Paul Romer: Ideas, Nonrivalry, and Endogenous Growth

DOIhttp://doi.org/10.1111/sjoe.12370
Date01 July 2019
AuthorCharles I. Jones
Published date01 July 2019
Scand. J. of Economics 121(3), 859–883, 2019
DOI: 10.1111/sjoe.12370
Paul Romer: Ideas, Nonrivalry, and
Endogenous Growth*
Charles I. Jones
Stanford University,Stanford CA 94305-5015, USA
chad.jones@stanford.edu
Abstract
In 2018, Paul Romer and William Nordhaus shared the Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel. Romer was recognized “for integrating technological
innovations into long-run macroeconomic analysis”. This article reviews his prize-winning
contributions. Romer, together with others, rejuvenated the field of economic growth. He
developed the theory of endogenous technological change, in which the search for new ideas by
profit-maximizing entrepreneurs and researchers is at the heart of economic growth. Underlying
this theory, he pinpointed that the nonrivalry of ideas is ultimately responsible for the rise in
living standards over time.
Keywords: Economic growth; endogenous growth theory; ideas; nonrivalry; technical change
JEL classification:O3; O4
I. Introduction
When Paul Romer began working on economic growth in the early
1980s, a conventional view among economists (e.g., in the models
taught in graduate school) was that productivity growth could not be
influenced by anything in the rest of the economy. As in Solow (1956),
economic growth was exogenous. Other models had been developed in the
1960s, as discussed further below, but these failed to capture widespread
attention. Romer developed endogenous growth theory, emphasizing that
technological change is the result of efforts by researchers and entrepreneurs
who respond to economic incentives. Anything that affects their efforts,
such as tax policy, basic research funding, and education, for example, can
potentially influence the long-run prospects of the economy.
Romer’s fundamental contribution is his clear understanding of the
economics of ideas and how the discovery of new ideas lies at the heart of
economic growth. His 1990 paper is a watershed (Romer, 1990a). It stands
*I am grateful to Ufuk Akcigit, Pete Klenow, Per Krusell, Paul Romer, and Chris Tonetti for
helpful comments and suggestions.
Research Associate, National Bureau of Economic Research.
C
The editors of The Scandinavian Journal of Economics 2019.
860 Paul Romer: ideas, nonrivalry, and endogenous growth
as the most important paper in the growth literature since Solow’s Nobel-
recognized work. In this article, I review Romer’s prize-winning work,
putting it into the context of the surrounding literature and providing a
retrospective on how this research has led to the modern understanding of
economic growth. The remainder of this introduction seeks to distill these
insights into several pages, while the rest of the article delves more deeply
into the details.
The history behind Romer’s path-breaking 1990 paper is fascinating
and is engagingly presented by Warsh (2006). Romer had been working
on growth for around a decade. The words in his 1983 dissertation and
in Romer (1986) grapple with the topic and suggest that knowledge and
ideas are important to growth. Of course, at some level, everyone knew
that this must be true (and there is an earlier literature containing these
words). However, what Romer did not yet have – and what no research
had yet fully appreciated – was the precise nature of how this statement
comes to be true. By 1990, though, Romer had it, and it is truly beautiful.
One piece of evidence showing that he at last understood growth deeply is
that the first two sections of the 1990 paper are written very clearly, with
brilliant examples and precisely the right mathematics serving as the light
switch that illuminates a previously dark room.
Here is the key insight: ideas – designs or blueprints for doing
something or making something – are different from nearly every other
good in that they are nonrival. Standard goods in classical economics
are rival: as more people drive on a highway or require the skills of a
particular surgeon or use water for irrigation, there are fewer of these
goods to go around. This rivalry underlies the scarcity that is at the heart of
most of economics and gives rise to the fundamental theorems of welfare
economics.
Ideas, in contrast, are nonrival: as more and more people use the
Pythagorean theorem or the Java programming language or even the design
of the latest iPhone, there is not less and less of the idea to go around.
Ideas are not depleted by use, and it is technologically feasible for any
number of people to use an idea simultaneously once it has been invented.
Consider oral rehydration therapy, one of Romer’s favorite examples.
Until recently, millions of children died of diarrhea in developing countries.
Part of the problem is that parents, seeing a child with diarrhea, would
withdraw fluids. Dehydration would set in, and the child would die. Oral
rehydration therapy is an idea: dissolving a few inexpensive minerals,
salts, and a little sugar in water in just the right proportions produces
a solution that rehydrates children and saves their lives. Once this idea
was discovered, it could be used to save any number of children every
year – the idea (the chemical formula) does not become increasingly scarce
as more people use it.
C
The editors of The Scandinavian Journal of Economics 2019.

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