Interview with William D. Nordhaus on 6 December 2018 during the Nobel Week in Stockholm, Sweden.
What’s the source of your passion for economic sciences?
William D. Nordhaus: So my passion for economics. It comes from many sources; I think the biggest one is for the benefit of humanity or mankind as we used to call it. Humanity, and also not just for humanity but for the broader world around us. I thought when I first began working on economics that it was clear that there were many economic problems that were unsolved. I think the ones I was most interested in when I first started was poverty and macroeconomics for business cycles. I still am interested in those, but I wird off into other areas particularly environmental economics and resource economics later, but the big passion was I thought economics was a tool that one could use, like a carpenter uses a tool to build something, it was an intellectual tool to be used to improve people’s well-being.
How has your upbringing shaped you?
William D. Nordhaus: My upbringing in New Mexico, I’d say was very focused on the outdoors. My father was interested in the outdoors, interested in skiing, fishing and building things, interesting things like tramways. He was interested in Indian law at that time and in the later part of his life became one of the nation’s leading Indian lawyers, so all this had to do with the outdoors. And so, when I moved east to a more urban environment, I had that in my background.
What interests you about climate change?
William D. Nordhaus: My interest in climate change was a natural outgrowth of interests that evolved over time. So, when I first became seriously interested in economics in graduate school, I was primarily interested in economic growth. I think it is quite interesting that the prize this year, which is really about economic growth, was what my interest, actually has been my interest all my life in economics. And I started working on that, working on the technology, and for four or five years I worked on exactly the same areathat Paul Romer got his prize for, but I gave it up, it was too hard, so it was just too hard for me so I moved on. And then I started worrying about … But it was the same issue that the technology Romer deals with which is that markets cannot solve certain problems, markets are very good at some things, they allocate bread, they allocate gasoline, but they don’t allocate technology efficiently and they don’t allocate energy and environmental issues efficiently.
I was always interested in the by-products of economic growth and so I worked first on energy and then, well, I have always worked on energy, I should say. And then gradually looked at some of the by-products of energy production and that very quickly led to climate change. I think that the place that sort of crystallized that for me was in 1974. I went to a new institute that had been formed in Vienna called the International Institute for Applied Systems Analyses or IIASA. At that time, it was just an extraordinary crop of brilliant, brilliant people. Director Howard Raiffa from Harvard, my colleagues Tjalling Koopmans and Alan Manne from Stanford being among them, and there was a man named Allan Murphy, a brilliant climatologist, I shared an office with and so we naturally got started, and he said: “Why don’t you think about this?” and so I started thinking about climate change.
How can your work be used to take better care of the planet?
William D. Nordhaus: I think the main message of the work, not just my work, but the work of people in the area of climate change economics, the integrated assessment modelling as it is called, a technical name, is really twofold; one is it to see the climate change problem as a by-product, an unintended by-product of economic growth and then the second thing is to understand that what we need to do is we need to correct that by fixing the price of emissions so now emissions are free in most places, not in Sweden, but every place else in the world outside of Western Europe. When you admit a ton of carbon dioxide you don’t probably know you’re doing it or think of doing it probably, you drive your car, or you have a product that has combustion behind it, that you are putting in the atmosphere, and you are causing damage, but you are not paying anything for it. So, the inside of economics is when you go through that and you analyse it to say we need to put a price on these, and that way give people incentives to reduce their use of carbon fuels or the product that use carbon fuels and thereby reduce their emissions.
The key message of economics is that this is a flaw in the market and it’s correctable. If governments take steps to change the price from zero to a high enough price, then you can meet your target. So that data is pretty easy to explain, but then the next step is, what is that price? And I think the most interesting thing about all the work I’ve ever done, is building models of this – the price just comes out of it. It’s just one of the by-products of the … it’s called linear programming, it’s a technical name for it but it has another technical thing, called a dual variable, which is, this is the price that you should set on carbon dioxide emissions if you’re going to meet your goal. I think of it as kind of a mathematical miracle in the sense that you can do this and out pops the price that the government should set.
What can an individual do to help the climate?
William D. Nordhaus: My message is, you by yourself can do nothing. There are too many people doing too much for too many generations of people so even if I’m the most ethical person or even if I’m not just an ethical person that I’m going to represent ten or hundred other people who are not so ethical or don’t care about it, the effect I alone, I want to emphasize the word alone, will have is insignificant, it’s like a billionth of a billionth or trillionth of what is necessary. So, what is necessary is that people act through their governments and their governments act together with other nations to take steps to solve this problem. I don’t want to say there’s a single step you can take, because there are multiple things to do, but I’d say the message is you need to exercise your duties and responsibilities as citizens, as voters on places where they’re not voters, where there’s no democracies as protesters, work through governments, work through non-profit organizations, work through schools to persuade people that we need to take steps to do this. There is nothing wrong with taking the step by yourself to curb your own emissions, to turn the heat down or whatever. That’s fine, but that by itself is not sufficient.
