11. Paul Romer: “I Figured Out How to Get Myself Fired From the World Bank.”

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0:59When I was first starting grad school, if you had asked me which economist I wanted to be when I grew up, I would have said Paul Romer. He was the hotshot young economist at the time who was transforming the field of macroeconomics with his breakthrough ideas. Well, it only took one graduate-level macroeconomics course for me to figure out that I was not going to be the next Paul Romer. It turned out I had no talent or intuition at all for the issues covered by macroeconomics, topics like inflation and fiscal policy, central banks, and economic growth. Instead, I turned my attention to microeconomics, the study of incentives and why people make the choices they make and how public policy can affect those choices.

1:40Welcome to People I Mostly Admire with Steve Levitt. My life as an economist has turned out pretty great, but there's still a little part of me that wishes I could have been Paul Romer. Not only has he won the Nobel Prize for his academic breakthroughs, but he also managed to launch a successful tech company and serve as chief economist for the World Bank. So today, talking with Paul Romer, I'm talking to one of my heroes. What makes me a little nervous, though, heading into this interview is the fact that many of his ideas are very abstract. And I think my biggest challenge will be, how can I get him to express those ideas in a simple enough way that regular people can understand.

2:20And to be honest, since I barely understand macroeconomics myself, if I don't do a good job on this interview, I'm going to be sitting here scratching my head just like the people listening.

2:38I feel really lucky to have the chance to talk to you today. Thanks for being on the show. Yeah, well, it's a treat. And I feel remiss that we haven't connected before, but I think for much of my life, I have to go by better late than never. Now, you're an economist who has taken the insights of economics way beyond the classroom, which we'll get to. But first, I wanted to talk a little bit about your approach to economics because myself, I've always been heavily driven by empirics and by data. But I think as I've gotten older, I have an increasing appreciation for the importance of theory. And that, in fact, the data alone almost never give us the answer to the question that we care about.

3:16But what's so interesting to me is that it seems like watching your career, you've had the exact opposite trajectory. You started out being heavily influenced by theory. And more and more, it seems to me, you've come to be driven by data. Is that fair? Yeah, well, this is an interesting arc in my career. It's true that I was very focused on theory. It's good when it can help us by encouraging abstraction. Take away the distractions and focus on the things that really matter. But the main value is when it shows you something unexpected. You know, the connection that you didn't anticipate, like when Newton sees that the falling of the apple is linked conceptually to the orbit of the moon around the Earth.

4:00And I still believe in the value of good theory. But over time, I've come to have a much greater appreciation for the importance of evidence as well. So my new mantra is that a fact beats a theory every time. And if we keep reminding ourselves about that, it can avoid the kind of hubris that can set in when we get very attached to our own theories. So I'm about 10 years younger than you are. And so when I got to MIT to do graduate work, it was just at the time when your research on economic growth was having such a profound influence on the profession. And every single macroeconomist at MIT, they wanted to be you.

4:40Did your impact surprise you? You know, when I first started working on growth, it was literally dead. I was at MIT for two years. I went to Queen's University to follow the woman who was going to become my wife and then set my thesis topic when I had no adult supervision. And it went from being, you know, out of fashion to then being kind of a fad. It's interesting that your success came out of not having adult supervision to make sure that you didn't do anything too important or too radical. Well, my success at MIT actually came from a different source. And that source was that I was so completely and totally ill-equipped to be a graduate student that I didn't really have any other choice.

5:22So while everyone else was out pursuing endogenous growth or trying to write fancy game theory models, I didn't have any tools. So all I could do was go to data and muck around. And it turned out to be an amazingly effective constraint because I just decided, look, I'm going to fail in this profession. And anyway, I'm just going to do what's fun for a couple of years until I go through some other thing that someone will appreciate. And it was through a whole lot of luck that people ended up liking what I did, even though what I did was not in a general sense, very highly respected by the profession.

