Lessons from a Nobel Prize winner on the role of government in innovation

New York University professor Paul Romer, who shared this year’s Nobel Prize for economics, documented, quantified and confirmed the assumption that innovation leads to economic growth.

In its announcement, of the award, the Nobel Prize committee said Romer and William Nordhaus “have designed methods for addressing some of our time’s most basic and pressing questions about how we create long-term sustained and sustainable economic growth.”

Romer’s work has focused on confronting the rapid pace of technological change by showing how knowledge can function as a driver of long-term economic growth.

It’s great to have this affirmed because politicians inevitably bang on about the great boost to economic growth they are generating when they announce they are pumping more public money into science, research and innovation.

But as this article in Fortune points out, Romer did more.

He showed that government policies have a salubrious effect on innovation. In other words, the right laws and regulations are the lubricant for turning great ideas into economy-sustaining growth. 

As The Economist explained this week: “In Mr. Romer’s models of growth, the market generates new ideas. But the pace at which they are generated, and the way in which they are translated into growth, depend on other factors—such as state support for research and development or intellectual-property protections.”    

Technologists who hit the mythical “product-market fit” and subsequently get stinking rich genuinely believe they got there all by themselves. It’s as if they’re able to explain their good fortune according to some pure laws of capitalism that don’t exist. Paul Romer’s research is an antidote to such thinking. And a welcome one.    

He shared his thinking this week with Wall Street Journal readers in an article headed Government Can Do More to Support Science and Innovation: 

The US government is divided and so are the people. But perhaps we can all agree that the economic growth of the 20th century, driven by robust markets and technological innovation, was good for everyone. The government can do more than most policy makers realize to sustain this long-term, broadly shared growth through investment in science.

He sets out three recommendations for the 116th Congress to support the sciences and foster innovation.

This should be must reading for Jacinda Ardern, Megan Woods and the rest of their team.

In an article in Forbes, writer says  business professionals can learn a valuable lesson about the path to economic growth and innovation, too, from Paul Romer:

The Nobel Prize committee noted that previous macroeconomic research had emphasized technological innovation as the primary driver of economic growth, but had not modeled how economic decisions and market conditions determine the creation of new technologies. Romer “solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.”

In 1990 Romer laid the laid the foundation for what is called endogenous growth theory. The theory is both conceptual and practical, because it explains how ideas are different from other goods and require specific conditions to thrive in a market.

Endogenous is a term that refers to something that is produced, originates or grows from within. Endogenous growth theory thus holds that economic growth is primarily the result of internal and not external forces. 

Simply put, investment in human capital, innovation, and knowledge are crucial contributors to economic growth.

Romer believes there is no basis for complacency when looking at past innovation successes.

He says there are new things we need to do in the labor market, in education, and in thinking about the future of energy sources. As long as we do those things everything can turn out fine – “but if we don’t do them, we’re going to be disappointed.”

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