Post scarcity prophet
This interview is reprinted from reason magazine 1 Dec 2001. Romer is an optimist in the Julian Simon mould, although far from a reflex free-market supporter; he supported the government in the Microsoft anti-trust case. Look out for the way he explains the difference between 1.8 and 2.3 growth over the next 50 years. Learn the difference between "ideas" and "things" in New Growth Theory. Enjoy how he swats off Paul Ehrlich, a man who has been on the wrong side of arguments for so long that sensible thinkers prefer not to convince him!
One of the most influential Americans” pronounced Time.
"His ideas may just revolutionize the study of economics." Newsweek
included him in its roster of "The Century Club," a "list of
100 people for the New Century." He is a perennial short-lister for the
Nobel Memorial Prize in Economics. His work has been lauded by business guru
Peter Drucker and Nobel-winning economist Robert Solow. He is the STANCO 25
Professor of Economics at Stanford University's Graduate School of Business and
a senior fellow of the Hoover Institution. He was recently elected a fellow of
the American Academy of Arts and Sciences.
As one of the chief architects of "New Growth
Theory," Paul Romer has had a massive and profound impact on modern
economic thinking and policymaking. New Growth Theory shows that economic growth
doesn't arise just from adding more labor to more capital, but from new and
better ideas expressed as technological progress. Along the way, it transforms
economics from a "dismal science" that describes a world of scarcity
and diminishing returns into a discipline that reveals a path toward constant
improvement and unlimited potential. Ideas, in Romer's formulation, really do
have consequences. Big ones.
Before New Growth Theory, economists recognized that
technology contributed substantially to growth, but they couldn't figure out how
to incorporate that insight into economic theory. Romer's innovation, expressed
in technical articles with titles such as "Increasing Returns and Long-Run
Growth" and "Endogenous Technological Change," has been to find
ways to describe rigorously and exactly how technological progress brings about
economic growth. As Robert Solow told Wired in 1996, "Paul
single-handedly turned [the study of economic growth] into a hot subject."
The 46-year-old Romer, son of former Colorado Gov. Roy
Romer, received his Ph.D. in economics from the University of Chicago in 1983,
six years after earning a B.S. in physics at the same school. Before joining
Stanford's faculty in 1996, he taught at a number of schools, including the
University of Chicago, the University of Rochester, and the University of
California at Berkeley. He and his wife, Virginia Langmuir, a medical doctor,
live in Portola Valley, California, and have two children.
In June, reason Science
Correspondent Ronald Bailey interviewed Romer poolside at his house, which
overlooks a huge expanse of rolling ranchland owned by Stanford University.
reason: In terms of real per capita income, Americans
today are seven times richer than they were in 1900. How did that happen?
Many things contributed, but the essential one is technological change. What I
mean by that is the discovery of better ways to do things. In most coffee shops
these days, you'll find that the small, medium, and large coffee cups all use
the same size lid now, whereas even five years ago they used to have different
size lids for the different cups. That small change in the geometry of the cups
means that somebody can save a little time in setting up the coffee shop,
preparing the cups, getting your coffee, and getting out. Millions of little
discoveries like that, combined with some very big discoveries, like the
electric motor and antibiotics, have made the quality of life for people today
dramatically higher than it was 100 years ago.
The estimate you cite of a seven-fold increase in
income-that's the kind of number you get from the official statistics, but the
truth is that if you look at the actual change in the quality of life, it's
larger than the number suggests. People who had today's average income in 1900
were not as well off as the average person today, because they didn't have
access to cheap lattes or antibiotics or penicillin.
Reason: New Growth Theory divides the world into
"ideas" and "things." What do you mean by that?
Romer: The paper that makes up the cup in the coffee
shop is a thing. The insight that you could design small, medium, and large cups
so that they all use the same size lid - that's an
idea. The critical difference is that only one person can use a given amount of
paper. Ideas can be used by many people at the same time.
reason: What about human capital, the acquired skills and
learned abilities that can increase productivity?
Romer: Human capital is comparable to a thing. You have
skills as a writer, for example, and somebody – reason - can use those
skills. That's not something that we can clone and replicate. The formula for an
AIDS drug, that's something you could send over the Internet or put on paper,
and then everybody in the world could have access to it.
