The Nobel Prize in Economics has been announced

8 October, 2018

The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018 to  William D. Nordhaus for integrating climate change into long-run macroeconomic analysis and Paul M. Romer for integrating technological innovations into long-run macroeconomic analysis.

According to the Academy, Nordhaus and Romer 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. 

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CERGE-EI director Michal Kejak comment on this year's laureates:

"Paul Romer received the Nobel Prize for the creation of the macroeconomic theory of technological innovation in the form of a model of endogenous technological change, allowing us to explain the mechanism of long-run growth and why some countries grow and others stagnate for long periods.

He replaced in a revolutionary manner the standard macroeconomic model framework with perfect competition by the one with monopolistic competition. Romer stated that the main source of progress is new ideas, new technological blueprints, goods which are nonrival (they do not lose their content even when consumed by a large number of consumers), e.g. a new internet search algorithm. Such nonrival goods must be protected by patents in order to achieve (at least partial) excludability and thus giving the innovators temporary monopoly power to cover their innovation costs.

The second economist awarded is William Nordhaus, who has been engaged in developing a global interdisciplinary model called DICE (a Dynamic Integrated model of Climate and the Economy), capturing interactions between the development of the economy and the natural environment, and their effects on climate development.

Both the awarded approaches are global and long-term, and built upon the concept of externalities: positive knowledge spillovers in the case of Romer, and negative environmental pollution in goods production in the case of Nordhaus.

There are some optimistic messages in these theories, as the existence of externalities creates potential room for government intervention, allowing it to establish well thought out policies to provide incentives to producers and consumers in market economies in order to achieve long-term sustainable growth in conjunction with climate balance."