Paul Romer’s Nobel Prize in economics announced today was a long time in coming. In the 1980s and 1990s, Romer did the economics profession the service of explaining to it the profoundly obvious. Romer’s “new growth theory” of that day and age, which has now won him the prize, demonstrated that the persistence of strong economic growth in the most advanced economies is natural and good.
Economics was in a bad way in the 1970s and the early 1980s. Stagflation, that concatenation of unemployment, recessions, and inflation that beset the economy for a dozen-plus years back then, had shaken the field’s confidence. It goaded economists to call into question whether economic growth was possible, even desirable.
That economic growth was no longer possible appeared to be certain. The earth was running out of resources: witness the OPEC oil shocks of the period. The labor supply was maxed out: even with women entering the workforce in droves, inflation kept going up, meaning we just could not figure out how to make more and more things any longer.
As for the high unemployment rate throughout all this, it was verification of the central Keynesian insight that capitalist economies reach their optimal point beneath levels of full employment. In the 1960s and early 1970s, the United States had had a military draft and college deferments to mop up the excess in the workforce. One peace started to reign after 1973, stagflation got its room to run.
“It was a weird time, to say the least,” as I put it in my book, Econoclasts, on the history of the economic transition from the sad-sack 1970s to the illustrious 1980s. One way it was weird was in the reaction of economists, who started to concede everything. Economic growth was not only a pipe dream, it was not desirable. It meant excess population, the kind that gets you into Malthusian famine situations. If we kept using resources, the planet would choke to death from the pollution, canceling the growth and leaving things unlovely where before they had been pristine. When growth did come, it led to social pathologies like narcissism, a term popularized in the late 1970s by sociologist Christopher Lasch.
Then in the 1980s, the Ronald Reagan years, government tweaked a few things, lowering tax rates and keeping the dollar stable against gold—the opposite of what had been done in the stagflation years—and off the economy went. Inflation collapsed, growth boomed, resource-use per unit of output plummeted, 40 million new jobs materialized, stocks soared, and entrepreneurial startups catering to needs and desires unimagined graced the land. This was our economy by the late 1990s, in a word.
Romer’s amazing work—and it is amazing—appeared in the middle of this humiliation of the stagflation episode, mainly in the Journal of Political Economy. The central insight is plain and simple. Economic growth means doing more with the same stuff. Romer’s metaphor was a recipe in the kitchen. The ingredients on the island are given. Eggs, milk, flour, spices, whatever. The trick is how you arrange them so as to make confections that people want ever more.
Those who know their way around a kitchen know that you don’t need very much out of the ordinary, in terms of ingredients, to keep making good, new, and wonderful comestibles. Here and there there will come an odd new ingredient request—a sprig of saffron from Valencia perhaps—or something brought in by an outsider as a suggestion—a potato from the New World for example. This only takes the process to higher level. The introduction of one new ingredient to a given list increases the total permutation of ingredients exponentially.
Here is where Romer’s economics got beautifully mathematical. So much of economics is blindingly simple (when not questionable) mathematics, but Romer’s is an example of high-order intensive mathematics fitting the theory it is applied to and pushing it to new levels of lucidity. Romer called on the “Hamiltonian” algebra of thermodynamics to bound the estimates of how much growth could come from any list of resources.
As thermodynamic equations necessarily entail, the results will be big and powerful. The permutations of the resources of the world reach numbers far beyond human scale. Therefore, economic growth—which derives from the rearrangement of current resources for better uses—cannot have an upper bound.
Romer’s new growth theory introduced the stunning, if manifest point that the resources of the earth are not merely given—they cannot be used up. There is no such thing as resource use. When we “use” something, petroleum in an engine for example, we process it into another state, namely energy, which as Einstein told us, in the most famous equation of modern times, is mass times an unimaginably large constant. Therefore, in creating energy via the combustion engine, we create the potential for huge units of new mass because of the identity with energy.
It is merely a matter of engineering for us to figure out how to work both sides of Einstein’s identity, E=mc2. And the capacity of the human intellect is surpassing, basically limitless. Resources are fixed, ingenuity unbounded. Ingenuity works on resources, and the result (in a well-ordered society) is economic growth. In any real sense, no resources have been used. Rather, human beings have performed their function. They have transformed, via the recipes of production, the resources (the ingredients) of the world into things that benefit people in their lives.
One of the most powerful aspects of Romer’s new growth theory is its consonance with classical philosophy. Not classical economics—Smith and Ricardo and so forth—but Aristotle. It is a fool’s game, one that economics and many Enlightenment sciences play, to say that Aristotle was wrong or is passé.
Aristotle taught that intellect is the defining characteristic of the human being, who also carries the more mundane defining characteristics of all other beings, the materiality of the stones of the earth, the need for food of the plants, the locomotion of the animals. The intellect that is perfected in the context of the given materiality in which it appears—the human being in the world—is the end, the goal of human life. The best intellects, in Aristotle, push their working by means of magnanimity and munificence (the highest virtues in Aristotle) so that the civilization as a whole may prosper at the peak of its extreme potential. Throw in Christian charity, and you have an engine for resplendence that you thought wasn’t even possible in this cursed world of tears.
Destroying things, like resources? That is the obverse of creating things. These are potencies reserved to the gods. Have we ever destroyed anything in this universe of ours, rendered something into nothing? Of course not. Only madmen (like Wagner, Nietzsche, and Picasso) thought we could destroy and create things as the gods did. That is a chase after the wind, a mistaken, not-too-human endeavor, and often malignant. Using things—that is our excellence.
These are some of the stakes that were introduced by the industrial revolution, and it may be that we never really glimpsed even a few facets of their reality until the beautiful, powerful essays of Paul Romer came to press some thirty years ago.