2018 Nobel Memorial Prize in Economic Sciences(2)
Reason for Award
for integrating technological innovations into long-run macroeconomic analysis
Laureates
United States of America
Explanation
When new ideas and inventions grow, life becomes easier and countries get richer. Mr. Romer created a way to describe with numbers how ideas are born and spread. He explained that ideas are a “special treasure” that never runs out when used, and that rewarding inventors helps create more ideas. His work tells us that studying and investing in research today will make the world better tomorrow.
Related Keywords
Endogenous Growth Theory
A theoretical framework in which economic growth is determined by mechanisms inside the economy, such as technological progress and human-capital accumulation. Romer’s contribution explicitly models an idea-production sector, showing that increasing returns can persist in the long run. Government R&D subsidies and education policies can therefore influence the steady-state growth rate, giving the theory strong policy implications. It removes Solow’s residual from the “black box” and connects it to measurable variables, a breakthrough that has fostered empirical studies on topics like semiconductor prices.
Non-rivalry of Ideas
The property that a design or formula can be used by many people at the same time without being depleted. Romer identified non-rivalry as the source that allows scale to generate sustained growth. Because the marginal cost of an idea is near zero—unlike physical capital—excludability via patents or copyrights is required for market pricing. Excessive monopoly, however, can impede reuse, so balance is vital. Current research studies the economic impact of open-source development and data sharing under this framework.
Technological Spillover
A phenomenon in which knowledge created by firms or research institutions diffuses to others at little or no cost, raising productivity. In Romer-type models, spillovers are the aggregate externality in idea production, leading to private R&D that is below the social optimum. Cluster policies and university-industry collaborations are designed to foster positive spillovers. Cross-border spillovers help explain catch-up growth in developing countries. Recently, empirical work has grown on measuring spillovers through data platforms and knowledge networks.
Intellectual Property Rights
A legal system granting inventors and creators exclusive rights for a limited period. In Romer’s theory, it enables mark-ups that recoup fixed R&D costs and stimulates the incentive to create ideas. Excessively long protection, however, can raise reuse and imitation costs, lowering social welfare. Optimal design is debated today for biotech and software patents. International rules such as TRIPS also play a key role in global growth dynamics.
Mark-up Pricing
A pricing strategy in which firms set prices above marginal cost to recover fixed or research expenses. In endogenous growth models, intermediate-goods firms protected by patents earn mark-ups that finance R&D. Excessive mark-ups raise production costs and lower final consumption, creating a gap from the social optimum. Competition policy and licensing schemes are used to narrow this gap. The high mark-ups of platform firms and their effects on growth and inequality have become a recent research focus.