Hope is not a method

My dad pointed me to this interesting Paul Romer interview on BBC Global Business. The BBC describes Romer as an optimist in a dismal science. I think of Paul Romer as one of the economists who founded the endogenous growth movement, though he’s probably done lots of other interesting things. I personally find the models typically employed in the endogenous growth literature to be silly, because they retain assumptions like perfect foresight (we all know that hard optimal control math is the essence of a theory of behavior, right?).¬† In spite of their faults, those models are a huge leap over earlier work (exogenous technology) and subsequent probing around the edges has sparked a very productive train of thought.

About 20 minutes in, Romer succumbs to the urge to bash the Club of Rome (economists lose their union card if they don’t do this once in a while). His reasoning is part spurious, and part interesting. The spurious part is is blanket condemnation, that simply everything about it was wrong. That’s hard to accept or refute, because it’s not clear if he means Limits to Growth, or the general tenor of the discussion at the time. If he means Limits, he’s making the usual straw man mistake. To be fair, the interviewer does prime him by (incorrectly) summarizing the Club of Rome argument as “running out of raw materials.” But Romer takes the bait, and adds, “… they were saying the problem is we wouldn’t have enough carbon resources, … the problem is we have way too much carbon resources and are going to burn too much of it and damage the environment….” If you read Limits, this was actually one of the central points – you may not know which limit is binding first, but if you dodge one limit, exponential growth will quickly carry you to the next.

Interestingly, Romer’s solution to sustainability challenges arises from a more micro, evolutionary perspective rather than the macro single-agent perspective in most of the growth¬† literature. He argues against top-down control and for structures (like his charter cities) that promote greater diversity and experimentation, in order to facilitate the discovery of new ways of doing things. He also talks a lot about rules as a moderator for technology – for example, that it’s bad to invent a technology that permit greater harvest of a resource, unless you also invent rules that ensure the harvest remains sustainable. I think he and I and the authors of Limits would actually agree on many real-world policy prescriptions.

However, I think Romer’s bottom-up search for solutions to human problems through evolutionary innovation is important but will, in the end, fail in one important way. Evolutionary pressures within cities, countries, or firms will tend to solve short-term, local problems. However, it’s not clear how they’re going to solve problems larger in scale than those entities, or longer in tenure than the agents running them. Consider resource depletion: if you imagine for a moment that there is some optimal depletion path, a country can consume its resources faster or slower than that. Too fast, and they get-rich-quick but have a crisis later. Too slow, and they’re self-deprived now. But there are other options: a country can consume its resources quickly now, build weapons, and seize the resources of the slow countries. Also, rapid extraction in some regions drives down prices, creating an impression of abundance, and discouraging other regions from managing the resource more cautiously. The result may be a race for the bottom, rather than evolution of creative long term solutions. Consider also climate: even large emitters have little incentive to reduce, if only their own damages matter. To align self-interest with mitigation, there has to be some kind of external incentive, either imposed top-down or emerging from some mix of bottom-up cooperation and coercion.

If you propose to solve long term global problems only through diversity, evolution, and innovation, you are in effect hoping that those measures will unleash a torrent of innovation that will solve the big problems coincidentally, or that we’ll stay perpetually ahead in the race between growth and side-effects. That could happen, but as the Dartmouth clinic used to say about contraception, “hope is not a method.”