What is your outlook for the future of climate change?
William D. Nordhaus: I’ve been working on this long enough to see that things change and change slowly. I’d say over the period since I have been working, I started work on this in the 1970s, there has been a lot of progress in the science, the social sciences more than natural sciences. I’ve seen considerable changes in viewpoint of professionals, of scientists, interested scientists, concerned citizens. I think there are now a great realization of the problem, the solutions and so on. So in that respect I think it’s been a good moment. At the same time the politics has moved backwards in the last, say, last couple of years, maybe more, maybe a little bit more, with people, particularly the American president, who makes ludicrous statements about climate change, but I think it spreads, it is a little spread so in all of our big countries we have problems of leaders who are really not thinking about global problems, not even thinking about problems often in a sensible way. So what I would like to say is two steps forward one step backwards, maybe it’s a big step backward now, but I’m hopeful that we will get over that and move forward again.
How important is education in relation to climate change?
William D. Nordhaus: People often learn their social, political, scientific views when they are in school and they get hardwired into their brain and their emotions and it’s sometimes very difficult for people to change. Often our leaders will be taught things 20, 30, 40, 50 years old and so they’re not really ready for the challenges of today, they are not ready for the challenge of the climate change. Climate change is one example, another one is cyber security. I think the people have, the people in leadership in the world don’t actually know anything about information technology so how can they perceive the threats of it. And I think it is now changing a little bit, but when it first came these people know nothing about computers, how can they possibly understand the threats of cybersecurity, so it’s little the same as with climate change. They grew up, they went to college, so I view the most important job that I do is teaching because people at college age, I think of 18-22, they have the most amazing open and plastic minds. I’m just absolutely astounded.
The students will come in at the beginning, let’s say teaching macroeconomics, and will know nothing, they know nothing about international trade, nothing about how the exchange rate works, they will know nothing about how the economy is affected. But by the end of the time they basically know what a professional economist knows. It’s just so easy and the they will forget half of it, of course, but somewhere deep in their brain they will know it, so when they run into it five or 10 or 20 or 30 years later, say: “Yes, I learned that at Yale”. This is the generation I love working with because there is a brilliance of minds but also a plasticity and an ability to absorb new ideas and to challenge also when poor ideas are put to them. So that is what teaching means to me.
Did you have a teacher who inspired you?
William D. Nordhaus: I had so many of them. I was just blessed, both at Yale as an undergraduate and at MIT as a graduate student and then in a way also in my professional life as having so many teachers, teachers and often later colleagues and co-authors. I think the one that I, in this area, in climate change, the one I particularly point to, would be Tjalling Koopmans. Tjalling Koopmans who’s Dutch, and he left Holland right before World War II, he was very much aware of the Nazi menace in Western Europe. He went to America, he worked in America, in mathematics and he invented his very important linear programme technique when he was working on shipping convoys in WWII. He went to Chicago and then he went to Yale and he was a colleague at Yale. He influenced me, not just because he was interested in energy and climate change, but because of his enthusiastic … and also his mentorship, he wasn’t really mentor at that stage, it was more his enthusiasm for the subject and his enthusiasm for my work. And the techniques he used were different from what everyone else was using and what I pointed out to earlier, this business about the shadow price, the dual variable that gives you the price of carbon, came out of work he did. If I hadn’t used that technique, I wouldn’t have found it. Actually, I think he was the first person I ever found mention climate change in a Nobel Lecture or speeches. In December 1975 he actually mentioned it in his toast at the banquet. I just mention him because he was a wonderful colleague, a brilliant, brilliant Nobel Prize winning economist and just a very generous man as well. But there were many, many others, but since in this context I would particular associate with Tjalling Koopmans.
How does it feel to share the prize with Paul Romer?
