The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1987
Robert M. Solow
Transcript from an interview with Professor Robert Solow at the 1st Meeting of Laureates in Economic Sciences in Lindau, Germany, September 1-4, 2004. Interviewer is freelance journalist Marika Griehsel.
Professor Solow, very welcome to this interview.
Professor Robert Solow: Thank you.
I'm honoured to meet you.
Professor Robert Solow: Yes, thank you, it's a pleasure.
Your lecture here in Lindau has been about low wage workers in high income countries. That is a typical Western World scenario. In Germany, for example, the government is suggesting that jobless people should stay on the social benefits, but above that get a job and only get paid one euro an hour. Is that a way to move ahead, to try to solve this enormous problem of the joblessness and the less work that is available to people in this part of the world?
Professor Robert Solow: Something of that sort, I think, has to be done. The background for this is very important. We are all, both in Europe and in North America, looking forward to a time when our populations will have aged, when there will be fewer people of working age, compared with the size of the population to be supported. So labour will be scarce and it is important to have people who can work, working. In Europe this is compounded by the fact that even now there is quite a lot of unemployment, much more unemployment than in the United States for instance and more than Europe has had in the past.
So, how to get people who are now unemployed back into the labour force and back into jobs? If a civilised country like German, like Sweden, like any, would like to limit extreme poverty, then people who are unemployed and have no income have to be provided for, some way. And if they are provided for relatively generously, they may have no motive to work, even if jobs were available, because their benefits may amount to as much as they could earn in a labour market and they come without the effort of getting up early in the morning and going to work and doing perhaps some unpleasant work and coming home tired in the evening. So, this creates a problem.
One way to deal with that problem is to somehow, even for people whose earning power is very low, to make their work pay them enough so that it is preferable to work than to sit with benefits. In Germany, the proposal is that people who have been unemployed, perhaps for a long time, and have been receiving social benefits, if they go to work, they find a job and go to work, then they continue to receive their benefits, but they receive an additional one euro and hour or two euros an hour on top of that. That does make work more profitable, make work yield more to a person than simple benefits, but it's a small amount and there is something a little insulting about the one euro an hour that you get for your work.
In the United States we have tried to attack the same problem, even though we have less unemployment than Europe, by what is called the Earned Income Tax Credit and it works this way: If you work a certain number of hours a week, a minimum of a certain number of hours a week, whether it is 20 or 30, I don't remember, it doesn't matter, and if you earn less than a certain amount, you fill out a tax return. But instead of paying a tax, you get a payment back from the tax authorities, enough to raise your income, often by a substantial fraction, by as much as 1/4 or 1/3, which is a little better than a euro an hour or two euros an hour. And this is a way of letting the labour market work and asking employers to pay only what the job normally brings in the market, but then putting on top of that, a negative tax, a rebate, a credit from the Federal Treasury which can bring the income for such a person to perhaps a decent level and this has been a solution to the problem in the US and something like it. I'm not sure that the German device is the best, but something like it could be used elsewhere.
Could there be another solution to the so called Western problem of ageing population, less people working. There are millions of people in the so called Third World who really would like to come and earn a living in this part of the world, but they are not really welcome.
Professor Robert Solow: That would be a solution, but a solution that brings obviously its own problems. The arrival of immigrants from poor countries, Third World countries, into Europe or into the United States, does two things for the ageing population. First of all it brings a number of young people of working age and secondly, those people normally have more children than Swedes or Germans or Americans are now having, so they will help in the future with the population. From that point of view, immigration is a solution to the problem. The difficulty is that many Americans, Europeans, resist immigrants. They see their culture changing, they see the streets look different than the way the streets used to look, you know, from some points of view that is an additional benefit, a little variety is a good thing. A street full of everyday Americans is not so interesting as a more colourful street, but it does create political resistance and it's impossible to know how that will come out. I presume what will happen is that there will continue to be immigration but rather less than there might be or there might be use for in terms of working population.
Is it so that we in the Western World have created a situation where our material standard is so high, our demands are so high that we really are not able to forsake anything, any longer. I mean, what is the solution? Must we forsake anything to make this world become a bit more, less divided between the rich and the poor?
