Paul Romer’s Nobel Prize in economics that was announced today was a long time 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.
Exponential curves can’t but keep going up.
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 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 granite-slab 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.