As one of the chief architects of “New Growth Theory,” Paul Romer has had a massive and profound impact on modern economic thinking and policy making. New Growth Theory shows that economic growth doesn’t arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a “dismal science” that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer’s formulation, really do have consequences. Big ones.
Before New Growth Theory, economists recognized that technology contributed substantially to growth, but they couldn’t figure out how to incorporate that insight into economic theory. Romer’s innovation, expressed in technical articles with titles such as “Increasing Returns and Long-Run Growth” and “Endogenous Technological Change,” has been to find ways to describe rigorously and exactly how technological progress brings about economic growth. As Robert Solow told Wired in 1996, “Paul single-handedly turned [the study of economic growth] into a hot subject.”
At one point Bailey asked about why are people richer today than they were 100 years ago. Romer’s rely makes a nice point about how little changes in the way we do things can add up to be big changes in welfare:
Many things contributed, but the essential one is technological change. What I mean by that is the discovery of better ways to do things. In most coffee shops these days, you’ll find that the small, medium, and large coffee cups all use the same size lid now, whereas even five years ago they used to have different size lids for the different cups. That small change in the geometry of the cups means that somebody can save a little time in setting up the coffee shop, preparing the cups, getting your coffee, and getting out. Millions of little discoveries like that, combined with some very big discoveries, like the electric motor and antibiotics, have made the quality of life for people today dramatically higher than it was 100 years ago.
One small step for Starbucks …