This is a hard distinction for people to get used to,
because there are so many tight interactions between human capital and ideas.
For example, human capital is how we make ideas. It takes people, people's brains,
inquisitive people, to go out and find ideas like new drugs for AIDS.
Similarly, when we make human capital with kids in school, we use ideas like the
Pythagorean theorem or the quadratic formula. So human capital makes
ideas, and ideas help make human capital. But still, they're conceptually
reason: What do you see as the necessary preconditions
for technological progress and economic growth?
Romer: One extremely important insight is that
the process of technological discovery is supported by a unique set of
institutions. Those are most productive when they're tightly coupled with the
institutions of the market. The Soviet Union had very strong science in some
fields, but it wasn't coupled with strong institutions in the market. The upshot
was that the benefits of discovery were very limited for people living there.
The wonder of the United States is that we've created institutions of science
and institutions of the market. They're very different, but together they've
generated fantastic benefits.
When we speak of institutions, economists mean more
than just organizations. We mean conventions, even rules, about how
things are done. The understanding which most sharply distinguishes science from
the market has to do with property rights. In the market, the fundamental
institution is the notion of private ownership, that an individual owns a piece
of land or a body of water or a barrel of oil and that individual has almost unlimited
scope to decide how that resource should be used.
In science we have a very different ethic. When somebody discovers
something like the quadratic formula or the Pythagorean theorem, the
convention in science is that he can't control that idea. He has to give it
away. He publishes it. What's rewarded in science is dissemination of ideas. And
the way we reward it is we give the most prestige and respect to those people
who first publish an idea.
reason: Yet there is a mechanism in the market called
patents and copyright, for quasi-property rights in ideas.
Romer: That's central to the theory. To the extent that
you're using the market system to refine and bring ideas into practical
application, we have to create some kind of control over the idea. That could be
through patents. It could be through copyright. It might even be through
secrecy. A firm can keep secret a lot of what it knows how to do.
reason: A formula for Coca-Cola?
Romer: Yes. Or take a lot of the things that Wal-Mart
understands about discount retailing. They have a lot of insight about logistics
and marketing which they haven't patented or copyrighted, yet they can still
make more money on it than other people because they keep it closely held
within the firm. So for relying on the market-and we do have to rely on
the market to develop a lot of ideas - you have to have some mechanisms of
control and some opportunities for people to make a profit developing those
But there are other stages in the development of ideas.
Think about the basic science that led to the discovery of the structure
of DNA. There are some kinds of ideas where, once those ideas are uncovered,
you'd like to make them as broadly available as possible, so everybody in the
world can put them to good use. There we find it efficient to give those ideas
away for free and encourage everybody to use them. If you're going to be giving
things away for free, you're going to have to find some system to finance them,
and that's where government Support typically comes in.
In the next century we're going to be moving back and
forth, experimenting with where to draw the line between institutions of science
and institutions of the market. People used to assign different types of
problems to each institution. "Basic research" got government support;
for "applied product development," we'd rely on the market. Over time,
people have recognized that that's a pretty artificial distinction.
What's becoming more clear is that it's actually the combined energies of those
two sets of institutions, often working on the same problem, that lead to the
reason: We hear a lot of complaints from academicians
about how business and corporations are taking over university research.
Romer: I think it's important to have a distinct realm of science and a
distinct realm of the market, but it's also very good to have interaction
between those two. One of the best forms of interaction is for people who work
in one to move into the other.
The people in university biology or biochemistry departments complain
when they see somebody go on leave from the university and start a company
that's going to develop a new drug. That's not the way it was done 30 years ago.
But this is the best way to take those freely floating, contentiously discussed
ideas from the realm of science and then get them out into the market process,
because the reality is that there are virtually no ideas which generate benefits
for consumers if there's not an intervening for-profit firm which commercializes
them, tailors them to the market, and then delivers them. You can point to
examples where things jump right from science to benefits for the consumer, but
that's the exception, not the rule.
reason: Do we run the risk of ruining science by
involving it too much in the market.