5:53So did you have like a mentor who encouraged you at all at MIT or were you basically just like self-directed? Jim Paterba was my advisor and he was the best possible advisor I could have had because he stayed out of my way. He was incredibly encouraging. And the only thing that he did wrong, although, of course, it's crazy to say it's wrong, is I had written a bunch of my silly little papers. And Jim pulled me aside and said, look, you've written a bunch of silly papers. What you need to do is to write something seminal, right? And I went back and I sat on my couch. And I can remember the fabric on the couch and the smell of everything.

6:28I sat there for three months trying to think big, seminal thoughts. And three months later, I literally had nothing. And I realized, look, you just can't pretend to be something you're not. I'm not a seminal guy. I'm a little mess around in the data guy. But it was a good lesson to learn because I've stuck true to that ever since. I know what I'm good at and I keep on doing that. I think you probably dealt with some of what I dealt with, which is after you do something which gets recognized as very good, everybody's saying, okay, well, do it again. What have you done lately? And a big important idea is something you stumble on.

7:00I think it's not something you manufacture. And so I ended up going and doing other things because I just didn't see anything on the horizon. So you won the Nobel Prize, and I thought that the Nobel Prize Committee did an amazing job of elegantly summarizing what you do. So here's what they said about you and about economics. They said, at its heart, economics deals with the management of scarce resources. Nature dictates the main constraints on economic growth, and our knowledge determines how well we deal with these constraints. Romer demonstrates how knowledge can function as a driver of long-term economic growth, demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.

7:45So, first, do you feel like that captures well the way you think about economics? Yeah, it does. In a sense, that conclusion was not really a surprise, right? I mean, people understood technological change was what was driving growth. A lot of people had some intuitive sense for this. The thing that has really sunk in for me after decades is this same possibility of sharing ideas that makes them a source for improvements in standards of living over time. So I think that was the surprise connection for me, that it's this non-rivalry or shareability of discoveries that not only makes them a driver of growth going forward, but explains why there's so much benefit from connecting with so many other people.

8:35Can you just define non-rival? Because I think there's some non-economists listening that won't know what you're talking about. Yeah. So imagine we had a bottle with some liquid in it that could save the life of your child. And if some other family had a sick child, there'd be this intense rivalry over who gets to drink the liquid in the bottle. That would be a rival good. The formula for making that liquid is a non-rival good. That formula is something that everybody can use at the same time. It was difficult to discover, but once they discovered it, at essentially no cost, you can communicate it to any family in the world.

9:10So accommodating those non-rival goods into economics required a departure from the model of perfect competition, which is a mathematical theory that perfect competition is the most beautiful theory I've ever seen. It's elegant. It's beautiful. I love it. But it couldn't accommodate this notion of a non-rival good, which was so important. And my thesis model of growth was just exactly along these lines. But one of the things I'm actually most proud about in my career is that even by the time I had published my first paper and finished my thesis, I concluded that model was just wrong. It just missed something essential.

9:52And this actually has a kind of a moral and ethical side to it. Because if you go back to the Pleistocene, other people were just a threat. The more people around, the less we have per person. But you switch to this world where we can start discovering ideas. they might discover something which we can then take advantage of. They can all be people that we work with and we all benefit from each other. So I think it enables a kind of growth in the human spirit that could be as important as the growth in the material goods that we enjoy. So I hear a wonderful optimism in you, but in the back of my mind, my pessimism is, couldn't we get more gains just by conquering them than trading with them?

10:34I mean, the ability for exploitation hangs in the background. Yeah, but fortunately, history shows that conquest is not a very good way to get benefit out of human capital. You know, in that old story about why Britain benefits from Portugal, they trade the wool for the port. The Portuguese have all of this very detailed knowledge and this ability to discover new things. And if you just took over and wiped them out, you just have a sunny location. if you'd make them be your slaves, but they're not going to be making very good port. They're certainly not going to be innovating. So I really think the way forward is to find ways to cooperate in a quid pro quo kind of basis.

11:16And it does hold out this possibility of a much better world. But then to be honest, I've been struggling with the fact that instead of expanding what I was calling this notion of who is us. We're living through a time where us versus them is becoming a lot more pronounced and intense. So I do have an empirical problem with my theory that, oh, you know, we're just going to become better people. It's going to keep getting better. Whenever economists talk about insights, the things you've been saying, I'm guessing they seem kind of obvious to regular people who haven't been trained out of thinking that way by economics.

