Nobel economics prize 2018 won by William Nordhaus and Paul Romer for breakthrough growth theories

The two American economists made breakthrough contributions to theories of economic growth and climate impacts

Two distinguished American economists, Paul Romer and William Nordhaus, have been jointly awarded the 2018 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for their pioneering research on climate change and the roots of economic growth.

Mr Nordhaus, 77, was cited by the Royal Swedish Academy of Sciences, as having “integrated climate change into long-run macroeconomic analysis”.

He developed an influential model of how the climate interacts with the global economy, which suggested that a uniform international carbon tax could be the most efficient way to tackle industrial greenhouse gas emissions.

Mr Romer, 62, was cited for his pioneering theoretical work on “endogenous growth theory”, which emphasises the fundamental importance of innovation and ideas in driving a nation’s prosperity.

“This year’s laureates ... have significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge,” said the committee.

“Their findings have brought us considerably closer to answering the question of how we can achieve sustained and sustainable global economic growth.”

The “post-neoclassical endogenous growth theory” championed by Mr Romer was once referenced by Gordon Brown in a speech in 1994.

Endogenous growth theory

What is it?

So called neo-classical growth theory holds that the spark of growth is essentially “exogenous” meaning that it comes from external factors. This could be increases in the size of a labour force, investment or new technologies. But “endogenous” theory, as advanced by Paul Romer, holds that the spark of growth is internal to an economy. It can come from the the accumulation of ideas. The theory is significant because it guides policymakers to the kind of policies that have the greatest chance of encouraging that powerful endogenous kind of growth, such as investments in education and scientific research.

The then-shadow chancellor was mocked for years for his use of an incomprehensible piece of jargon. But Mr Brown was referring to novel economic ideas of how governments could deliver sustainable long-term growth.

In recent years, the Swedish academy has tended to make the Nobel based partly on the political salience of the work of the academics or the degree to which they feel their ideas are relevant to policymakers.

The United Nations’ Intergovernmental Panel on Climate Change warned on Monday that global greenhouse gas emissions must be cut almost in half by 2030 to avert global environmental catastrophe, including the total loss of every coral reef, the disappearance of Arctic ice and the destruction of island communities.

“The timing of Nordhaus’s prize – coming as the IPCC says that action is necessary – is perfect,” tweeted the US economist Justin Wolfers.

He added that the “common thread” of the two academics’ work is that “smart government policies that tame, harness and direct economic forces are essential if the economy is to deliver good outcomes in the long run”.

Last year, the economics Nobel was awarded to the behavioural economics researcher and father of “nudge” theory Richard Thaler.

Mr Romer stepped down after just 15 months as chief economist at the World Bank earlier this year, after an acrimonious clash with the institution’s staff.

He had accused World Bank employees of manipulating data in its annual rankings of countries by ease of “doing business” for political reasons.