Romer: Well, some people would say that everything
should be patented. The danger is that if you went that far, you could actually
slow the discovery process down. There are very good theoretical reasons for
thinking that market and property rights are the ideal solution for dealing with
things, but there are also strong theoretical reasons for thinking that in the
realm of ideas, intellectual property rights are a double-edged sword. You want
to rely on them to some extent to get their benefits, but you want to have a
parallel, independent system and then exploit the tension that's created between
reason: What are those theoretical reasons?
Romer: It traces back to this multiple use I was
describing for ideas vs. single use for things. The miracle of the market system
is that for objects, especially transformed objects, there's a single price,
which does two different jobs. It creates an incentive for somebody to produce
the right amount of a good, and it allocates who it should go to. A farmer looks
at the price of a bushel of wheat and decides whether to plant wheat or plant
corn. The price helps motivate the production of wheat. On the other side, when
a consumer has to decide whether to buy bread or corn meal, the price allocates
the wheat between the different possible users. One price does both jobs, so you
can just let the market system create the price and everything works
With ideas, you can't get one price to do both things.
Let me give an extreme example. Oral rehydration therapy is one of those few
ideas which did actually jump immediately from science to consumer benefit. It's
a simple scientific insight about how you can save the life of a child who's
suffering from diarrhea. Literally millions of lives have been saved with it. So
what price should you charge people for using it?
Because everybody can use the idea at the same time,
there's no tragedy of the commons in the intellectual sphere. There's no problem
of overuse or overgrazing or overfishing an idea. If you give an idea away for
free, you don't get any of the problems when you try and give objects away for
free. So the efficient thing for society is to offer really big rewards for some
scientist who discovers an oral rehydration therapy. But then as soon as we
discover it, we give the idea away for free to everybody throughout the world
and explain "Just use this little mixture of basically sugar and salt, put
it in water, and feed that to a kid who's got diarrhea because
if you give them pure water you'll kill them." So with ideas, you have this
tension: You want high prices to motivate discovery, but you want low prices to
achieve efficient widespread use. You can't with a single price achieve both, so
if you push things into the market, you try to compromise between those two, and
it's often an unhappy compromise.
The government doesn't pay drug companies prizes for
coming up with AIDS drugs. It says they've got to incur these huge expenses, but
then if they succeed, they can charge a high price for selling that drug. This
has generated a lot of progress and we're prolonging the life of people with
AIDS, but the high price is also denying many people access to those drugs.
reason: Over the broad sweep of human history,
technological progress and economic growth were painfully slow. Why has it sped
Romer: It's so striking. Evolution has not made us any
smarter in the last 100,000 years. Why for almost all of that time is there
nothing going on, and then in the last 200 years things suddenly just go nuts?
One answer is that the more people you're around, the better off you're going to
be. This again traces back to the fundamental difference I described before. If
everything were just objects, like trees, then more people means there's less
wood per person. But if somebody discovers an idea, everybody gets to use it, so
the more people you have who are potentially looking for ideas, the better off
we're all going to be. And each time we made a little improvement in technology,
we could support a slightly larger population, and that led to more people who
could go out and discover some new technology.
Another answer is that we developed better
institutions. Neither the institutions of the market nor the institutions of
science existed even as late as the Middle Ages. Instead we had the feudal
system, where peasants couldn't decide where to work and the lord couldn't sell
his land. On the science side, we had alchemy. What did you do if you discovered
anything? You kept it secret. The last thing you'd do was tell anybody.
reason: How did the better institutions come about?
Romer: That's one of the deep questions. There's some
kind of political process, some group decision process, which leads to
institutions. If you go back to what I said a minute ago about the advantages of
having many people, you can see that there's a tension here. There are huge
benefits to having more people and having us all interact amongst ourselves to
create goods and to share ideas. But you face a really big challenge in trying
to coordinate all of those decisions, because if you have large numbers of
independent decision makers who aren't coordinating their actions appropriately,
you could get chaos. Think about millions of drivers with no rules of the road,
no agreement about whether you drive on the left or the right.
