'Ideas', Limits to Growth & Non-Zero sum games: A Nobel-winning thesis
On integrating technological innovations into long-run macroeconomic analysis, and its impact on conquering humanity's core ideological battle. Part of Imprint series.
Today, I’m pulling an old note from my archives about a Nobel Prize-winning work, that draws the relation of prosperity & progress to ideas, and reveals their potential to rescue humanity from the rhetoric of ‘us vs them’ thinking.
Any guesses on who the economist in question is?
Yes, it’s Paul Romer, who shared the 2018 Nobel Prize in Economics with William Nordhaus! Romer, who teaches at New York University, made ‘technological change’ an internal parameter in dominant economic growth models, by linking investment in human capital, innovation, and knowledge to economic growth. Underlying his Endogenous Growth Theory (EGT), he pinpointed that the nonrivalry of ideas is ultimately responsible for the rise in living standards over time.
Systems’ Insights OR TL;DR, gimme the dessert!
Get the context: Understanding and appreciating a work done over 40 years requires a shift in frame to place it back in the reigning context of the time. This skill needs constant practice and mindfulness - and pays dividends!
Capture the essence in a title: “On the Possibility of Progress” is a BEAUTIFUL summary of the work and its scope, where each word plays a crucial role. Writing like this is something I’m still learning!
Time-proof your metrics: How would you measure human progress over millennia? Can you think of a crisp, useful metric that will stand for generations to come?
Measuring the right thing the right way is what makes or breaks important initiatives. Work to find the right metrics from the get go!
Don’t get trapped in Linear thinking: Many of our sciences have benefitted from starting with a “paradigm of simplification” that isolates objects from their environments. While this is great for a beginning study of the interactions that create observable phenomena, “blind intelligence” with overconfidence on a reductionist way of thinking can lead us astray in facing complex problems.
A few ways this happens is by creating unanticipated consequences, by entrenching new norms and mental models, by creating new power structures and by underestimating the power of emergence (to solve or create problems).
Understand that Economics is personal and reigning mental models are important: The reigning economic models create the paradigms we, as a society, unwittingly follow. In Systems language, these are the immovable norms that make change hard - An “Us vs them” mental model results in protectionism, radicalism, and increasing polarisation we see today, and Romer attempts to shift this mindset with his findings.
Romer’s work provides a great mirror to where these arise from!
Let’s begin!
[PS. If you like what you see, do forward to your friends. They can sign up with the button below.]
The lecture this Imprint1 is based on is called:
On the Possibility of Progress2
I find the title visionary, as it defines a very clear scope for his work.
How?
He starts with the question of the “possibility” of progress. I find it especially relevant in an era where globally, we have started facing difficult questions about human progress and its implications, as we face climate & humanitarian crises and strong divisive rhetorics, supported by digital technologies.
[Recommended: Zeynep Tufecki’s brilliant newsletter, Insight, for more on this. Her Systems Thinking-based approach has been covered by NYT. Link goes to a recent, related piece.]
Context
Let’s step back and look at growth under Neoclassical Economics from the 70s.
Most economic models were still quite simplistic at the time. Growth, the holy grail underlining the importance of economics (and economists), was modeled via ‘Exogenous’ technological inputs. In simpler words, this means that the growth was driven by technological progress, but the economic model didn’t explain just where this technology came from. Romer’s key contribution has been to explain growth, by making his model explain where technological progress comes from - and also embracing a complex system which looks at the limits of growth.
Understanding Paul Romer’s work requires you to place yourself in the context of a different world, in the 1970s, when he began his research - and here I borrow heavily from his talk. At the time, there was:
Growing negative impact of technology in the form of unanticipated consequences: CFCs & Ozone depletion, the harmful effects of DDT and the linkage of cigarettes to Cancer, were a few out of many emerging evidences of the negative consequences of last few decades’ positive progress in science & commerce.
Extended stagflation after a Post-war Boom: In this period, governments’ economic policies had started failing for the first time in decades. Countries faced insurmountable challenges of stagflation - a concept economists hadn’t yet solved for.
