Paul Romer on Economic Growth
By David Henderson
I’ve been busy since about 5 a.m. writing the Wall Street Journal op/ed on the 2 Nobel Prize winners. This year was easier than average because I know Romer’s and Nordhaus’s work well.
I’m just coming up for air.
Paul wrote a piece on economic growth for The Concise Encyclopedia of Economics. His piece is one of the more popular ones that professors put on syllabi.
Here are some of my favorite segments from Economic Growth.
On the power of compounding:
People are reasonably good at forming estimates based on addition, but for operations such as compounding that depend on repeated multiplication, we systematically underestimate how quickly things grow. As a result, we often lose sight of how important the average rate of growth is for an economy. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in pennies, pounds, or pesos? For a nation, the choices that determine whether income doubles with every generation, or instead with every other generation, dwarf all other economic policy concerns.
On the importance of little discoveries:
Take one small example. In most coffee shops, you can now use the same size lid for small, medium, and large cups of coffee. That was not true as recently as 1995. That small change in the geometry of the cups means that a coffee shop can serve customers at lower cost. Store owners need to manage the inventory for only one type of lid. Employees can replenish supplies more quickly throughout the day. Customers can get their coffee just a bit faster. Although big discoveries such as the transistor, antibiotics, and the electric motor attract most of the attention, it takes millions of little discoveries like the new design for the cup and lid to double a nation’s average income.
(By the way, someone else who does this well is Donald Boudreaux. His article “The Prosperity Pool” is one of my favorite pieces he’s ever written.)
On chemical refineries and cows:
Instead of just mixing elements together in a disorganized fashion, we can use chemical reactions to combine elements such as hydrogen and carbon into ordered structures like polymers or proteins. To see how far this kind of process can take us, imagine the ideal chemical refinery. It would convert abundant, renewable resources into a product that humans value. It would be smaller than a car, mobile so that it could search out its own inputs, capable of maintaining the temperature necessary for its reactions within narrow bounds, and able to automatically heal most system failures. It would build replicas of itself for use after it wears out, and it would do all of this with little human supervision. All we would have to do is get it to stay still periodically so that we could hook up some pipes and drain off the final product.