So where do these institutions come from? It was a
process of discovery, just as people discovered how to make bronze. They also
discovered ways to organize political life. We can use democratic choice as an
alternative to, say, a hereditary system of selecting who's the king. What's
subtle here is, how do those discoveries get into action? It's not like a
profit motive in a firm that brings software to market. There was a process of
persuasion when somebody discovered that, hey, this would be a better way for us
to organize ourselves. So we had political and economic thinkers - Locke,
Hobbes, Smith - who managed to persuade some of their peers to adopt those
So institutions came from a combination of discovery,
persuasion, adoption - and then copying. When good institutions work somewhere
in the world, other places can copy them.
reason: Many economic historians are critical of New
Growth Theory. Economic growth is a modern phenomenon, yet it appears that New
Growth Theory should apply equally to the Roman Empire or Ming China as well as
the modern world.
Romer: I think that's a caricature of the theory. New
Growth Theory describes what's possible for us but says very explicitly that if
you don't have the right institutions in place, it won't happen. If anything, it
was the old style of theory which made it sound like technological change falls
from the sky like manna from heaven, regardless of how we structure our
institutions. This new theory says technological change comes about if you have
the right institutions, which we have had.
reason: So what's the crucial difference between Ming
China and modern economies today?
Romer: Ming China was very advanced. It had steel. It
had clocks. It had movable type. Yet it was far from generating either the
modern institutions of science or the institutions of the market.
The market and science differ in their treatment of
property rights, but they're similar in that they rely on individuals who are
free to operate under essentially no constraints by authority or tradition. It took
a special set of historical circumstances to persuade people that things could
work if you freed people, within certain institutional constraints, to pursue
their own interests. This is where Ming China was very far away from modern
Part of the answer to this big question about human
history has been the acceptance of relatively unfettered freedom for large
numbers of individuals. It's something we just take for granted, but if you
described it in the abstract to the people of 50,000 years ago, they would never
believe it could possibly work. They were conditioned to systems where there was
the head man or the chief, and as numbers got at all large, there was a sense
that you had to have somebody with kind of dictatorial control. It was a deep
philosophical insight and deep change in the whole way we viewed the world to
tolerate and accept and then truly celebrate freedom. Freedom may be the
fundamental hinge on which everything turns.
reason: You often cite the combinatorial explosion of
ideas as the source of economic growth. What do you mean by that?
Romer: On any conceivable horizon - I'1l say until
about 5 billion years from now, when the sun explodes - we're not going to run
out of discoveries. Just ask how many things we could make by taking the
elements from the periodic table and mixing them together. There's a simple
mathematical calculation: It's 10 followed by 30 zeros. In contrast, 10 followed
by 19 zeros is about how much time has elapsed since the universe was created.
reason: Of all those billions of combinations,
the vast majority are probably going to be useless. So how do you find the
Romer: This is why science and the market are so
important for this discovery process. It's really important that we focus
our energy on those paths that look promising, because there are many more dead
ends out there than there are useful things to discover.
You have to have systems which explore lots of
different paths, but then those systems have to rigorously shut off the ones
that aren't paying off and shift resources into directions which look more
promising. The market does this automatically. The institutions of science could
tip either way. In American science, we have vigorous competition between lots
of different universities, which leads to a kind of marketplace of ideas. You
can think of other institutions of science that aren't nearly as competitive. In
the national laboratories, people are in the worst case civil servants: They're
there for life, and there's always more funding for them.
reason: Does New Growth Theory give us some new insights
on how to think about monopolies?
Romer: There was an old, simplistic notion that
monopoly was always bad. It was based on the realm of objects - if you only have
objects and you see somebody whose cost is significantly lower than their price,
it would be a good idea to break up the monopoly and get competition to reign
freely. So in the realm of things, of physical objects, there is a theoretical
justification for why you should never tolerate monopoly. But in the realm of
ideas, you have to have some degree of monopoly power. There are some very
important benefits from monopoly, and there are some potential costs as well.
What you have to do is weigh the costs against the benefits.
Unfortunately, that kind of balancing test is sensitive
to the specifics, so we don't have general rules. Compare the costs and benefits
of copyrighting books versus the costs and benefits of patenting the human
genome. They're just very different, so we have to create
institutions that can respond differentially in those cases.
reason: You have written, "There is absolutely no
reason why we cannot have persistent growth as far into the future as you can
imagine." Your Stanford colleague, the biologist Paul Ehrlich, disagrees.
He believes that economic growth is an unsustainable cancer that is destroying
the planet. How would you go about convincing people like Ehrlich that they are
Romer: Paul seems singularly immune to being convinced.
