Today we’re getting really wonky. Paul Romer, who’s currently at New York University’s Marron Institute has just been appointed to be the chief economist for the World Bank. Personnel decisions involving technocratic positions at global NGOs is about as wonky as it gets, of course. But this is a genuinely interesting development, especially if you’re passionate about cities, and economies, as we are.
First, an introduction: Romer is a prolific and wide-ranging economist. He’s most famous for his work in creating what’s come to be called “New Growth Theory” (NGT). It bears a much longer and more precise description, but briefly, NGT focuses on the critical role that creating new ideas plays in driving long term economic growth. The reason we become more prosperous over time, is not because we accumulate more stuff, but because we continuously generate new and better ways of making use of the finite materials around us. A critical property of ideas are that they are “non-rival”–you and I can equally make use of an idea without diminishing its utility to one another. Romer pointed out that non-rivalry is crucial for driving growth, and for some pretty technical reasons, it also means that unfettered free markets can’t automatically generate the conditions that produce long term growth. As a result, the kinds of institutional arrangements we create, both nationally and locally, are very important to whether we experience growth or not.
New Growth Theory has an important implication for cities. Cities are, as Jane Jacobs argued decades ago, the crucibles and laboratories where new ideas — what Jacobs called “new work” gets created. The combination of a diverse population, frequent interaction, and the right set of rules or institutions is what makes economies grow–and these forces play out most dramatically in cities. (For a much longer explanation of NGT and its policy implications you can read a report I wrote for the US Economic Development Administration).
Romer explained this all in a quite accessible article written for the World Bank 25 year ago, entitled “Two Strategies for Economic Development: Using Ideas and Producing Ideas.” This article demonstrates Romer’s keen ability to translate complex economic arguments into simple and powerful metaphors. He illustrates the difference between traditional views of economic growth and the knowledge-driven growth of new growth theory by contrasting two child’s toys. The conventional model is the Play-Dough Fun Factory. It combines capital (the plastic press and dies) with labor (a child’s arm) and raw materials (clay) to produce tubes, I-beams, and other shapes. This model (and the very math-ey versions of it used by economists) are good for thinking about production efficiency and allocation, but don’t help much to explain how growth happens.
In contrast, New Growth Theory visualizes the growth process much as if it were a child’s chemistry set. It turns out that there are so many different possible combinations of even a few handfuls of ordinary chemicals, that its simply impossible for a manufacturer to verify that all of the ways they might be mixed would turn out not to be hazardous or explosive (which for many children is the chief motivation for playing with chemicals). That’s a downside for chemical companies, their risk analysts, attorney and insurance companies, but its got a surprisingly optimistic implication for long run economic growth.
The point is that prosperity is driven by the nearly inexhaustible opportunities to create new ideas–new combinations of things–that produce useful products and services. The trick is figuring out the kinds of institutional arrangements that will prompt people to undertake the experiments that will generate these ideas. This has a critical implication for cities, as Romer explains:
“As the world becomes more and more closely integrated, the feature that will increasingly differentiate one geographic area (city or country) from another will be the quality of public institutions. The most successful areas will be the ones with the most competent and effective mechanisms for supporting collective interests, especially in the production of new ideas.”
In recent years, Romer has been a strong advocate of cities, and has pointed out the direct relationship between urbanization and economic and productivity growth. Across countries, within countries, and over time, a higher degree of urbanization is strongly correlated with greater economic output.
The question going forward is what we might do to harness the growth potential of cities as places that offer new ways to do things and develop ideas. He proposed the idea of “Charter Cities” — de novo city-states that would experiment with new institutional arrangements, looking to generate the kind of growth that we’ve seen in places like Singapore, Hong Kong and Shenzen. An abortive attempt to do actually try this out in Honduras actually died stillborn–for reasons that illustrate what it will take to really make such a proposal work.
More recently, he’s also made the case that creating new cities would be one of the ways that Europe might better respond to its refugee crisis: HIs argument, in a nutshell:
1. It takes only a few cities, on very little land, to accommodate tens or hundreds of millions of people.
2. Building cities does not take charity. A city is worth far more than it costs to build.
3. To build a city, do not copy Field of Dreams. (“Build it and they will come.”) Copy Burning Man. (“Let them come, and they will build it.”)
The World Bank is the dispenser, not just of billions of dollars in loans for less developed nations, but is also the dispenser of the the conventional wisdom, especially when it comes to cutting edge development strategies. Its notions about the processes and strategies that can stimulate economic growth have immediate, practical and widespread implications.
Romer is a brilliant and original thinker, and is an economist who is willing to fully explore the policy implications of his theoretical work, and regularly comes up with ideas that make us look differently at the world. He’s somebody who sees cities at the center of the solution to many of the globe’s most pressing problems. We’re excited to see what he does at this new job.