The Economics of Bliss: The 2018 Noble Prize in Economics

The Economics of Bliss: The 2018 Noble Prize in Economics
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TANVEER AHMAD KHAN

The Nobel Memorial Prize in Economic Sciences, officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Swedish: Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is awarded annually by the Royal Swedish Academy of Sciences to researchers in the field of economic sciences. The award (50th in economics) for this year was given to two American Economist’s William D. Nordhaus and Paul M. Romer for their pioneering work in the field of growth economics. Economic growth has been the concern of most economists since the birth of subject as such. Earlier economists were concerned mainly about raising the level of GDP over a sustained period of time. They considered growth as an end in itself. The above pair of economists have analysed the growth question in depth with focus on its impacts and causes.
The impact of growth on environment has been tremendous. The stupendous growth witnessed by the developed nations in the previous century has contributed greatly to the deteriorating environmental health. The major issue of climate change impending on the world is the direct result of blind economic growth. William D. Nordhaus, from Yale University, has been the chief architect of quantifying the impact of economic growth on climate and, in turn, impact of climate change on economic growth. Nordhaus received the prize “for integrating climate change into long run macroeconomic analysis”. He called for the imposition of certain environmental taxes like carbon tax to impose penalty on the economic growth for the damage it does to the environment. He is of the view that economic growth has certain negative “spillovers” which impede the long run growth. So a corrective taxation needs to be put forward to curb the environmental damage.
Paul Romer , on the other hand, is known for his Endogenous Growth Model wherein he put forward the role of technological progress for sustained growth of an economy. Romer’d work on the economics of ideas and the externalities generated by innovative ideas led him to conclude that technological innovations will be underprovided by the market. He was of the view that the ideas share certain characteristics with public goods which makes it difficult for the market to ration them. So, he called for the use of taxes, patents, copyrights and subsidies for the innovators to give them an incentive to invent and innovate(as invention was considered to be the main determinant of long term sustained growth rate of an economy). Romer was concerned mainly with developed nations and how they exhibit long run growth when Robert Solow has postulated that growth processes will slowdown. Paul Romer maintained that it is the innovations which give the developed nations a temporary monopoly in the domestic and world markets and brings growth to the system.
However, Noble Euphoria does not let them to escape from criticism. They were mainly concerned with market failures created by externalities and increasing returns. But, quantifying the impact of externalities leaves a lot to subjective judgment. It is not easy to compute the right amount or what we call as optimal amount of pollution for the economy. Imposition of corrective taxation and subsidies to correct externalities is very difficult to evaluate objectively. Also the extensive use of mathematics (especially the mathematics of Romar Model) renders their models susceptible to the variability of data. Their work also found limited application to developing world where quantifying an externality is not a cake walk for economists and statisticians. So the main criticism of their economics lies in its limited applicability to the real world problems and complexities.
Keeping aside the serious criticism labelled against them, the decision of the committee to award the Nobel prize to these two economists is well acclaimed. The award was given for their efforts to achieve a ‘Sustainable and Sustained Growth Process’. The accolades given to them will inspire new generation research into the field. So, we envisage that research into the new field will provide us with required tools and techniques to quantify the unquantifiable and will serve as a means to achieve green and sustained future growth.

—The author is pursuing M.A in Economics from Kashmir university. He can be reached at: khantanveerlearner@gmail.com