The Nobel Prize in Economics

Paul Romer is a genius.  He was a nominee for the 2011 Nobel Prize for economics.   Here is a man who looks continuously at the human condition and tries to make it better by making it more understandable.  He does it with numbers, cosmic thinking and tenacious research.  He embodies what I love about economics.

Romer is the son of former Colorado Governor, Roy Romer.  He has an undergraduate degree in physics and a doctorate in economics.  He and I are probably not hitting for the same political team, but that doesn’t matter.  He is intelligent, hard working and plays by the rules.  That is all I ask from anyone.  This man speaks my language.

Since Romer started as a physicist he probably has heard that no one could explain Albert Einstein’s theories better than Einstein himself.  Likewise, no one explains Romer’s economics better than Romer.  He talks about how societies can increase production and economic growth.  This is certainly the action needed to restore job growth, economic stability and the preeminent position of the United States in the global community.  Romer’s work starts with the contention that societies continuously rearrange their finite resources to produce more and better products.  He compares this to how people work in a kitchen.  You use the various and limited materials in the kitchen to make everything from a fine dinner to a simple snack.  If you only have three eggs in the house on a snowbound winter morning, you may not have enough to make scrambled eggs for the whole family, but you can use one egg to make pancakes and have plenty of food to feed the troops.  It is a matter of choices. 

He describes how productivity transfers to increased income.  There is a simply way to figure how long it takes for something to double.  You simply divide the rate of growth into 72.  Quoting Romer’s own example, India doubled its income every 40 years.  China’s income doubled every 12 years.  The US’s doubling rate was every 31 years.  It becomes easy to see why China is a burgeoning economy, why India’s is stagnant, and which direction our country is trending.  By asking why these rates are different we come up with a very human element in the equation—the human capacity for ideas.

It is true that America is blessed with a wide palette of resources, but so are other countries which have failed to use them productively up to this point.  There are also many small countries with limited resources that have become economic powers—think Switzerland and Taiwan.  Romer presents mathematical models and compelling narrative to show how ideas have made the difference between successful and failed countries.   Investing in human capital (healthy, educated, work oriented people) and doing nothing to interfere with their use, exchange and adaption of ideas, can produce growth in an economy.  In addition, he advocates putting incentives in place for privately held ideas to be put to work within the borders of the country, enriching their own people.

 Government rules should encourage entrepreneurship, not inhibit it.  He is not opposed to governmental regulation, but it should never be designed to extend the status quo.  Romer is quick to point out the problems that can come from too much governmental tampering with the machinery of production.  He is just as quick to point out that governmental support for education and training benefits the private enterprises that produce growth. 

To Romer, the solutions lie in each of us.  Governments should provide a rich environment for its citizens to grow production, and then step back.  Genius!

Promote genius and keep the faith.