2018 Prize Lectures in Economic Sciences

2018 Prize Lectures in Economic Sciences

but has evolved both in terms of parameters in terms of some of the details of the sectors but the structure is basically the same as it was in 1992 and the structure of the model is shown in the figure here I'll just describe it briefly you have economic growth leading to emissions on the upper left and that's from our driving or heating or cooking our airplane dharia travel this leads to rising co2 concentrations and other forces leading to climate change and climate change is not just temperature but it's precipitation and sea level rise and many other processes and then that to the next arrow it has impacts or it has impacts ecological impacts economic impacts lower corn yields coastal flooding ocean acidification which is actually the other carbon dioxide problem which I won't talk about very much but it's bad for crustaceans and then the next is so the next link is climate play and change policies to reduce emissions and these would be through different mechanisms such as cap-and-trade which you know here in Europe but carbon taxes which you know in Sweden regulations which all countries know and then that then through the policies leads back up to affecting emissions reducing emissions and then affecting more you know a greater or lesser degree climate economic growth itself and I put those arrows there to see India and the first two errors are ones we know about and actually exist the other two we don't actually all lives don't actually exist in all cases so this is the lot this is the circular flow that is part of the modeling that we're talking about today so I want to say a word see what we're doing here I was saying a word about mathematics for just a little bit of mathematics as a language particularly for people for young people and students and who are thinking about what they're gonna study my first teacher and and mentor and co-author Paul Samuelson was also the first American laureate in economics and he was responsible for the introduction of mathematics into economics and his view was mathematics is necessary if we were to understand and analyze complex phenomena and it's something that point is now part of my brain it's it's actually built in just as much as the English language is it's it's is part of my brain and it's an interesting the the great American physicist John Willard Gibbs in a Yale faculty meeting when there was debate about foreign languages he stood up and he said mathematics is language and he sat down and and he's write the language and that language is increasingly part of our lives it's from the design of the computers that are running this the show here to our power plants to the medical scans that save our lives and I think mathematics is our future that's all I mean I think we need to study foreign languages we need to study all kinds of things poetry art but mathematics is is key to so many areas of our future the math the language of mathematics is also simple to our modeling of climate change economics I'll just show you a little picture here I thought I'd show you the mathematics of the model and here it is that's all that's all it is it's a maximization constrained maximization problem it's comes simple so there's a lot of vectors here and times and integrals and so on and it'll be discretized for the actual computerized model but any of you who know the modeling and know mathematical economics will say oh yeah that's just that's a simple old growth model that we know and love for so many years ago and those of you know mathematics will say well that's kind of interesting and those of you don't just view it as a it's just it's a counterpart of goya it's just a picture here okay maybe not so frightening I don't know maybe more frightening but don't don't be frightened don't be frightened so economists are focused on the strata so let me just turn out of to a little bit of the actual results so economists have focused on the economist and others have focused on strategies to slow climate change and they're basically three potential strategies abatement or reduction of emissions is the one I'll focus on the second one is removing carbon dioxide from the atmosphere which would be run wonderful but actually you could grow trees to do that for example but but well I won't say but and then there's management of sotell solar radiation through say putting dust in the stratosphere abatement the first one I mentioned is the only realistic and safe option at present others may come along but at present it's all that we have so I'm going to concentrate there but I have to say while realistic it's also expensive particularly in if we are ambitious and just to give an example in a common goal of the international negotiations and policies is to limit temperature to two degrees C above pre-industrial levels and estimates are that that would might cost about 4% of our income over the next next century or two this may be good for nature but it's it's not actually all that attractive to voters to reduce their income that sharply so it shows some of the trade-off now that's abatement I'll say a word about just a word about damages because in our economics what we're going to do is weigh the costs of reducing emissions and slowing climate change or limiting temperature on the one hand with the reduction in damages on the other so we have to you have to go out and do the modeling you have to determine what the damages are and you might say well that's impact sound easier because our debate mentor you need the physics and the chemistry and all that but actually damages damages is just comics and ecology but actually damages are much much more difficult and it's probably the most difficult task in all of our processes that were on that last slide because it's so far in the future the things we don't understand very well there we don't have historical experience of this so it's actually probably the most difficult so what I'll do is I'll show you some illustrative results I suppose these slides will be available so that they will be available let me I guess they will be available on the website so some of you I know this goes by very fast but some of you who want to look at them in detail can go back and and find them but I want to show you an example of