Nobel Lecture: On the possibility of progress

Many people ask why I received the Nobel Prize* in Economics. Here’s the best answer I’ve come up with so far:

The human condition emerges from a never-ending contest between the dismal Malthusian economics of objects and the unrealized possibilities of the economics of ideas. For centuries, economists took sides and followed Thomas Malthus. A paper I published finally turned it into a fair fight. Economists no longer have to assume that Malthus wins before exploring the question posed by title I chose for my Nobel lecture: “On the possibility of progress.”

After all, a fact beats a theory every time, and the fact of human progress is hard to deny. The best available evidence about this fact comes from Bill Nordhaus’s justly famous paper on the price of light. It is so convincing that I used it as the framing device for my Nobel lecture.

In my paper (“Endogenous Technological Change,” published in 1990 in the Journal of Political Economy) all I did was make the trivial observation that ideas belong to neither of the standard analytical categories: private goods and public goods. So my contribution? I showed that this observation has consequences; big consequences; the biggest possible consequences. The unique characteristics of ideas make material progress possible, but that’s not all. Ideas matter not just for what humans have, but also for how they are. During the Pleistocene, human nature evolved in a Malthusian world of objects. We developed an ugly tendency to split humanity into “us” and “them.” A world that also includes ideas justifies a new mindset that treats all humans with the dignity and respect that we offer to “us.” It is a world in which we may derive net material benefits from the presence of others.

Use this link to watch my lecture – or better, just listen to it. All that matters is the audio. The modern presentation may not be an improvement over radio, which is still a fine way to engage with ideas:

On Bill Nordhaus

I was very happy when I heard that William Nordhaus and I were co-recipients. Bill was a pioneer on both sides of the idea/object divide. On the idea side, he published a paper in 1969 (“An Economic Theory of Technological Change,” American Economic Review) that anticipated everything in my 1990 paper. (For you insiders, he already had a model of monopolistic competition, even before the Dixit and Stiglitz model.) I’ve felt for years that this paper deserves far more attention that it has received. My 1990 paper has 100 times as many citations than his paper, so honestly, economists are not doing a very good job of rewarding priority. It made me feel that there was some order to our world, some coherence, some justice – even if delayed – to hear that Bill had won the prize.

Of course, as economists, it’s our job to disagree. It is a sign of Bill’s professionalism as a scientist, a discipline which requires a constant vigilance to keep confirmation bias and motivated reasoning in check, that he sees the weaknesses in his paper and the strengths in mine. I do my best to keep up. After he offered, yet again, an appreciation of my paper during the official press conference in Sweden, I leaned over, pretending to be in huff, and whispered to him, “I’m not going to let you get away with being more generous to my work than I am to yours!” then proceeded to return fire.

Bill has always understood that the human future hinges on the contest between the economics of objects and the economics of ideas. Even now, too few who have taken up Bill’s suggested policy of a tax on carbon that increases over time seem to appreciate that its most important effect will be to tip the contest in favor of the economics of ideas. And that to have this effect, it is the expectation of high future taxes that matters most. We both believe that only new discoveries can protect the environment and sustain material progress. We both believe that such discoveries are possible.

I am perhaps a bit more optimistic than Bill that the discovery and adoption of new low-carbon energy technologies will be less costly and less disruptive than everyone seems to think. (Did you notice those massive sacrifices that the doomsters were prescribing to save the ozone layer? Me neither.) Once people get serious about adopting some policy measure (any policy measure!) which foster discoveries that truly add social value, discoveries will follow.

And yes, yes, from a technical perspective, it is amazing what people working in both the government and the private sector have discovered about how to lower the cost of extracting fossil fuel. And yes, yes, gas is better than coal. But seriously. Wouldn’t it be better if we pointed the enormous power of the market-government innovation machine away from ever more reliance on fossil fuel? We don’t even need to spend more on discovery. All we have to do is spend differently.

On Alfred Nobel and The Nobel Foundation

In my lecture, I closed by expressing my deep appreciation for the system of prizes that Alfred Nobel envisioned and for the Nobel Foundation, which, for more than a century, has keep his vision alive. The prizes Nobel specified in his will–in Physics, Chemistry, Medicine and Physiology, Literature, and Peace–recognize those who have “conferred the greatest benefit to humankind.”

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which was added 50 years ago, fits in between the hard sciences and literature and peace. As a group, the Nobel Prizes celebrate the practical benefit that all people derive from the full range of intellectual inquiry that emerged from the scientific revolution and the Enlightenment. Now, more than ever, we must protect and nurture that commitment to intellectual inquiry.

To Young Economists

The economics profession is a lot more competitive than it was when Bill and I were graduate students, but even though it’s much tougher for a young scholar to get noticed these days, the intellectual possibilities in economics–both practical and conceptual–have never been greater. It is good that we have escaped from the Malthusian intellectual monopoly, but there is far more to do.

Economic theory sells people short by emphasizing the selfish pursuit of material goods. Sometimes people rise above our low professional expectations. I’m convinced that our discipline is, finally, ready to take the other parts of human motivation more seriously, both the ugly side revealed by “us versus them” and the better side too. To be relevant, to offer practical policy advice, economists must embrace the full range of motivation that William Faulkner alluded to in his Nobel banquet speech: “love and honor, pity and pride, and compassion and sacrifice.”