In scholarly work done more than three decades ago, economist Paul Romer proposed that societies look beyond the material drivers of long-term growth, such as oil, ports, or labor. Economic progress, he showed by dint of data, relies more on how well a society manages an intangible good: the discovery of new ideas that propel innovation.
Dr. Romer, now at New York University, especially focused on ways to reward people who come up with useful ideas in technology or management. He challenged fellow economists by asking questions like “What is the value of an idea?”
On Monday, Romer himself was rewarded for his work. He won the Nobel Prize in economics. (He shares the prize – and its $1 million reward – with Yale University’s William Nordhaus, who won for being the first to calculate links between the economy and the climate.)
Romer’s influence can be seen today in the worldwide chase among nations to build an “innovation economy.”
Many countries now vie for start-ups and bright students. They beef up basic research. They are more aggressive in guarding intellectual property, reflected in the current “trade war” between the United States and China. They promote creativity, curiosity, and freedom of thought. They idolize great inventors and innovators.
In the past, Romer says, countries practiced a “complacent optimism” toward new ideas, from the cotton gin to assembly-line manufacturing to driverless vehicles. They saw inventions as something that mostly just happened and are external to the main task of adding “more inputs” of workers, natural resources, and capital to gain “more outputs.”
“Every generation has underestimated the potential for finding new ... ideas,” he wrote. “We consistently fail to grasp how many ideas remain to be discovered.”
Yet innovation must be managed and promoted (such as in the awarding of prizes like the Nobels). Romer’s approach is perhaps best summed up in his famous saying, “A crisis is a terrible thing to waste.”
On climate change and the need to reduce carbon emissions, for example, he believes that once governments provide the right incentives for innovation in energy research, “We will be surprised that it wasn’t as hard as we anticipated.”
In the US today, industries that rely intensively on patents and other intellectual property account for more than a third of the gross domestic product. Their growth outpaces industries that rely little on intellectual property. As Romer puts it, “Possibilities do not add up. They multiply.”
In other words, long-term economic growth as well solutions for climate change can be found in understanding how to tap the many ideas as yet undiscovered.