Paul Romer

Paul Romer Speaking Topics

• Charter Cities

• The Mismatch Between The Dynamics of Technologies and Rules

  The constraints facing nations and firms arise not from limited technological opportunities but rather our limited capacity for discovering and implementing new rules.

  The internal combustion engine is a technology that tells us how to structure interactions between physical objects (e.g. spark plugs and pistons.) “Stop on red” is a rule that tells us how to structure interactions between people. In a modern urban center, there is a better approach: “don’t enter the intersection unless you can leave before the light turns red.” Despite its value in preventing gridlock, it has rarely become the rule. Laws mandate this behavior, but rules depend on individual norms about right and wrong. Most people can’t give up their belief that they are in the right if they enter the intersection when the light is green.

  Because our social norms are difficult to change, our rules often fail to keep up as technologies evolve and human interactions scale. Norms about privacy, honesty and courtesy that worked well when a few dozen of academics exchanged email are now exposing us to needless criminal activity. Norms about paying a fixed fee for unlimited data are now bringing the sorts of congestion to our wireless networks that we’re used to seeing in our streets.

  Much of the texture of modern life comes from the mismatch between continuously evolving technologies and social norms that go through long periods of stability that are punctuated by bursts of change, change that often comes from startups.

The Critical Role of Startups in Changing the Rules and Driving Future Growth

Communities are shaped by technologies, to be sure, but also by rules. The rules that IBM established for mainframes were strong and broad. The Wintel rules were strong but narrow. For a time, a narrow focus left room for rapid innovation, but the lead has now shifted to the community governed by Apple. The weak and narrow rules of the Internet left room for innovative new communities governed by Google, Salesforce.com, Amazon, and Facebook, but weak and narrow rules can also impose costs. Internet users playing defense are now at a serious disadvantage relative to black hats playing offense.

The lessons from technical communities apply equally well to nations and cities:

• Good governance typically requires rules that are narrow but strong.
• The big leaps forward come when a startup community competes by proposing a new set of rules.
• The weak and narrow rules of both the global financial system and the European Monetary Union expose us to far more risk than the weak and narrow rules of the Internet.

Sustaining Economic Growth

Government officials will select better policies and business people will make better decisions if they understand both what causes economic growth and what does not. Sustained growth comes from a steady inflow of new ideas. These flows will be larger if a nation maintains the right structural institutions.

Institutions create the playing field where economic competition takes place. A stabilizing institution like the central bank keeps inflation low and lifts an economy from a recession. A successful nation must have good stabilizing institutions, but ultimately their role is limited. The central bank is not like a coach who helps an athlete rise to higher levels of performance. It is more like an emergency room doctor who stops the bleeding after an accident.

Structural institutions are the ones that foster sustained improvements in economic performance. The conventional wisdom rightly insists that among its structural institutions, a nation must have competitive markets, good schools, and a legal system that facilitates voluntary exchange. But these alone are not enough. Growth comes not from doing ever more of the same thing. It comes instead from new ideas about how to do old things differently or entirely new things for first time.

Throughout human history, drawing from a bigger pool of existing ideas has been the key to discovering new ones. If the local pool got bigger, discoveries came more rapidly, further increasing the size of the local pool. In the past, this virtuous circle meant that regions that started with a lead were able to surge far ahead. Now, globalization is evening up the opportunities by making a common pool of ideas available everywhere in the world. Increased worker mobility, falling trade barriers, and shrinking communications and transportation costs are moving ideas between once isolated economic regions. Multinational corporations and global supply chains are creating fluid networks that encourage idea flows. The connections they are creating to following countries like India and China are helping these countries catch up more quickly. Other connections between leading countries are speeding innovation at the technological frontier. There is no longer any need for each region to reinvent the wheel. When it already exists somewhere else, a local entrepreneur can use it right away or a local innovator can improve it.

To sustain growth, the most important challenge is to use the best existing ideas and to create new ones. To meet this challenge, nations will need structural institutions that encourage local firms to use the best ideas from anywhere in the world and that connect local innovators into the rapidly developing worldwide networks of idea flows.