Why the leading economist of innovation sees a central role for cities

Two years ago, in 2016, we did our best to nudge the Royal Swedish Academy of Sciences to give the Nobel Laureate in Economic Sciences to Paul Romer.  It turns out we were just a couple of years early. Yesterday, the Academy, announced Romer as the 2018 economics laureate (along with William Nordhaus).

This should be of far more than academic interest to urbanists. As we argued in our missive two year’s ago, Romer’s work has a lot to say about cities.  With typical modesty, Romer’s response to winning the prize was to move a short, non-technical post summarizing the work to the top of his personal blog. It features a prominent role for cities as engines of innovation, progress and wealth creation:

One of the biggest meta-ideas of modern life is to let people live together in dense urban agglomerations. A second is to allow market forces to guide most of the detailed decisions these people make about who they interact with each other. Together, the city and the market let large groups of people cooperate by discovering new ideas, sharing them, and learning from each other. The benefits can show up as a new design for a coffee cup or wages for a worker that grow with experience acquired in jobs with a sequence of employers. People living in a large city cooperate with residents there and through many forms of exchange, with residents in other cities too. Cities connect us all together. China’s growth reflects is rapid embrace of these two big meta-ideas, the market and the city.

We won’t try to summarize all of Romer’s work here.  Suffice it to say, he deserves enormous credit for focusing our attention on the importance of creating new ideas as a principal means of driving economic growth and improvements in well being. As the quote above illustrates, he sees a central role for institutions, like cities, in creating the environment in which knowledge creation can flourish. And he’s proven many times that his is a clear and outspoken voice for realizing the potential his theories describe.

First, in a series of papers published a couple of decades ago, Romer was responsible for some of the key breakthroughs in what is called “New Growth Theory,” which re-writes the mechanics of long-term economic growth in a fundamental and optimistic way. We described the key insights from of these theories a couple of months ago at City Observatory. Romer’s long been short-listed for the prize on account of this work, awaiting it seems, only sufficient quantities of gray hair to take his turn.

Second, in the past few weeks, Romer has turned the economic world on its head with a scathing critique of deep flaws in the past two decades of macroeconomic theorizing. In a paper entitled, “The Trouble with Macroeconomics,” Romer indicts the state of macroeconomics, and its growing detachment from the real world. The abstract of this paper reads as follows:

For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

You may never read economics papers: But you should read this one. The paper bluntly calls much of the published work in macroeconomics “unscientific” and Romer re-labels some widely used economic terms as “phlogiston” and “aether” and “caloric” and describes the entire fields as “post-real” macroeconomics.

In the academic world, Romer’s paper is the equivalent of Martin Luther’s having nailed his 95 theses to the door of the Wittenberg Cathedral (which, incidentally was 499 years ago, this month). As Romer himself has pointed out, few of his criticisms are new, but to date they’ve been stated largely in oblique terms and obscure quarters. This paper has generated considerable comment and controversy, and Romer has responded to criticism in a measured but forceful way. But now this debate is very much out in the open.

It may seem like the macroeconomics and the Nobel Prize for Economics is a bit far afield for an urban policy focused website like City Observatory. It isn’t. Getting the macroeconomy right is an essential precondition for healthy cities. In recent years, an austerity policies—predicated on the flawed theories of the real business cycle and the advice of its promulgators—has led national governments to throttle back economic growth. In the decade prior, flawed policies and a blind faith in the power of the market to discipline financial institutions produced both a wasteful bubble of housing investment and a subsequently devastating economic collapse. Macroeconomics matters deeply to cities. And as we’ve written, Romer’s work as drawn a clear line between the institutions and innovation of cities and the process of long term growth.

Speaking truth to power, in terms that cannot be misunderstood

Romer’s critique also raises an important question about tone and rhetoric. He’s taken the extraordinary step of bluntly and personally challenging some of the acknowledged leaders in field (including Nobel laureates). He has done so at not insubstantial risk to his own personal career. But as he argues, in the spirit of Voltaire, our primary allegiance has to be to the truth, and not to the favorable opinions of a cadre of peers.

Especially this year, when the rhetoric of the nation’s presidential campaign has fallen to an all-time low, it seems like a bad time to celebrate apparent incivility. Academic debates—at least those that appear in print—are supposed to be muted and polite disagreement, rather than a brawl. In practice, they are so opaque and inaccessible that few outside the profession can even understand that there’s a disagreement. For all scientists, but especially economists, its even more important that they write in a way that cannot possibly be misunderstood, even at the cost of offending someone.

Another Nobel Laureate in Economics, Paul Krugman reached a similar conclusion:

Outsider positions, like that of being an iconoclastic columnist at the New York Times, require a lot of effort to get peoples’ attention. It wasn’t nice to characterize the doctrine of expansionary austerity as belief in the confidence fairy, but I do believe that it focused the discussion in a way that a less caustic approach would not have achieved.

And one more point: writing effectively requires that you have a voice, that the passion shows — and too much self-censorship can get in the way, making the writing dull and stiff.   . . . pretending to respect views that you don’t isn’t, and shouldn’t, be part of the job description for economists trying to grapple with these important issues.

The Nobel prize sends a signal to the world–and to the scientific community–and to urbanists, about what matters.