the results from the the dice model and this I want to emphasize this is only one of many models there there are people in the room who do who do I won't point you out but you know who you are who are doing my other models and they're they're wonderful models and people around the world who are doing this the only reason I present well the main reason I presented is cuz I know it but also it's a simple model has a virtue of simplicity and comprehensiveness in the sense that it does close that all the boxes the links in that and another model some do and some don't but I would emphasize that these are very simplified models and so for example the climate sector two equations whereas if you go to some of the large climate models they'll have a million equations and so these are very very these don't have the resolution of the most the most comprehensive and up-to-date models so he let me give me so I want to talk about four sets of policies and I'll just mention these briefly one is what a business-as-usual which is basically no policies or minimal policies a second one is where you balance the costs and the benefits a third is where you limit temperatures over time to say one and a half degrees which is the latest objective or two degrees or two and a half degrees and a third is my modification of that where you don't limit it as an absolute cap but you're limited over an average period that actually makes more sense because a lot of processes are function of averages rather than just the absolute level at a point of time so those are the four that I'll I'll show you some results from so one is you you take these and I'll just one other thing so you take this business as usual what happened and then let's say if you want to limit the temperature to two degrees C which is in the third bullet there how can you do that most efficiently so it's not just any old way but if that you've got cost of doing it and you've got the systems and you want to find how can I limit it to two degrees in the way that's the most cost the least costly and in the economic sense so here's a here's a picture that shows it's a little it's a little crowded but I'll give you a quick rundown so the top so on the this is time from 0 to I've gone to 2150 just to give it a little further depth and this is then from 0 to 6 degrees C above pre-industrial we're already at about 0.8 0.9 so in and this shows you different paths doing this on the top path is if we do nothing and you can see that just keeps climbing and it's it's pretty pretty substantial by the 20 120 150 and then there are other paths there's one that have say economic cost-benefit path where you balance costs and benefits and then there's this green one where you limit it to two degrees C and then some of the other ones are where you limited say two degrees C with the 200-year averaging two degrees C with a 100 year averaging or one and a half degrees with the one your 100 your averaging they all look pretty much this so if you go out and you they actually don't look very different for quite a while and then they begin to diverge after 2050 or so but they have very different paths but the main thing I'll show you is actually if you take steps now to implement these you have quite different futures from very very high temperatures on the one hand to relatively low for the for the temperature limiting paths the next slide I want to show you it shows you the of the economics of this so the Green Line the green bars show you and don't worry too much about the the the units here on the left they're their present values but but they're just the bars or what I want to emphasize on so you can see the damages from doing nothing to the optimal to the temperature limiting and the damages obviously as you limit temperature increase the damages are going to go down from from left to right and these are increasingly stringent policies from left to right increasingly ambitious policies and then so the damages go down but then what are the costs well they're not not much cost if you don't do anything but as you become increasingly ambitious the cross rise and so you wanted what economics says well how are you going to balance these and if you if you were if your manukan see that the extremes you have a lot of damages and no cost at one extreme and a lot of costs and very little damages or the other and somehow in between you can balance the two and what you wanted to think of in economics or in more generally is what's the best balance between these two is that the optimal is it a two degree is a averaging period what different averaging period so you want to find some balance between the costs and the benefits of the damages now economics yep so economics points to one inconvenient truth about climate change policy and that is to be effective the policies have to raise the price of carbon or co2 and by doing that correct the externality of the marketplace and so one of the I think one of the insights of economics I feel very strongly about is if you're going to be effective you have to raise the price because putting a price on our activities is the only way I mean we have to we have to get billions of people in now and in the future millions of firms thousands of governments to take steps if we're going to move in the direction we want and the only way that you're going to do that effectively is to increase the price of carbon and I would say something about the history of that because is I think it's an interesting scientific story the idea on carbon pricing flowed from the research on what are known it technically is dual variables in linear programming from the pioneering nearing work of Ken aerobic and Koopmans for which then they won the Nobel Prize in 1975 and it's if you do this the optimization I showed you a little earlier and you just rock and grind and you just grind through it and you look what we used to be computer printouts we don't have those anymore you would see the dual variables there and I remember when I looked at I just scratched my head I had no idea what this dual variable and the carbon constraint was and there were different ones on different different different reservoirs and then eventually I realized and I'll quote when when I first realized this is what I what I wrote in 1977 and it's it's I haven't gone much further