Professor Robert Solow: That would be a very nice outcome, but I do not think it's likely to happen. You know, there has hardly been a time in the past 200 years when you could not have said something similar, even when standards of living in the West were much lower than they are now. They were better than they had been and they were better than in poorer countries and the possibility was always there that the rich people of the Western countries would tax themselves, so to speak, to benefit the poor elsewhere. I do not think mankind has a very great record at caring seriously about people far away, whom they do not know, who speak a different language, who live a quite different life, so I suspect that if a solution to that enormous world inequality was a dreadful thing, I think the solution is more likely to come from raising incomes abroad in Africa, Latin America, Asia and elsewhere, than from generating sacrifices from Europeans and Americans, who like their comforts and I do not think one can blame them for liking their comforts. So I think our efforts look to be focussed on trying to raise standards of living elsewhere through primarily the work and investment of the people there.
There are enormous resources, obviously, in some of these countries and in many of these countries, not at least the population itself.
Professor Robert Solow: Oh, there is the population and there is oil and other natural resources as well.
Can we expect this idea of continued economic growth when we know that there is a limitation to the world's natural resources though?
Professor Robert Solow: I am a little more optimistic than most people about that, for these reasons. We know that as incomes rise, at least this has been true in all of the Western World, what people want to spend their incomes on is services, rather than material goods. This is often put amusingly by describing ourselves as moving toward a weightless economy, an economy in which the gross domestic product will not weigh as much as it does now and that is clearly happening. Now education is much less resource using than driving an automobile and banking, financial services, is much less resource using than food production. But in fact, as we get better off, we spend a much smaller fraction of our income on food and a much larger fraction on education, on financial services and on services generally, so there is some tendency, an almost automatic tendency for countries as they get more wealthy to behave in a somewhat more sustainable way.
The second thing is, we have not yet made a real effort in the technologically advanced Western World to encourage renewable sources of energy. We are still an oil and natural gas based civilisation. Now we could, I don't know exactly when, because a lot of technological progress is needed and that is always uncertain, but sooner or later we will be shifting noticeably toward energy derived, well all of it comes from the sun one way or another, but from wind or from direct sunlight and so we will be able to conserve energy resources much more than we do now. Even automobiles, you know, can be run without the use of petroleum based fuels, so with a little more emphasis on renewable resources, we still of course, by the way, in Germany, in Sweden, in the US, we produce an incredible amount of waste.
My pet complaint is packaging. Everything one buys comes in packages which first of all, it takes an engineer to get them open and I have spent a whole aeroplane trip trying to open the little envelope with peanuts and don't succeed and then we simply throw away the wrappings. If we never wrap them so much in the first place, we could also ... So between conservation and the consumption of services, I think the situation is serious but not desperate and our governments could probably encourage the conservation of materials much more than they do, either through regulation or through taxation or things like that. So, we will have to work our way in that direction but I don't think it's hopeless, I don't think the situation is hopeless.
Earlier today you referred to a paper, read a paper from your colleague, Paul Samuelson, and it was quite a special paper in the sense that he was discussing who should have got the economy prize, if not those people who had got them.
Professor Robert Solow: Well remember, he was very careful to suggest additional people, not substitutes, yes.
That's right, yes. I was wondering your opinion. Is there a time to look into alternative ideas around economic thinking, you know, environmental economists, developmental issues? Do you think we're going to see a different kind of prize takers in the future?
Professor Robert Solow: I think that the Royal Swedish Academy of Sciences has already begun that process. Of course one of the earlier Nobel Prizes in Economics went to development economists, Arthur Lewis and Theodore Schultz, but Amartya Sen was a very recent prize winner and he is clearly unorthodox in the sense that he is concerned with problems that most economists don't think about. He's a person who seems to be as much read by philosophers as he is by economists. I think that there may very well be soon a prize given to environmental economists, I think there's every reason to believe that the tendency is in that direction and I think that's on the whole a good thing and I would like to see it continue.
It may also be that economics, science of economics itself, will turn more in the direction of economic development and environmental preservation and things of that sort. There's a very interesting history. In the 1950s or 1960s, development economics, the study of development, the evolution of poor countries was very popular amongst graduate students. Then it kind of lost popularity, I think because there was not much success in generating new ideas and if the new ideas aren't there, then young students are not likely to be attracted to it. There has been a revival of development economics, at least there has been in my own university, at MIT, and I think, although I'm not sure about other places and I think it's because there is some intellectual ferment, there are new ideas. There are new kinds of data available so one can ask questions that previously could not possibly be answered because the basic information was lacking and that seems to be changing and I think that's a good change.
Is there a realisation as well, some kind of ethical even or moral realisation that maybe the financial economy or the financial market is not the full solution to the problem that the world is facing?