A perceived approach of a Growth Wall: There was a pervasive belief in the finiteness of resources, and when Economics and Science started failing, it was presumed that it’s because the world had hit the growth wall. An early example of this concept is in Thomas Malthus’ work on Population & Growth, which painted growth as self-cannibalising. The Solow-Swan model, the classical model of the time, on the contrary predicts a convergence to a steady state of growth.
[Sidenote: I remember reading some of Malthus’ works in school and blaming his thesis for the Brits’ lackadaisical approach to the famines in Bengal, India in the 1800s. His work labeled them a necessary corrective to India’s overpopulation and limited resources, and was used by British politicians as a flimsy excuse for their racism towards Indians.]
Coming back, here’s a basic Loopy3 model made by me, illustrating this concept.
In a nutshell, there were rising concerns due to the trends of this time about limits to growth. The economic models of the time didn’t incorporate this. On top of this, the models kept technological progress & its impact constant, making it exogenous. There was no link between the impact of growth on technology use and vice versa.
The breakthrough of the Romer EGT model was in decoupling ‘human capital’ (ideas, skills and innovation) from other forms of ‘capital’ that created diminishing returns over time. He showed that human capital behaved differently. First, it created compounding, not diminishing, returns over time, and second, it was nonrival.
Ideas are an interesting form of capital.
Ideas are unlike other factors of production. Copper being used by me would mean lesser copper available for you to use. Labor being used by you would mean less labor available for me to use. This finiteness creates a natural competition between individuals, groups and nations for access and control of resources. This is best framed as a zero-sum game, and zero-sum games without payoff for cooperation promote an ‘US VS THEM’ (or antagonistic) thinking. Psychologists Rozycka-Tran, Boski et al. (2015) state4:
A general belief system about the antagonistic nature of social relations, shared by people in a society or culture and based on the assumption that a finite amount of goods exists in the world, in which one person's winning makes others the losers, and vice versa ... a relatively permanent and general conviction that social relations are like a zero-sum game. Those who share this conviction believe that success, especially economic success, is possible only at the expense of other people's failures.
One can see signs of this thinking from the underlying truth of the picture below. A row of students study by streetlight, as they struggle to access basic innovations.
Ideas are unbound to zero-sum principles or finiteness. They are thus, non-rival. In addition, ideas prosper when they meet more ideas, to accelerate innovation from an infinity of possibilities.
Romer hails this paradigm of ideas (and innovation), harking to this picture and asking us to imagine how the right access to technology would enable these students (and others!) to create more innovation for the world.
“Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered.”
Romer’s ideas have changed the way the global economy, nations and organisations look at growth.
He played an important role in creating incentive for policymakers to invest in education, R&D and in human capital.
The EGT also broke away from a ‘convergent’ model of economics, where nations were moving towards a common, steady growth rate, to a ‘divergent’ model of economics, where developed nations grow and progress faster than the developing countries, widening the gap between them. These predictions align with observations of the last 2-3 decades.
It also encouraged policies that embrace openness, competition, change and innovation, linking these to the promotion of growth.
Measuring Progress
A winning part of the talk for me is in the definition (and measurement) of progress. William Norhaus, Romer’s co-winner, put progress in “time-proof metrics” to enable comparison across centuries and millennia in output-for-labour terms.
The metric used is ‘lumen-hours’5 - which is the number of lumens of light that can be bought by an hour of work.
This metric shows that there has been a 350,000 fold progress over millennia.
Tim Hartford writes a lovely piece on man’s journey with light: fire to candles, bulbs & LED.
I believe the seminal work of Paul Romer definitely validates the feedback created by progress in enabling more progress, and I await the next Nobel laureate who helps us understand how this feedback can be strengthened as we see diminishing returns to progress on our finite world.
I will call it “On the longevity of progress”.
What do you think? Drop me a line (just hit reply or leave a comment through the button below) - I’d love to hear from you!
Read about the formats planned on Symptoms to Systems, on our launch post, “Systems Thinkers, assemble!” from January 2021. Here I share the Imprint series: “Content such as essays, articles, perspectives, books or videos, that merits to be shared for its depth of insight.”
Loopy is a great tool developed by Nicky Case, that enables thinking in systems using simulations that you can play with. Go ahead, try it.