than this because of the externalities there are no market or political mechanisms which ensure that the appropriate level of control will be chosen to implement the efficient path implies that we are implicitly putting a positive price on emissions of carbon into the atmosphere quote carbon taxes as a way of implementing the global policy on a decentralized level so that that that that was the first time it really occurred to me that to think of this in this way and so what basically I it is evolved over time and i won't i won't spend much more time on the I'll just mention that this actually disappeared for a long time and then re-emerged about 20 years later in the idea of the social cost of carbon which is how much it costs to put a ton of carbon in the atmosphere and that's actually central now to national policies it's central to the design of carbon instead of climate institutions as a setting a carbon price or carbon tax so over the years nations have negotiated many international climate treaties the Framework Convention the Kyoto Protocol the Copenhagen Accord the Paris Accord how are we doing you might ask how are we doing we-we is the carbon price where it should be or is it lower or higher you know the answer that question is that the world carbon price is nowhere near where anyone thinks it ought to be it's maybe 1/10 of the most modest estimate of the social cost of carbon the actual global carbon price is essentially zero and I I'm not going to go through the various proofs of that but I want to talk about what why that's a problem and what we might do about it enough so as I think about this the the read the problem here is the that these treaties have been ineffective in limiting carbon emissions I'll just show actually I'll show you one graph here which is the trend in global emissions from 1970 to 2017 policies have been really ineffective in dealing with climate change and the reason is because of free riding and freeriding is where you receive the benefit of collective activity collective action without paying the cost without contributing and the case of international climate policy what it means is you you get the reduction in down due to people's efforts but you don't have to do any costly steps at home and so I'll just talk that's the free rider problem in economics in climate change so in in research on this issue and following much the brilliant studies of the economics of treaties and game theory I came to a solution that I called a climate Club and want to talk about that in my last three minutes so what is the idea of a climate club the idea that nations can overcome the syndrome of free riding in international agreements if they adopt the the model of a club and a club is an agreement where you you know what clubs are we're all in clubs of various kinds but they're also international clubs as the club of the EU to which you which you remember there's the club of NATO which you're not a member but the Sweden is not a member but is a beneficiary there's the club of the World Trade Organization of which we're all beneficiaries and the idea for club here is to change the way we think of international agreements which are essentially voluntary for climate to make them ones where you you not only benefit but you pay and for the example that I'll suggest is an international climate Club to overcome free-riding is the idea is that you would have club played ooze through abatement but members but non-members are penalized by having tariffs on their imports into the club region and so let's say you set a target carbon price of $50 a ton then nations would have their domestic price through whatever mechanism they would choose at $50 a ton but if you weren't a participant then you would have a penalty attack a penalty tariff into the club region so the dues or abatement and penalties are the tariff and I'll just show you a very simple example this is from my presidential address to the American Economic Association and it's a very simple idea here the bars from left to right are the tariff rates of a club there are 15 regions in this and the height of the bar is how many participants there are as a function of each tariff level and the first tariff level is zero and that's the basic structure where there's no penalty to non participation and they're no participants but in this simple example for a $50 tonne as the tariff rates gets up to three four five percent you see more and more nations participate and then is high enough all nations participate so we're obviously a long way from the climate club or analogous arrangements but I think that I think that we should we should look at this as a kind of model for future going forward so I think I'll just wrap up here and I'll just make four points to end up where do we need to go next first we need to accept and understand the gravity of climate change scientists must continue their research and citizens must reject politicians who spread falchion tendentious reasoning that's a very important step we must establish policies that raise the price of co2 and other greenhouse gas emissions we must act locally and nationally both actions must also be coordinated on a global level and it that's it and it's clear that finally that we need rapid technological change in the energy sector for the transition so this concludes my discussion of the economics challenges posed by climate change and I would emphasize the solution ultimately lies in harnessing human ingenuity to develop and deploy low-carbon technologies and with that thought with that thought I'd like to turn to the extraordinary insights on the economics of technological change that have been developed by my fellow laureate Paul Romer so listen up thank you [Applause] before before we get back to Paul Romer Paul you're there let me pick up just briefly on the Sweden Norway so in the spirit of brotherly love as we call it and and in the spirit of Alfred Nobel actually I would like this game to end 1-1 so we need to have award Sweden and now the point and I I think I've chosen to give it for producing less fossil fuel than Norway but Paul Romer was born in 1955 in Denver Colorado he received his PhD from University of Chicago but unlike professor Nora house Paul moved around quite a bit University of Rochester back to University of Chicago University