In this week’s episode, EconTalk host Russ Roberts welcomed back new Nobel laureate in economics, Paul Romer. A fascinating discussion ensued, the big focus of which was on the methodology of economics. The pair also discussed Romer’s brief tenure at the World Bank, as well as Romer’s work on charter cities.

What role do ideas play in economics? Romer and Roberts agree that how we think about that question impacts the way we “do” economics, and may even allow us to focus on allies rather than foes, or to stop viewing the world in zero-sum terms. Romer also shares his criticism of modern-day macroeconomics, likening the work of many of his contemporaries to pulling a fire alarm falsely with no repercussions.

 

1- What is the difference between the “economics of objects” and the “economics of ideas,” as Romer describes it? How is this distinction illuminated by the following statement (also made by Romer): “And the usual story about gains from trade says it’s good that Portugal exists. The new insight is that ‘It’s good that the Portuguese exist.”

 

2- What do we ignore in constructing utility functions? Are there things (like Faulkner’s “love and honor, pity and pride, and compassion and sacrifice”) that don’t lend themselves to measurement? Or is Romer right that we (economists) can do more to build these into our exiting analytical apparatus? Explain.

 

3- Why does Romer believe there is greater possibility for the creation of charter cities within developed countries (the ‘Hong Kong approach”) than in developing countries? Why not start them in West Virginia or rural Ohio (areas that have lost manufacturing jobs)?

 

4- What’s the real “Trouble with Macroeconomics,” according to Romer?  How does this compare to Roberts’s well-known criticisms of the discipline? (Hint: You should probably consider the distinction between data analysis and theory somewhere in your answer.)

 

5- Asked about his tenure at the World Bank, Romer opined about the difference between what the Bank actually does versus the ideal of what it’s supposed to do. To what extent is the World Bank really an “ideological arm of free-market capitalism?” Why is Romer critical of the Banks’ Doing Business report, the subject of this past episode?

 

6- At the end of the conversation, Roberts asks Romer what the profession learned from the Great Recession. How does Romer respond? Explain the analogy he draws to air travel (the FAA and NTSB in particular).  How might such a model be applied to the financial sector? To what extent do you think it might work?