He has been on the wrong side of these issues, so I wouldn't set that as my
standard of persuading anybody. However, if I took a neutral observer who might
listen to me and Paul, there's a pretty easy way to explain why I'm right and
why Paul misunderstands. You have to define what you mean by growth. If by
growth you mean population, more people, then Paul is actually right. There are
physical limits on how many people you can have on Earth. If we took peak
population growth rates from the '70S at 2 percent per year, you can only
sustain that for a couple of hundred years before you really run into true
reason: I would remind you that Ehrlich said that there
would be billions of people dying of starvation in the 1980S.
Romer: He got the potentials wrong and the time frame
wrong, but it's absolutely true that population growth will have to come to zero
at some point here on Earth. The only debate is about when.
Now, what do I mean when I say growth can continue? I
don't mean growth in the number of people. I don't even mean growth in the
number of physical objects, because you clearly can't get exponential growth in
the amount of mass that each person controls. We've got the same mass here on
Earth that we had 100,000 years ago and we're never going to get any more of it.
What I mean is growth in value, and the way you create value is by taking
that fixed quantity of mass and rearranging it from a form that isn't worth very
much into a form that's worth much more. A canonical example is turning sand on the beach into
reason; What do you make of the recent protests against
Romer: When we were describing the broad sweep of human
history, we talked about how hard it was for people to get used to the idea of
freedom. There was another kind of adjustment that we had to make as well: We
had to get used to the idea of the market, and especially market exchange among
anonymous strangers. People often contrast this with the institutions of the
family, where you've got notions of sharing and mutual obligation. Many of us
have a deep psychological intuition rooted in our evolutionary history that
makes us feel warmly toward the family and suspicious of large, impersonal,
anonymous market exchange. I think that emotional impulse is part of what some
of the environmental ideologues draw on when they attack the whole market system
and corporations and modern science and everything.
This is a case where human psychology that was attuned
to a hunter-gatherer environment is just a little bit out of touch with a new
world that's much more interconnected, much more interactive, and in many ways a
much more satisfying and rich human experience. You can idealize life in a
hunter-gatherer society, but nobody wants to go through the frequent death of a
child - a very common experience for almost all of history that has been reduced
a phenomenal degree within human memory.
reason: How would you convince protestors of the
benefits of globalization?
Romer: First, just look at the facts. The protestors
are amazingly ignorant about what has happened in terms of, say, life
expectancy. Life expectancy for people in the poorest countries of the world is
now better than life expectancy in England when Malthus was so worried about it.
Then you look at the variation of experience between
the poor countries that have done best and the ones that have done worst, and
try to see what the correlations are. Which countries did best? Was it the
countries that adopted the market most strongly, embraced foreign investment,
and tried to adopt property rights? Or was it the other countries?
The evidence again is clear. One of the untold stories
about the '80s and '90s was the really dramatic turnaround in the
developing world that took place on this issue. If you track the legislative
history on foreign investment, you see a colonial legacy, even as late as the
'70s, where developing countries have laws designed to keep corporations out.
Then there's this dramatic turn-around as they saw the benefits that a few key
economies received by inviting in foreign investment. It's not the people from
the developing world who are making the argument that Nike is a threat to their
sovereignty or well-being. It's people in the United States. The people in the
developing world understand pretty clearly where their self-interest lies.
reason; What about boosting economic growth in developed
Romer: For Europe and the United States, I think we
need to be thinking very hard about how we can restructure our institutions of
science. How can we restructure our system of higher education? How can we make
sure that it has the benefits of vigorous competition and
free entry, especially of those bright young people who might do really
different kinds of things? We should not assume that we've already got the ideal
institutions and the only thing we need to do is just throw more money at them.
Unfortunately, I think a lot of countries have a long
way to go to catch up to the state where we are in the United States-and I'm not
that happy about where we are in the United States. Many European countries
simply have not recognized the power of competition between institutions. So
they have monolithic, state-run university systems. That stifles competition
between individual researchers and slows down the whole innovative process. They
also need to let people move more flexibly from the university into the private
sector and back. This is something that many countries watching venture capital
start-ups have become aware of, although they've been slower to get their
institutions to adjust.
reason: In your recent paper on doing R&D, you said
you think it would be possible to raise the growth rate from its average rate of
1.8 percent between 1870 and 1992 to 2.3 percent.