11:56What makes your research hard? Why didn't the smart economists who were thinking about these questions 20 years ago, 200 years ago, why couldn't they come to the same insights that you came to? One of the things that struck me is that we have a group of people trying to figure something out. It's not a good model to treat them as if they're a unified individual discovering things. When different people are discovering things and following their own interests, competing, discussing, the outcome is just inevitably going to be different than if you had an omniscient social planner who's in charge.

12:36One of the inevitable consequences of this structure with many different people all trying to contribute to discovery is that we're likely to get excessive herding. There's times in science where you can see everybody starts to say, oh, I've measured the mass of the electron, it's here. Others try and measure it. They all come up with numbers that are close. Consensus emerges that the distribution of possible values is within this very narrow region. And then all of a sudden, everybody shifts. Some new piece of evidence comes in and it's like, oh, my goodness, it's over here. And then they all start clustering or herding around at different value.

13:12I think in general, we listen to others who know a lot. We don't have this unbounded faith in our own observations, our own ability to understand things. So we use as an input what others have found. And so I think one of the less obvious things, but that's important to explain to outsiders is that to get the benefits we want from discovery and collective learning, it's important to have incentives for a wider range of views that get expressed. so that when a new bit of information shows up, it at least gets entered into the conversation rather than having somebody self-censor it because they don't want to be too far outside of the norm.

13:58There is another side to this, though, that if the barriers of entry go down, you just get crazy views that get thrown in there, which we've seen with the internet, and it takes more time to dispute a crazy view than it takes to articulate one. So there's a certain level of integrity and a reputation that you're worried about maintaining in science that has to be in place before you're qualified to join the conversation. You're listening to People I Mostly Admire with Steve Levitt and his conversation with Nobel Prize-winning economist Paul Romer. They'll return after this short break.

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15:59We are Marines. We were made for this.

16:10All right, I want to ask you about one of the craziest things I think that maybe an economist has ever tried to do, which was that you essentially tried to create a city in a developing country that would be separate from that country and independently run. Could you tell us about that idea? Oh, yeah. The origins of this was a presentation I gave commissioned by USAID. The title was Building a Hong Kong for Africa. So what I was thinking was Hong Kong created a local example of a successful economy that China and other Asian economies could learn from. And so why don't we think about trying to do the same thing in Africa?

16:55Find a way to create, by bringing in Western institutions like rule of law, create a small city-state that could be the seed from which a more modern economic system could develop in the rest of Africa. As anybody, I guess besides me, will notice, this raises all kinds of alarms about colonialism and the history of colonial exploitation in Africa. And even though the intent of what I was proposing didn't imply anything like that, it had this kind of guilt by association that meant that everybody was a little bit horrified by the suggestion. But I felt like we just needed to talk about how we could try something else in development, because development assistance, frankly, has been a failure.

17:47I think economists and official aid have really done very little. So I thought it was time to kind of broaden the set of things we were talking about. Could you explain a bit more about one of these cities, charter cities, you called them, which are deliberately separated from everything else? So how would that change the surrounding cities and countries? The more I thought about this notion of a charter city, the more I realized it was actually a mechanism to help a new set of norms emerge in a situation where the traditional norms, which had been efficient in the past, were no longer appropriate in a new context.

18:30And because norms tend to be transmitted horizontally, you know, we're conformists. We tend to do what other people around us do. It's very difficult to get a coordinated change in the norms in some location. So then what you do to create new norms and give them a chance to survive, create a new place where they can go. And then when they associate with each other, the new norms can be self-reinforcing. So the Charter Cities idea is really a story about selecting a founding population with a different set of norms than the prevailing one in the existing population, and then letting those norms reinforce each other in this new location.

19:11And if they're genuinely better, other people will join to just get the advantages those offer. They'll get socialized into the new norms. And it gives you a way to basically carry out a change in what would otherwise be a stable system of norms. So that was the kind of intellectual idea behind all of this. I think you make a really fundamental insight in what I've heard of you talk about this before, which is there's something like 750 million people who, given the choice to leave where they are, would like to be somewhere else, a place with better developed rule of law norms. And the kinds of discussions we have on immigration policy are not even beginning to address that fundamental need.

