary invention and research.

The prize is awarded in six categories and economics is one of them. This year, William D Nordhaus and Paul M. Romer are awarded Nobel Prize in Economics. This paper is an effort to explore why they won 2018 Nobel Prize in Economics.

Before finding out the major causes behind wining the prize, let explore the pros and cons of Nobel Prize briefly. The prize is named as Nobel Prize after the name of the world famous chemist and industrialist Alfred Nobel (1833-1895). He had 355 extraordinary scientific inventions and dynamite was the most popular invention. From those inventions he earned huge amount of wealth.

Before one year of his death, Alfred Nobel made a will where he stated a donation of 94 percent of his total wealth, 4.4 million US dollars. Later, the will was sanctioned and a foundation was built and the foundation started to award Nobel Prize from 1901.

In the very beginning he prize was awarded in five categories such as Physics, Chemistry, Medicine, Peace and Literature. Royal Swedish Academy of Sciences announces the prize in Physics, Chemistry and Literature while Karolinska Institute and Norwegian Nobel Institute announce the prize in Medicine and Peace, respectively.

However, Nobel Prize in Economics was awarded from 1969 and it is not awarded from the original fund of Nobel Foundation but from the fund donated by the central bank of Sweden in honor of celebrating 300 years of the bank. After donation, the bank suggested the Nobel Foundation authority for awarding the prize in Economics in memory of Alfred Nobel.

From that time, the prize is awarded by Royal Swedish Academy of Sciences named 'The Sveriges Risbank Prize in Economic Sciences in Memory of Alfred Nobel'. As it is the most prestigious prize in the world, Nobel Foundation gives away the prizes to the winners following many strict rules and regulations.  

Every year on or before 31 January, Nobel Committee distributes nomination form to 3000 persons in the world and nominates only 300 forms from them. From the nominated persons and institutions, the winners are selected by voting. The prize is awarded to only living persons but institution only in peace although there are some exceptions as well. A prize is awarded to maximum three persons for two distinct contributions. Every year the name of winners is declared on October and the winner is called Laureate.

The prize is given away on 10 December, the day of Nobel's departure from the earth. From Norway's Oslo City Hall, Nobel Peace Prize is given away and other prizes from Sweden's Stockholmes Concert Hall. A gold medal, a diploma, the citizenship of Sweden and huge amount of money (about US $1.4 million) are given away to each Laureate. This money is given away for the further higher research and to contribute to the welfare of the society. 

The Royal Swedish Academy of Sciences decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018 to William D Nordhaus and Paul M Romer. The prize is announced by the Secretary General of the Royal Swedish Academy of Sciences on Monday, 8 October this year. The Nobel Laureate American Economist, Professor Nordhaus, born in 31 May 1941, graduated from Yale in 1963 and earned a doctorate in economics from MIT in 1967.

Then he returned to Yale and joined as a member of the economics faculty and now he is a professor of Yale University, New Haven, USA. William Nordhaus is awarded the prize for "integrating climate change into long-run macroeconomic analysis". In this regard, the Nobel committee cited Professor Nordhaus is awarded for showing "the most efficient remedy for problems caused by greenhouse gases is a global scheme of universally imposed carbon taxes."

On the other hand, Professor Romer, born in 7 November 1955, received his bachelor and doctorate degree from the University of Chicago. Paul M. Romer is a professor (on leave) of Stern School of Business, New York University, New York, USA. He is awarded the prize for "integrating technological innovations into long-run macroeconomic analysis".

Both Nordhaus and Romer have designed methods for addressing some of our time's most basic and pressing question, how the long-term sustained and sustainable economic growth is created. Economics deals with the management of scarce resources while nature dictates the main constraints on economic growth and our knowledge determines how well we deal with these constraints.

Nordhaus and Romer are awarded the prize for significantly broadening the scope of economic analysis by constructing models that explains how the market economy interacts with nature and knowledge.

Nordhaus's solution demonstrates the interactions between society and nature. Although Nordhaus thought to do research on this topic in the 1970s as scientists had become increasingly worried about the combustion of fossil fuel resulting in a warmer climate, he first created an integrated assessment model in the mid-1990s. This is a quantitative model that describes the global interplay between the economy and the climate.

Interestingly, this model integrates theories and empirical results from physics, chemistry and economics. Nordhaus' model is now widely used to simulate how the economy and the climate co-evolve and to examine the consequences of climate policy interventions, for example, carbon taxes.

On the other hand, Romer brings to light how knowledge can function as a driver of long-term economic growth. A few percent of annual economic growth accumulated over decade transforms people's lives.

Although technological innovation was emphasized as the primary driver of economic growth in earlier macroeconomic studies, how economic decisions and market conditions determine the creation of new technologies was not modeled. Paul Romer solved this issue firstly in 1990 by illustrating how economic forces govern the willingness of firms to produce new ideas and innovations.

This solution laid the foundation of what is now called endogenous growth theory which explains how ideas are different to other goods and require specific conditions to thrive in a market. Romer's theory has generated a large number of new researches into the regulations and policies that encourage new ideas and long-term prosperity.

How was the first feeling of hearing the news of being awarded the Nobel Prize in Economics of Professor Nordhaus and Professor Romer? A report was published in this regard in Washington Post.

That report states it was like a comedy when the day began as the Swedes struggled to contact the winners. It is also mentioned in the report that "Professor Nordhaus said he slept in, only learning that he won the prize when his daughter called. She said, it's so nice! Professor Nordhaus recounted, and I said, What?"

On the other hand, in the same report it is also stated that "Professor Romer said he heard his phone ring, twice, in the early morning hours, but he did not answer because he assumed it was a spam call. Then he checked caller ID and saw the call was from Sweden. So he called back and, after waiting on hold, learned he had won the Nobel Prize".

From the above analysis, it is clear that William Nordhaus and Paul Romer basically contributed to the methodological aspect of the macroeconomic research which provides the fundamental insights into the causes and consequences of technological innovation and climate change.

Though this year's Laureates did not deliver any conclusive answers, their findings considerably eased to answering the question of how sustained and sustainable global economic growth can be achieved.


The writer is lecturer and researcher
of economics, Varendra
University, Rajshahi