New York University economist Paul Romer and Yale economist William Nordhaus have been jointly awarded this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Of the two, Romer's contributions are much more fundamental and far-reaching.
Romer won based on his conceptual overthrow of old-fashioned limits-to-growth economics. As the Nobel Committee notes, Romer "showed that growth driven by the accumulation of ideas, unlike growth driven by the accumulation of physical capital, does not have to experience decreasing returns. In other words, ideas-driven growth can be sustained over time." Economic growth and wealth creation is limited only if one believes that human ingenuity is limited.
In my 2001 Reason article "Post-Scarcity Prophet," I explained that Romer's "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."
As some countries adopted institutions that foster human ingenuity—e.g., free markets, strong property rights, and scientific liberty—economic growth accelerated. Global GDP stood at $3.4 trillion in 1900 (in constant 2011 international dollars). Since then, global economic growth has averaged about 3 percent per year, boosting that figure to more than $116 trillion by 2017.
The Nobel Committee conferred the prize on Nordhaus based on his development of integrated assessment models (IAMs) to project the effects of future climate change on economic growth and the accumulation of wealth. As the committee observes, "Nordhaus' model is now widely spread and is used to simulate how the economy and the climate co-evolve. It is used to examine the consequences of climate policy interventions, for example, carbon taxes."
A year ago, I wrote about a new analysis by Nordhaus and his colleague Andrew Moffatt that used 36 IAMs to project the future costs of climate change. The duo found that the projected increases in average global temperatures—between 3 and 6 degrees Celsius—would reduce global GDP from what it would otherwise have been by between 2 and 8 percent by 2100. To illustrate concretely what such projections would mean, I sketched a scenario in which world population reached 9 billion and global GDP grew at an average rate of 3 percent annually until 2100. In that scenario, world GDP without climate change would rise to $872 trillion and income would be $97,000 per capita. Assuming a 3°C increase in average temperature, that would reduce global GDP from $872 trillion to $854 trillion, and income to $95,000 per capita. At 6°C, the figures would be $800 trillion and $89,000 per capita. Current global GDP per capita is about $10,000.
In an interesting coincidence, the United Nations Intergovernmental Panel on Climate Change today released its new report on Global Warming of 1.5°C. Citing new IAM projections in Chapter 3 of that report, the IPCC asserts that an increase in global average temperature of 3.66°C would result in a global GDP loss of about 2.6 percent by 2100, as compared with 0.3 percent in the 1.5°C scenario and 0.5 percent in the 2°C scenario. Roughly speaking ($872 trillion x 0.026), that means world GDP would be about $23 trillion lower than it would have been had average temperature not risen by 3.66°C.
Oddly, the new IPCC report cites an unpublished study by Tyndall Centre environmental scientist Rachel Warren and her colleagues that suggests mean net present values of climate-change-induced damages (including market impacts, non-market impacts, impacts due to sea level rise, and impacts associated with large scale discontinuities) will increase to $551 trillion if average global temperatures rise by 3.7°C, by $69 trillion if the increase is 2°C, and by $54 trillion if the temperature can be restrained to just 1.5°C.
How seriously should policymakers and the public take IAM projections? Not very, says Massachusetts Institute of Technology economist Robert Pindyck. He acknowledges the models' pedagogical and theoretical usefulness, but he persuasively argues that they "have crucial flaws that make them close to useless as tools for policy analysis." He pointedly adds, "These models can be used to obtain almost any result one desires." These analyses, he concludes, "create a perception of knowledge and precision that is illusory and can fool policymakers into thinking that the forecasts the models generate have some kind of scientific legitimacy."
Ultimately, man-made global warming is an open-access commons problem, the consequences of which will be substantially curtailed by the technologies and wealth created by human ingenuity. In other words, they'll be mitigated by the forces explored by Romer.