William D. Nordhaus: I think it’s wonderful, it’s wonderful to share this with Paul Romer for lots of reasons. One is that I have a great admiration for his work. What Paul Romer got the prize for as you will explain, is opening up the box of technological change. In the earlier work that had been done in economic growth, the work that I learned in graduate school, technological change was taken as a given, it was known as exogenous, falling from heaven and not produced by humans, it just comes to you. And everybody knew that’s wrong, everybody knows we produce great technologies, we produced the steam engine, the idea for the steam engine and the steam engine, the idea for the transistor and the transistor and modern electronics, the idea for the telephone and then the telephone, and now the telecommunications. Everybody knows it didn’t just come floating down from some intellectual heaven, but it was invented by people, but it wasn’t in our models.
We knew this, I actually tried to work on that myself, as I said, it was too hard, so I gave it up. But that was the problem that Paul Romer tackled and solved and produced this really brilliant new way of thinking about technologies. I think it’s really nice for me to share with Paul, partly because that was a problem I thought about, worked on and failed at when I was a graduate student. And partly also, coming to today, because it’s clear that the solutions to problems like climate change involve exactly what he is talking about, finding ways to induce new technologies, finding ways to get people to think about them, to invent them, to develop the products and processes to make sure they are commercial, to get them out in the world. This is the issue he saw and using his insights in the climate change area, marrying those two, is a critical, critical need over the next few years if we are to succeed.
Where do you do your best thinking?
William D. Nordhaus: One of the things to understand, it’s not a linear process, it’s not, you sit down with a blank piece of paper. I know nobody thinks this, but just to emphasize, you sit down with your paper and you say, climate change and underline and say, number 1, number 2, number 3, and you say there is the problems, let’s go solve them. Often things will occur while you are outside walking around, when you’ll see something, when you’ll talk to somebody or where you are maybe sometimes, actually an art exhibit will stimulate some thinking. A problem, obviously a problem, when you see problems, an example of a problem was when in 2002-03 when the US was about to go to war in Iraq. We were just marching, marching on as back WWI, Europeans will know the history from WWI, marching, sleepwalking in the history so to speak, and we were just marching along. It wasn’t 100 %, but it was pretty clear, and the question is, how costly this is going to be, and so I started working on the costs of the Iraq war, a pretty big study on that. But that was one where there is a problem just in front of you and you say: Well, how much is this going to cost, have we thought about the costs of this? Talk to people: Well, yes, it is not going to be very expensive, but of course, instead of 50 billion dollars, it’s like 2, 3, 4 trillion dollars – I’m just vastly, vastly underestimating. But that’s something where it is a problem.
Other times it’s just curiosity. An example of curiosity was I was thinking about light and whether we are measuring light correctly. It was just something I thought about and then I forgot about it, then thought about another year later, and then something would happen and I would see something and: Oh, that‘s how to do that. And then I got interested and worked intensively on it. So usually there’s, sometimes there’s a problem, sometimes just pure curiosity about something when you want to … was it measured correctly, and the lighting is a good example. With lighting, the background of lighting was it was a big controversy whether the price indexes were being measured correctly. This was particularly in the United States and there was a big report by a Stanford colleague named Mike Boskin, and the Boskin report, he argued that the consumer price index in the United States was seriously mis measured and that looked right. Part of the problem was we weren’t measuring quality change correctly, so that looks right. And I looked at some other price indexes, like the European price indexes are even worse that the US price indexes. So then at that point I said, what about light, are we measuring the price of light correctly, so at that point then I would say how we are going to measure, we can look at different sources, oil and electricity, compact fluorescence, that was before the LED bulb, and then you say we are measuring incorrectly because we are measuring them by the price of the light bulb, rather than how much it produces or certain number of lumen hours. I would say that was just pure curiosity that drove then.
How has the world interpreted your award?
William D. Nordhaus: I receive obviously as many Nobel Laureates do, a lot of e-mails, in these days e-mails, a few phone calls, a few letters and then personal congratulations from colleagues that I know in New Haven, friends. I think the most interesting thing about it is that this particular award for climate change, yes it’s economics, but people think this is an award for somebody who’s working on climate change. People think this is like a light in a dark time and they see this as very important institution, really the premier scientific award institution of the world, saying to the world and particular America, they are Americans, I think, particularly useful to Americans, to take heart, even if, I don’t think the Nobel, I don’t say you are saying, this is what they think you are saying, the people, and why they are so happy about it is because they think that you are saying take heart, there is good work out there, there are people who care about you, the United States and the rest of the world and just stay with it, keep heart and we have people who are working for good. So it was very interesting, and I think, I’m very grateful for that particularly, that it gives a kind of courage and heart to the people who are on the right side of history.
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Their work and discoveries range from the formation of black holes and genetic scissors to efforts to combat hunger and develop new auction formats.
See them all presented here.