of California Berkeley Stanford University New York University where you're currently the research question there as we already know now was about this other resource knowledge and in particular knowledge how it's ever advanced in market economies not in at universities obviously it's advanced here as well but in market economies and I said that knowledge accumulation in the form of new technologies is absolutely crucial for us and we've heard it's crucial in this particular area as well so the key step here was the development of what is now ubiquitous Lee called endogenous growth theory please ladies and gentlemen Paul Romer I too will rely on technology and and as that there's a designated advocate for technology you can count on it failing me at some point during the talk so thank you pair for framing the work that bill and I have been engaged in in such I think an appropriate way it really is the global macro economics of the tension between the restraining force of scarce resources and the positive force that can come from discovery and innovation let me ask you to thank all the members of the committee for highlighting the connection between these two forces the restraining and the positive and it's the balance of these two that will determine our fate thanks as well to the many friends and colleagues and to the members of my family who can all be here today I let me save my appreciation for the vision of Alfred Nobel and for the foundation that continues to keep his vision alive let me save that for my conclusion so lately lots of people have been asking me why exactly I won the Nobel Prize in Economics my task once again is to try to explain and I'll do my best but one of the things I learned from my father who's here in the front row as who spent his life as a politician is that the key to success is to manage expectations so let me warn you that I have trouble explaining why I think technological change is Oh compelling and so subtle when my son Jeff was seven or eight he asked me what kind of work I did as a professor I told him well I'm trying to understand why your grandparents when they were children didn't have access to the kinds of things that you have like a video cassette recorder Jeff looked at me and said dad that's obvious when nanny and granddad were kids the video cassette recorder hadn't been invented yet is there anything else from your work that I can help you with so today I'll start by trying to describe this notion of the possibility of progress and explain why when I was in graduate school in 1980 there were so many doubts about whether progress was possible whether this positive force of discovery could offset the tension the restraining force of the the scarce resources then I'll describe the theory I developed the trance show that progress is indeed possible at least in principle I'll turn after that to the description of two practical suggestions that emerge from this theory analogous to Bill's suggestion about the carbon tax mindful as I am that Alfred Nobel stipulated that prizewinners be judged on the benefit they confer to humankind not just on the scientific merit of their discoveries so when I was in graduate school in 1980 I think there were at least three distinct forces that were undermining confidence about the possibility of progress one was a growing list of negative side effects from unanticipated negative side effects from what seemed like positive technological discoveries one of the most interesting was a discovery by sherlyn Rowand and melina that chlorofluorocarbons could be destroying the ozone layer a discovery for which they received the Prize in Chemistry in 1995 but there were this was their paper on this was in 74 but at this point we had also seen problems with DDT the damage that was done to human health by leaded gasoline even the cancer that was caused by cigarettes so it seemed plausible that that positive force of discovery might not turn out even on its own to be so positive because of the unexpected negative side effects it was also the case in 1980 that people had lost faith in the government to do the very basic jobs that we expected of the government the throughout the 70s there had been this steadily increasing rate of inflation we'd had recessions that caused unemployment and moved inflation down but still to a relatively high level so we referred to the new experience is that of stagflation but the really disturbing fact was that from one recession to the next the general trend was for a steady increase in the underlying rate of inflation now finally my undergraduate degree was in physics and from economic theory the only theory of growth that made any sense to a physicist was the one developed by Thomas Malthus it starts from an invertible incontrovertible premise that there's a finite quantity of every natural resource using only simple arithmetic it then follows that there is no possibility of sustained progress let me use copper as an example of a natural resource the total mass of copper on earth and the Earth's crust is finite think of measuring that in kilograms for every person in the earth the total number of people you divide kilograms of copper by people you get a certain amount of copper per person even if we don't use copper up because we transform it but it still exists there's no way to increase the total supply of copper available per person that we can use to do things like provide electricity so there's no possibility of progress if it takes more of something like copper per person to make progress and if we see a pattern of progress it's it's very easy to reconcile that with this scarcity because it could be a sign that we're depleting the untransformed stock of copper and Earth's crust we're depleting that using more and more per person but were soon headed to a the wall we won't be able to keep extracting more and more copper and when we hit that wall it was equally plausible that we might not just slow down but we could really face a collapse now I was focused primarily on the trend I was looking at history and saw this progress over 10,000 years that seemed hard to justify is just a temporary phenomenon that would soon come to the end but the Malthusian theory has another implication not about the trend but what about what economists refer to as a scale effect