David Warsh: Romer's huge contribution to growth economics

  Ruins of the church at    São Miguel das Missões   , Rio Grande do Sul, Brazil, one of the missions that ministered to the Guarani tribe.

Ruins of the church at São Miguel das Missões, Rio Grande do Sul, Brazil, one of the missions that ministered to the Guarani tribe.

It was a newspaper feature story of a sort that has become fairly familiar, if rarely so well executed, and my physicist friend was enthusiastic about it.  “I love studies like this. Data on almost anything can be squeezed out of the most unlikely places. Clever data acquisition, analysis, and normalization to an ingeniously inferred control group. And in this case, the look-back period is 400 years and the ripple effects have continued for 250 years after the stimulus was removed.”

As described by Washington Post reporter Andrew Van Dam, “The Mission: Human Capital Transmission, Economic Persistence, and Culture in South America,” a study published in the Quarterly Journal of Economics, tells the following story:

Jesuit missionaries arrived in South America in the mid-16th Century, proselytizing Catholicism and teaching useful new skills in roughly equal measure. In 1609, the order established the first of some 30 missions in the remote homeland of the Guarani tribe, what is today the “triple frontier” region where two great rivers meet to form the boundaries of Brazil, Paraguay and Argentina. Jesuits taught blacksmithing, arithmetic and embroidery to the Guarani people. The missions mostly thrived until 1767, when King Charles III of Spain expelled all Jesuits from the Spanish Empire. Formal instruction stopped.

Yet even today, people living near the ruins of those missions show the effect of that long ago training, going to school 10 to 15 percent longer and earning 10 percent more than residents of equivalent towns without missions. Felipe Valencia Caicedo, of the University of British Columbia, chose to piece together the story of the Guarani missions from archival sources because the relatively isolated region, with its jumble of governments, offered a natural experiment.

Bringing to bear much of the apparatus of a randomized controlled trial, the economic historian was able to show that it wasn’t colonialism that produced the result, it wasn’t geography, it wasn’t religion. It was investment in skills. “Valencia’s analysis is among the most striking of a surge of studies that show how returns from education and vocational training span generations and even centuries,” wrote Van Dam.

“The Mission” is also a prime example of the torrent of important work that was unleashed t by a single paper, “Endogenous Technical Change,” in 1990,  for which Paul Romer, of New York University, shared this year’s Nobel Prize in economics with William Nordhaus, of Yale University. Nordhaus’s topic is the interplay of economic growth and climate. Romer’s topic was the role of inventors, researchers and entrepreneurs in economic growth. Even before he completed his thesis, in 1983, at the University of Chicago, his emphasis on differential and, often, accelerating national growth rates was causing excitement. As his adviser Robert Lucas famously put it in his Marshall lectures,

I do not see how you can look at figures like these without seeing them as possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly?  If not, what is it about the “nature of India” that makes it so? … The consequences for human welfare involved in questions like these are simply staggering: Once one starts thinking about them, it is hard to think of anything else.

Romer concentrated narrowly on the economics of technological change. On Vox EU Web site, Charles I. Jones, Romer’s successor at Stanford University’ Graduate School of Business, describes the path by which his friend introduced an “economics of ideas,” with is powerful implication that governments inevitably influence growth through intellectual property regimes, education and training policies, and subsidies to long-run research and development..

Almost immediately researchers began looking for other policies that might influence growth, financial, legal and political institutions in particular. New journals appeared. So did a long shelf of books, including Why Nations Fail: The Origins of Power,, Prosperity, and Poverty, by Daron Acemoglu and James Robinson; The Great Escape: Health, Wealth, and the Origins of Inequality, by Angus Deaton; The Race Between Education and Technology, by Claudia Goldin and Lawrence Katz; and The Rise and Fall of American Growth, by Robert Gordon.  Economic historians emphasized the role of culture:  Joel Mokyr, of Northwestern University, in A Culture of Growth: The Origins of the Modern Economy; and Deidre McCloskey, of the University of Illinois at Chicago, in her epic trilogy, The Bourgeois Era, especially its third volume, Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World.  Historian Youval Noah Harari contributed Sapiens: A Brief History of Humankind.

Romer tried for a while to keep ahead of the torrent, beginning to work on endogenous change of tastes and preferences, and then gave up. He started an online learning company, Aplia, sold it, resigned from Stanford University to become a policy entrepreneur, advocating for the creation of “charter cities” around the world. He joined the Stern School of Business at NYU, founded the Marron Institute of Urban Management on the university’s campus, then left to serve for a tumultuous time as chief economist of the World Bank.

Between times he skirmished publicly over a tendency to “mathiness” in economics and the state of macroeconomics, continuing to play a role behind the scenes in research economics.  Today he is an Institute Professor at NYU. As Jones concludes, Romer’s contribution to growth economics has been monumental. With a single paper, he virtually invented the modern field. “Endogenous Technical Change” is an especially vivid reminder of Einstein’s dictum, that it is the theory which decides what we can observe.

David Warsh, an economic historian and long-time columnist, is proprietor of Somerville, Mass.-based economicprincipals.com, where this column first appeared.