Professor Robert Solow: Yes, but I think that the ethical imperative has always been there. I think that economists, academics and their students have always felt that there was some obligation first of all to advocate policies that will help poor countries lift themselves out of poverty and some obligation to think about those questions and try to learn more about what it takes to improve situations and you know, there have been some notable successes and the biggest poor country of all, China, now appears to be advancing at a fairly rapid rate, so I really think the problem has been, at least in academic circles, discouragement. No-one wants to spend their life working on a problem that is too hard to solve. For one thing, it is not easy to get promoted when you're doing that, but for another, you get your pleasures from academic work in economics by working on problems that you can just barely solve, that are hard, so you feel good if you have succeeded, but that are not so hard that you can't get anywhere.
What I'm hoping is that there will be this kind of intellectual advance and one other source of discouragement about this in the past has been the feeling, and I think this is what was in your mind, that merely trying to provide funds for poor countries, the sort of thing that the World Bank has been doing for 50 years now, is now adequate. It no doubt helps, or perhaps there is doubt that it always helps, but the main thing is that the feeling has grown that it will take something more than simply providing funds to allow or to find a route, a way in which poor countries can raise their standards of living, so there is some of that as well.
Now, the question that I think is still a little dodgy is, to what extent deep down most Europeans and Americans think that success in a poor country means becoming more like us or whether there is some other route to development which does not involve our sort of consumer oriented production, oriented economy. I don't think that there is any general answer to that question, I think you find out by trying and seeing what happens and seeing whether other countries, currently poor countries, like India, like China, like Indonesia, can find what will be development from their point of view in the sense that those people will feel better off, but that will not simply amount to being like Americans or Germans or Swedes. One can think about it. If I wanted to write about that I might be just inclined to write a novel, except that I know I'm incapable of writing a novel, but that's the sort of thing that you find out experimentally, I guess.
It's very interesting. I just want to briefly touch on this: South Africa, who has an enormous challenge ahead of spreading its wealth and really making people, who are discluded of any kind of decision taking for economic wealth to kind of, spread their risk. They're dealing a lot with Asia, for example, in their trade and it has certainly been of some great benefit for the macro economic situation in the country, so they are also looking into different ways, not just the traditional.
Professor Robert Solow: Yes, I didn't know that about South Africa, of course I know what the problems in South Africa have been, but I think that the idea of diversifying both their economy and their trading partners, that sounds very interesting and I think it's likely to succeed.
Mmm ... and I think that scares certain more established economies like the United States and Europe as they see how South Africa are diversing.
Professor Robert Solow: Oh, I hope it doesn't, because the possible benefits are very great and any possible costs to the rich countries are bound to be small compared with the amount of wealth that we now have.
We just want to go back a little bit to that day in 1987 ... I don't know if you got a phone call or how you got to know that you were to receive the prize, but I very much liked your speech at the banquet, when you said "In the last seven weeks I've been asked to solve X amount of countries economical problems" and you said "Of course I know how to answer that, but I'm not going to tell you now". How did you feel and what has it come with to get this honour or this prize?
Professor Robert Solow: Well, of course, you know, it's a very great satisfaction, and the satisfaction is that it suggests that you're admired by the very people whose admiration you care most about, namely other people in your profession. So, I mean, there's no doubt that it's a great boost for the ego, there's no way out of that. There is however that the remark I made on that staircase in Stockholm had the ring of truth to it. There is a feeling that if you have won the Nobel Prize in Economics, you must know the answer to every question and that persists. It's now 1987, 2004, that's 17 years ago, but when I was meeting, here in Lindau, with a roomful of graduate students, they started off by asking questions that I thought I might have some chance of answering, but every so often, someone asked me a question of such cosmic significance that I wouldn't know where to start answering it. And I suppose they still had the feeling, you know, here is someone who has a Nobel Prize in Economics, good Lord, he must be able to answer any question we ask.
That can be a little embarrassing at times, but it's probably good for one's psychological health every so often to have to say "I don't know" or "I haven't the slightest idea" or "I wouldn't even know how to begin thinking about that question". There is, you know, just an enormous respect for the Nobel Prize which means it must have been conducted in a very intelligent way so that one still has the feeling that ... I have to be very careful about what I say because anyone who hears what I say may be inclined to believe that it's true and one doesn't want to mislead anyone, so there is that, there's no question about it, yes.
Thank you very much Professor. I really enjoyed speaking to you. Thank you.
Professor Robert Solow: I enjoyed it too, thank you, I enjoyed speaking with you, thank you.
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