Romer: Well, I was trying to set a goal. When you're
thinking about the future, you never really know what we're going to discover,
but I think there's a reason to set for ourselves an ambition of trying to raise
the rate of growth by half a percent per year. The United States achieved about
0.5 percent a year faster growth than the U.K. did since 1870, so we've got a
historical precedent for creating institutions which lead to better innovation
of the market and strengthen science significantly. We should aim for that kind
of improvement again.
reason: Why would that be important?
Romer: As you accumulate these growth rates over the
decades, we get much higher levels of income. That lets us deal more effectively
with all the problems we face, whether it's making good on commitments to pay
for people's health care as they get older, preserving more of the environment,
or providing resources so that people can have time to be out of the labor
market for a certain period of time-when they're raising kids, say, or when they
want to take an extended sabbatical.
Income per capita in 2000 was about $36,000 in year
2000 dollars. If real income per person grows at 1.8 percent per year, by 2050
it will increase to $88,000 in year 2000 purchasing power. Not bad. But if it
grows at 2.3 percent per year, it will grow to about $113,000 in year 2000
In today's purchasing power, that extra $25,000 per
person is equal to income per capita in 1984. So if we can make the choices that
increase the rate of growth or real income per person to 2.3 percent per year,
in 50 years we can get extra income per person equal to what in 1984 it had
taken us all of human history to achieve.
One policy innovation, for example, that would boost
the growth rate would be to subsidize universities to train more undergraduate
and graduate students in science and engineering. Also, you could give graduate
students portable fellowships that they could use to pay for training in any
field of natural science and engineering at any institution the students choose.
Graduate students would no longer be hostage to the sometimes parochial research
interests of university professors. Portable fellowships would encourage lab
directors and professors to develop programs that meet the research and career
interests of the students.
reason: What's next in New Growth Theory? Any conceptual
breakthroughs on the horizon?
Romer: Because the economics of ideas are so different
from the economics of markets, we're going to have to develop a richer
understanding of non-market institutions, science-like institutions. This is
going to be a new endeavor for economics.
reason: Do you think that there is a big role for
economic historians in helping uncover this richer theory?
Romer: History is an absolutely essential body of
evidence, because you can't make inferences about long-run trends using
year-to-year or quarter-to-quarter data.
reason: There is a growing movement against technological
progress around the world. Why is there this negative reaction to technological
progress and what can we do about it?
Romer: You're a big believer in turmoil and creative
destruction when you're early in life, because you can knock down the old and
create your new thing. Once you achieve a certain level, you tend to get very
conservative and try to slow the gales down, because they might blow you over.
So I think we have to seriously commit ourselves to maintaining space for new
entrants and for young people. That's one way to keep the process going. Another
is to do what scholars have always done: to proselytize, to dissect incoherent
I think we'll be able to maintain this dynamic of
progress that was unleashed a couple centuries ago. There will be small setbacks
and a lot of noise and complaining, but the opportunities and the
benefits are just too great to pull back.
reason: Could anything stop economic growth and
Romer: Even if one society loses its nerve,
there'll be new entrants who can take up the torch and push ahead. Mancur Olson
talks about Caldwell's Law, the idea that no nation has remained truly
innovative for very long. Look at Italy, and then Holland, and then the U.K.,
and then the United States. The pessimistic interpretation is that nobody can
keep the process going. The optimistic interpretation is, Yes, you can, but
somebody else comes along and the progress moves from one place to the
We've seen individual societies where conservative or
reactionary elements suppress the changes. What has protected us in the past is
that there were other nations that could try new paths. You didn't have the same
political dynamic everywhere at once.
the far future we reach a situation where there really is truly global political
control - if multinational institutions grow more powerful over economic affairs
so that there is imposed uniformity across all nations-then there'd be a loss of
diversity. And if the reactionary elements got in control of those institutions,
there'd be no room for the new entrant, the upstart, to adopt new ideas. But
that's a pretty distant and unlikely prospect.
reprinted from reason
magazine 1 Dec 2001.
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