Paul M. Romer

Nobel 2018 | Urbanization Economics: The Macroeconomics of Smart Cities

Economist Paul Romer has held many titles, ranging from professor, to Chief Economist at the World Bank, to tech entrepreneur. Throughout the years, through his work, he has single-handedly reshaped how people think of concepts related to ideas, education and cities.

Paul M. Romer

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2018

At a glance

Born: 1955, Denver, USA

Field: Economic growth

Prize-winning work: Integrating technological innovations into long-run macroeconomic analysis

Not your average sabbatical: Took time away from academia to launch a highly successful tech start up, Aplia, which many credit as the beginning of online education

Programming language of choice: Python

Passed on politics: His father and brother chose politics while he studied physics, math and even cosmology

Putting a value on ideas  

Romer began challenging the status quo within the field of economics when he was in graduate school by rephrasing certain long-standing theories turning them into questions.

“One of the oldest questions in economics is what responsibilities fall to the government,” says Romer. “And what responsibilities can we give to individuals and let them independently compete, experiment, innovate. That’s kind of the government versus the market.”

During the time, economists tended to put a value on ideas and their relation to progress. The thinking was that ideas were produced outside of the market. Romer challenged this by saying that many ideas are refined and combined with other ideas within the market, meaning that they should be qualified as something that the market produces and distributes. This was the foundation of his endogenous growth theory, that shaped not only his own career, but made waves throughout the entire field.

In one of his most famous papers to date, this was the focus as Romer created a model of growth based on ideas. He formulated the difference between ideas and objects, along with a definition of rules and norms. The difference between an idea and an object, according to Romer, is fundamental.

“Something like the Pythagorean theorem can be used by everybody,” he says. “Whereas a kilogram of copper can’t be used by more than one man or one company at the same time. It’s this capacity for simultaneous use.”

While he was mostly focused on the concept of ideas in his early work, rules and norms have become just as important. Without the combination of all three, Romer doesn’t think we would have the kind of progress we see today.

“Rules and norms are reflections of things operating inside people’s heads,” he says. “Norms are things people feel. Rules are closer to things like laws. We might pass a law because we want to change norms about right and wrong in a way that will be beneficial for everybody.”

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Innovation and growth

Building a different kind of world  

It was the notion that ideas lead to the discovery of more ideas, and having the ability to share this knowledge with everybody, that led Romer down a different path: urbanization.

“I started thinking about urbanization as part of the practical work that came from my insight that this duality between new technologies and new norms is the key to progress,” he says.

He began by looking at norms in the past and, specifically, at cases where a subset of society who has a different set of norms breaks away and establishes a new culture instead of being the minority, something Romer refers to as being “a startup.”

“My message was those who really want to seize this modern world and already have values that are inclined in that direction, go to a startup,” he says. “You can show the way and then other people will follow and join your new city. Through that process, you can actually change the entire set of norms in a society.”

Romer wanted to find a university that could start a new center focusing on urbanization, not from the perspective of architecture and design, but more from the perspective of social science and history in progress. He found that place at the NYU Marron Institute of Urban Management.

“What cities give us is the possibility to go find the right person with the right ideas,” he says. “It’s the interaction with other people that makes us smarter. If I have a question about policing, vaccinations, public health, I can go meet somebody who knows a lot about one of those domains and talk to that person. But for that to be possible, I have to get to where that person is. And so those logistical, organizational details are what are required before you can unleash this power of helping cities make everyone smarter.”

While the term “smart cities” has become a trending topic and buzz word, Romer thinks the focus should be reversed. 

“If you think back to what was good about the internet, it was the dumb platform and so I think we should really be thinking about dumb platforms, not smart cities,” says Romer. “The street grid in Manhattan is a dumb platform. There’s nothing built into it. There’s no special technology. But if you’ve got a good platform that everybody can count on, you can layer everything else on top of it.”

The biggest mistake in urbanization, according to Romer, is a failure to allow enough physical surface for public space. It is this surface area, arranged in a grid-like structure, that lets people connect.

I think we should really be thinking about dumb platforms, not smart cities.

Building cities from the ground up

Rethinking global warming    

Romer was awarded the Nobel Prize in Economic Sciences in 2018 along with William Nordhaus, which many saw as a significant pairing, including Romer himself. 

“When I got the call from Sweden, the really good news was that I was paired with Bill Nordhaus,” says Romer. “I have a great respect for Bill, and I couldn’t think of a better person to be affiliated with. There’s also a message in that pairing. One, that carbon emissions and global warming is a very serious problem, and that the potential for discovering new ideas is how we’re going to solve it.”

Romer has an optimism not shared by many when it comes to solving global warming. He believes the biggest barrier is simply a lack of effort and incentives to do so. With the right incentives put in place, he believes that the market will come up with entirely new ways to produce and distribute energy. 

As with most of his work, Romer has a concrete example that he uses as proof this is tangible. He likens the situation to the ban on chlorofluorocarbons (CFC) in the US in 1980s. 

CFCs are chemicals that contain carbon, chlorine and fluorine atoms, mostly commonly used in the production of things like aerosol sprays and packing materials. While essentially nontoxic, CFCs have contributed to ozone depletion. The US encouraged a ban on the production of CFCs and went on to negotiate treaties throughout the world. 

“Before the ban went into effect, the leaders in industry who were producing all these chemicals we’re saying, ‘The economy can’t survive, our way of life will be threatened.’ It was just all nonsense,” says Romer. “Nobody even noticed the small changes we had to make to find something else other than chlorofluorocarbons to use. It was a very successful example of a strong government solving a problem in a way that helped everybody.”

While Romer admits it’s an easy time to be pessimistic, he sees the possibilities in terms of production and the technological physical opportunities as enormous.

“The reason we’re facing difficulty right now is to take advantage of those possibilities,” he says. “It’s not enough for individuals to just try and make money. We’ve got to have a structure for the economy that encourages ways to make money which are not harmful.”

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Global warming is a very serious problem, the potential for discovering new ideas is how we’re going to solve it.

Looking back on a legacy 

When Romer reflects on his career as an economist, it’s his ability to learn from mistakes that he is most proud of. 

“I had a first-generation model of ideas and growth,” he says. “And then I realized it was wrong. I think there’s no truer sign of how science should work than a willingness of the individual to say, ‘That was a nice try, it’s wrong.’ And that’s really the spirit I’d like to be remembered for.” 

After all of his years in economics, and varied career, he still sees a lot of room for growth in the field of which he loves. Viewing economics as a collective endeavor is something that he believes needs more focus. 

“A fact beats a theory every time, and theories have to be logically coherent,” he says. “If we stay committed to those principles, then we’ll make progress. I’m more interested now in trying to explain, encourage, and help everybody invest in the kind of process that leads to those insights, because it’s all of the insights that have yet to come that are going to matter for quality of life in the future.” 

Prioritizing facts over theories has not typically been the approach that economists take, and this is something Romer hope will change in the future. 

“Part of my evolution now is that there’s a problem in economics as a science,” he says. “Because people were so committed to promoting the market, they decided to make theory be more important than facts. We have to get back to theory as a way to clarify, simplify and communicate. I think that would be a huge step forward.”

While Romer thinks economics has a long way to go as a field, ever the optimist, he’s hopeful for the future. 

“Economics is in kind of a mess right now,” he says. “But young people should take that as a sign of opportunity because it’s ripe for some new reorientation. I think that the mess – a chance to build something better – is going to attract smart people, and they’ll leave their mark on the field.”

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