what's the effect of having more people say at a point in time suppose you have twice as many people here to the the the conclusion is very grim twice as many people means half as much copper per person it's just arithmetic now Homo sapiens emerged during the Pleistocene in an era when this Malthusian Theory applied with full force and key elements of human nature were shaped by this experience the one I want to emphasize is the pre-decision predisposition we have to group people into us and them them is a group that poses an existential threat to us they might steal our resources there are also an opportunity we might be able to steal their resources from them and even if all we do is share there's less for us when there's more of them now Donna Strickland who was one of these years prize recipients in physics told me that when she was president of the optical society she was part of the planning for the International Year of light one of the goals they emphasized was the eradication of light poverty now this is a figure but a picture that I've never forgotten when since I've saw it many more than a decade ago what it shows is some students studying under streetlights outside the airport in Conakry Guinea now this conveys just instantly that the human consequences of light poverty they can't do their homework at home it also suggests this obvious fact about technology we know how to provide light in homes why don't we use that technology to provide light in the homes of these these students but there's an emotion that can be invoked by this picture which also relates to this Malthusian fear about us in them with existing technology if we were to provide them the same access to electricity that we have this would lead to more emissions of carbon and could threaten the planet so although it's not always voiced there is a realistic perception it seemingly realistic perception that we have to retreat to a notion of us in them we can't let them have what we have because we'll destroy the planet now the problem is I saw it in my development of this third theory of the economics of ideas was not what Malthusian theory suggested about scarce objects but it was what it emitted which was this possibility of discovering new ideas this had been referred to the process of the accumulation of ideas was often referred to as technological change and just like my son Jeff my colleagues recognized that this could be the offsetting force but to have a theory that could satisfy a physicist I needed to dig down and to what was the meaning of an idea how could we be price of be precise about an idea and then use the accumulation of ideas as a way to understand technological progress now one of the key elements of an idea is that it represents codified knowledge it's knowledge represented in symbols on a piece of paper or in Bent's these days because it's codified it can be copied and shared and then used by everybody on earth and by shared I don't mean the kind of sharing where we take turns this is the sharing where everybody can use something like the Pythagorean theorem at the same time if we want for example create the kinds of right angles that we use in construction now the best way I know to illustrate a single idea comes from a truly remarkable paper that my co-recipient bill wrote in the nineteen of the 1990s his insight was that we could measure progress by using not the conventional units of a dollars worth of purchasing power today or a euros worth of purchasing power we could measure output per person in the kind of units that a physicist wouldn't recognize lumen hours now think of a lumen is the light that's produced by a candle going all the way back to the pleistocene bill measured the amount of light that the average person could get from an hour of work there's no way for me to improve on his words from this paper I have performed a number of experiments with sesame oil and lamps purportedly dating from Roman times see the appendix these experiments provide evidence that an hour's work today will buy 350,000 times as much illumination as could be bought in early Babylonia that's real progress and when you look at the pattern of progress most of it comes in the very recent period the period since the Industrial Revolution and since the the Scientific Revolution now in this paper there's one data point which represents the roughly tenfold increase in the amount of light that we could extract from a gas flame that was the result of burning that flame inside what was called a mantle now the my protection did that was what in the world is a mantle and what's the physics behind the process whereby it coaxes ten times as much light out of a gas flame this picture illustrates the difference between an open gas flame and a mantle and it's hard to see but if you look at a physical mantle what you notice is that it's a metal cage and burning flame inside the cage heats up the metal to the point of incandescent which means the metal glows with this bright white light that you see in the picture now the man who discovered this welsbach could take that insight and then put it to use in streetlights all over the world long before Edison discovered how to make a wire incandescent by running electricity through it but welsbach could share this idea with everybody in the world who had access to a gas streetlight because it was codified knowledge which could then be spread and was copied all throughout the world now there's another concept that I need to flesh out about related to ideas which is what computer scientists refer to as combinatorial explosion if you have a number of elements that you can combine you have ten elements and combine them we can calculate how many combinations can you make if you have 20 we can calculate again combinatorial explosion is a summary of the fact that the number of combinations explodes as you take more and more raw different elements that you can use to combine them so when for example we think about all the possible peptides you can make out of amino acids the there's just immense just unbelievably large set of are ya peptides that you can create out of 50 amino acid pair me no acid units and this year's chemistry prize is about methods for creating libraries of all of these peptides and exploring them using new new kind of methods including those