19:56Now, what's interesting about you is you didn't just give this presentation, but you actually went out and tried to make this reality. And it sounds like you got pretty close. If somebody just says, ah, I don't think it's ever going to happen, those conversations just don't go anywhere. So I thought if we could make something happen, then people would have to engage with this idea. So I was fairly involved in conversations in Madagascar. I was engaged in conversations with Honduras where they actually passed some enabling legislation. I think, to be honest, I made a miscalculation, which was I thought the hardest thing would be to get a developing country that could say we could do this within our borders, invite somebody else in.

20:41The harder thing was to get some kind of a Western sponsor to play the role that Britain played in Hong Kong. And so I should have been focusing first on the sponsor rather than the place, because the fundamental problem here is that if a country has not got strong enough institutions to develop successfully, they may not have strong enough institutions to really stick to the idea of this sort of charter city. So it ended up not succeeding in either Madagascar or Honduras. But after the refugee crisis in Europe, European governments got very interested in this idea. So I think it will come back to life at some point.

21:24But I just think some of these ideas have a very long gestation leg, and you have to wait for the right opportunity.

21:37So I have to say, as crazy as that Charter City idea is, I love it. I think it'd be so important, so valuable, and I hope that somehow, someway, Paul Romer will get that launched. Now, for the second part of this interview, I want to ask Paul about quitting. It's something he's done a lot of, and I suspect he'll have deep insights into it. And also, I want to ask him about a bunch of different controversies he's been right in the middle of. Let's see if I can get him to open up on some touchy subjects.

22:11So you served as chief economist at the World Bank, which is a dream job for many economists. But for you, it seems like it was more like a nightmare. What happened there? With the World Bank, I was brought in to reform the research department. And then once I got there, they decided they didn't want any noise. And so you can't reform an organization if people don't want noise. And so I spent, you know, 14, 16 months fighting to try and do some reforms against the opposition from the top, realized I was never going to win that fight. And so I was persuaded that it would be very damaging to the bank if I quit.

22:49So then I gave an interview that I knew would be controversial. And, you know, I was appropriately contrived afterwards because I didn't want to do damage to the organization. But I did think it was a waste of time to continue there. So, you know, I figured out how to get myself fired and it worked. So I'm going to call you a quitter. And most people, those would be fighting words, but I think you'll actually be one of the few people who would consider that a compliment. Because as I look at your past, you have quit more things than just about anybody I've ever met. Do you have some insight into what makes you such a quitter?

23:23Yeah, well, I'd never framed it the way you do, but I like the in-your-face descriptive of quitter. The way I've tried to offer the advice to PhD students is by saying, there's always something else you can do. So if you reach a roadblock, and especially if you feel like your notion of right and wrong is going to require a compromise to continue to get past the roadblock, go do something else. I think this was something that I learned in my family because Because my father had been a Democratic politician. He ran for the U.S. Senate and lost in the middle of Johnson's term, 66. But in 65, he went and visited Vietnam.

24:08And he was already having doubts about the Democratic Party's commitment to the Vietnam War at that point. He started voicing those doubts and was basically kicked out of the Democratic Party. So he'd been this rising star and was sort of like out in the wilderness. And then some 10 years later, when another Democrat, Dick Lamb, became the governor, my dad was pulled in to be the secretary of agriculture, eventually became the elected state treasurer, then elected to become governor. When he decided he was just leaving the party rather than conform about the war, he had no idea that it would play out that way, but he knew that there were other things in life he could do.

24:47So I think that gave me the confidence to just be unafraid about trying something different. So tell us some of the things you've quit. I'm trying to think about clear cases where I've quit. Well, you quit cosmology to be an economist. I don't know if you consider that quitting, but that was a switch that you made, I know. Oh, that's true. That was because physics had benefited quite a bit from all of the funding that went into the NASA program. Those funds were being cut. So it looked like it was going to be tough to make a living in physics. And to be honest, I didn't think I was enough of a genius to survive in physics.