motivated by evolution when Wells back was trying to find the right mix of metals for his mantle he tried a number of different metals and mixtures and again the number of possible mixtures explodes as you think of more and more metals so an idea is codified knowledge about the properties of one from an almost infinite set of possibilities and when you define an idea that way it's immediately obvious that the discovery of new ideas from these almost infinite sets of possibilities could offset the scarce resources implied by the Malthusian analysis so to understand the difference this makes look again at this picture if more light gives these students the chance to study to go work in science they may discover something like the mantle and they may provide a benefit to us that could more than offset the costs of additional mitigation of or avoidance of carbon emissions so ideas mean that people are no longer our rivals they can be our allies and this suggests a very important possibility that we can take the set of us and expand it we can draw a bigger circle include more people inside us and treat them with the at least indifference or the small appreciation that comes from membership in the set of at the set of us now this benefit of other people was a possibility that bill wrote discovered and model he published in nineteen sixty nine can arrow another Nobel prize-winning economist wrote a model with that same property in nineteen sixty-two I in the 90s after working out a theory of growth based on ideas and along with other economists worked on results showing that integrating different regions of the world into a unified global system where we traded goods but particularly importantly we traded ideas this could speed up the worldwide rate of growth but in a conversation I had with Bill he said that he was uncomfortable about this result that more people could actually beneficial be beneficial because it was a theoretical possibility but how did we know it was true and when I looked at combining different regions letting them work with each other I skirted this issue because in effect what I was saying is we can let more people come to this party but they got to bring their own resources so there wasn't the same effect of more people meant less natural resources for each of us what was astonishing was that work that emerged around this time including work by Chad Jones who's here somewhere but also Ron Lee from demography Michael creamer another young economist work showing that from the period of roughly the Neolithic Revolution to at least the Scientific Revolution the actual evolution of humans as a species was driven by a process of more discoveries leading to the production of more food which led to more people who in turn developed more and more discoveries and so there was this explosive process of growth that was in the population that was proceeding at a rate that was growing exponentially so this is not exponential growth this is exponential growth in the rate of exponential growth which is the best way to characterize the behavior of humans up through about the Industrial Revolution and as Michael creamer showed and and as was also implicit in analysis by a diamond in his book Guns Germs and Steel that the evolution of at least the carrying capacity if the number of people varied across regions that had started from initials that differences in stocks of people and differences in the initial intrinsic carrying capacity so some regions could take off in terms of technology and then have this more rapid growth of people and more growth of technology others like Australia after the ice of the ice had melted and there was no longer a land bridge that connected them to other people where technological progress was very limited but but notice this is an unusual notion of progress its progress in carrying capacity but it's not progress in standards of living because for most of this period as we got more and more capacity for producing food what it led to was more and more people so rapidly growing people rapidly growing technology and increases in carrying capacity but not much improvement in standards of living and it's really after the Industrial Revolution at about the same time as we started to limit our own fertility in the growth of the population that we see what I would call material progress which is growth in standards of living growth in how much we have like how much light we can have now the key point I want to make is that there's a third notion of progress but I want to call human progress progress not in what we have but in who we are and it's the kind of progress that comes from seeing other people even perhaps starting to see other sentient beings like the the animals we interact with seeing them as part of us treating them with at least in difference rather than malevolence and treating them as objects of predation this type of progress in who we are is even more important than the material progress and I know that the moral reasoning suggests that we should be capable of that kind of moral progress human progress even if in some sense it works to our disadvantage but let's be honest people are people it's a lot easier to get people to think of others as allies if in fact those others actually help them and this is what the period of explosive population growth shows on balance it's better to have more people they are our allies they are part of us now am I being Pollyanna ish that's something I get accused of in saying that we're capable of this kind of deep human progress I don't think so for example we live in cities with millions of people most of whom are strangers and we're not threatened by them and we don't try to attack them and this is something that our our ancestors in the Pleistocene could never have understand could never have understood but but even more importantly us used to mean the way that men thought about other men and we're in the process of a fundamental change in our human nature and our making a fundamental improvement along the lines of human progress because we now recognize that women belong as full members of us we're a long way from full equality in terms of respect and dignity but the product direction is unambiguous we've made some progress on this dimension and the direction is unambiguous and again this shouldn't have required any personal benefit it shouldn't required shouldn't have required self-interest to to demand this kind of human progress but again it helps when people understand that the discoveries of Marie Curie or Donna Strickland or Francis Arnold can actually make our lives better and that there's a huge advantage in doubling the number of people who can contribute to the production of the ideas from which we all benefit so my my time is coming to an end let me just hint at to two practical policy applications that emerge from this economics of ideas one is to think of cities as chances for people especially in the developing world to get the benefits of interaction with other people other people are beneficial on net in the words of my colleague ed Glaeser cities make us smarter now in the coming century we will build more urban area than we've built we humans will build more human area than we've built since the Neolithic Revolution it'll take only about a hundred years and then when the pop as the population stabilizes in this century this project what my colleague Sally Angel calls the urbanization project will be done will have the layouts of the cities that people will live with forever and if we lay out the city from the beginning if a government lays out the city with a plan that protects some public space that allows the kind of connectivity you get when you've got a street that's wide enough for a bus to drive down and to make sure that nobody's more than about a half a kilometre from a bus route that they could use home to work if you lay out that space in advance it costs almost nothing if you try to get it after completely disorganized unplanned development it's almost infinitely costly to get that space I don't think we'll ever see anywhere in the future the kind of experience that Paris went through under Houseman where it was possible to just destroy large numbers of buildings move people and build broad avenues where they didn't exist before so we have a chance in the next hundred years at very low cost to lay the foundation for successful urbanization that can help everyone enjoy the benefits of learning from others but if we take a pass on this that the opportunity will be gone and the the entire future will be less well will generate less material progress for all the people who could so much benefit from it the other point I need to make is that because the population won't grow after this century to get to keep getting more and more ideas we need more people to go into science and we need to raise the productivity in science one of the interesting things that I looked at in the data about Nobel Prize winners is in the 1910 to the 1900s the first decade in the second decade of the 20th century something like 6% only 6% of the recipients were from the United States no I think I think even 3% in the first 20 years then and from 19 the 1930s and 40s it increases to 15 percent after World War two it approaches more than 50 percent that early development is a sign of investments the United States made in a university system that started in the 1860s and it takes time for a commitment to science to progress to the point where you have people doing nobel prize quality science but it's possible and we could do now new things that helped spur the same kind of both increase in the total fraction of the population that is engaged in discovery and research and science and we can raise the productivity of all of those people there is evidence right now that productivity in science hasn't and has been falling as more important into it but this is something that we can correct finally it is true that we face a very serious challenge with addressing global warming but it's important to remember this is a challenge not of the physics not of nature not of scarce resources this is a challenge of making a decision it's like deciding to stick switch to daylight savings it's like deciding in Sweden to shift to driving on the right it's not hard to do it once you decide what's hard is deciding and that's what Bill's idea if the club is about but even within a country we need to find ways to appeal to other parts of the human spirit to persuade us all to make those kinds of decisions so let me close with encouragement to young people about what a fantastic life can come from science and encouragement to young economists at a time when the economics profession has gotten a lot more competitive it's much tougher to start out as a young person than it was when I was a graduate student or bill was but remember that there is an enormous opportunity in economics to start to explore these broader notions of progress the broader side of human nature that it includes the kind of things that William Faulkner talked about in his Nobel speech love and honor pity and pride and compassion and sacrifice economics will be much more relevant when we can take account of all those and we'll have a better idea about why is it that we can sometimes appeal to sacrifice and people respond because this is what we'll need so let me close by expressing my deep appreciation for this system of prizes that Alfred Nobel established and that the Nobel Foundation has sustained a system for celebrating all the types of intellectual inquiry that emerged from the period we call the Enlightenment and remember there's a reason we call it the Enlightenment so yes let there be light let there be light in daily life but let there be light too in our spirits and our souls thank you yes it means me love I guess you can shake hands or something

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5 thoughts on “2018 Prize Lectures in Economic Sciences

  1. What is the solution to climate change? Let us first assume that we have sufficient time to implement changes in law, regulation and taxation. What would be the most effective as well as fairest measure to implement? This would be to replace existing taxation with the imposition of an annual charge on all who control locations (whether urban, rural or resource-laden) equal to the potential annual rental value of whatever locations are held. A zero pollution requirement imposed by governments would tend to lower the potential annual rental value charged, given the cost of compliance.

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