Professor of Economics at New York University Paul Romer firmly believes in the power of innovation.
He tells an apt example from the 1980s, when the world became aware of the ozone depletion and panicked.
– It was realized that propellant gases and freons destroy the ozone layer. Innovations played a big role when the world wanted to solve a problem.
Romer recalls how people were almost shocked at first when ozone-depleting substances were banned. Freons kept refrigerators cool and propellants were used in underarm spray deodorants.
– After all, it was silly when many said that these bans are a death blow to our way of life.
The propellants were replaced by other substances. Since then, deodorants have been applied to the armpits with rolls and the freons in refrigerators have been replaced by substances that do not destroy ozone.
There was a problem and there was a common desire to solve it.
Romer points out that the modern economy flexibly invents solutions when there is a need for it and the idea is rewarded.
– There is always an alternative. But if we don’t signal the reward to the market through decision-making, then we will continue as before.
Strong faith in innovation
interviewed Professor Paul Romer at the end of January in connection with the “A new world order” conference at Sciences Po University in Paris. The event’s panels discussed the state of the world after the Russian invasion.
Europe wants to get rid of Russian fossil energy. Due to climate change, there has been a desire to get rid of oil and coal for some time, but the war in Ukraine hastened the green transition.
– The good thing about this is that European countries have woken up to change their energy system. Now we are aiming for a carbon dioxide-free system, which would have been switched to anyway.
Romer trusts in innovation and discovering new things even now, when the world’s energy production is being directed away from fossil energy. The green transition calls out for inventions and new openings.
Romer is a 2018 Nobel laureate in economics who has focused on researching innovation. His research work that led to the Nobel Prize can be roughly boiled down to the realization that technological progress creates growth and conditions for market development.
Decision-making is paralyzed
According to Romer, states and political systems must create room for will and thus the conditions for innovation. They, in turn, show the way for, for example, the green transition.
Romer says the war in Ukraine is not the only factor causing the turmoil now. In his opinion, the biggest risk is that political systems seem to be in a paralyzed state.
– Systems do not make decisions. If we compare to the previous example of ozone depletion, the difference is that that same one-inchness is now missing from the world.
The fragmentation and polarization of the political field is one significant factor in the internal disputes of western democratic systems. It is difficult to find consensus on direction.
– The growth of populist movements has also been paralyzing democracies, says Romer.
Is the green transition the seed of a trade war?
The EU is currently considering how it will respond to the large US state subsidies, which are used to speed up the green transition behind the scenes.
Europe fears that the United States will take a strong path to protectionism and stifle free competition with support packages of almost 400 billion dollars.
The worst situation for Europe would be that innovations related to the hydrogen economy, wind power technology and other forms of clean energy would be born in the United States and Europe would be left licking its fingers.
There are already hints of a trade war in the air.
Professor of economics Paul Romer is on top.
– Everything depends on what we support. As long as the subsidies are for things that are good for everyone, I don’t think there’s as much harm in them as people seem to imagine.
At this point, Romer takes the example of the aircraft industry, i.e. the competition between the European Airbus and the American Boeing.
In the United States, there was a complaint that Europe heavily subsidized its own Airbus aircraft production. In fact, everyone in the world, including the United States, ultimately benefited from Airbus entering the market.
– Otherwise, the whole world would have been dependent on one manufacturer, Boeing.
Emotional reactions aside and look at the benefit
Romer points out that in the green transition, the focus should be on the most important thing, i.e. how we overcome climate change.
He says that too many companies whose operations are temporarily hampered by these support measures get a voice in the discussion. Companies trying to protect their own profits talk about the threat of a trade war and state power disrupting the market.
Romer also reminds us that the idea of fairness and equity causes strong emotions.
– It is important to get over emotional reactions and ask what effect this has and what is the benefit for the whole world.
As a good example of this, Romer considers the rivalry between the United States and China over the production of solar panels in recent years. In the US, people thought that China’s strong support for solar panel production was distorting competition and driving American manufacturers into trouble.
– In the end, however, it significantly reduced the costs of the entire solar energy. The whole world benefited from it. In the end, investments that support innovation always bring good for everyone.
According to Romer, the corona pandemic was a good reminder of how the state’s generous support policy is sometimes in order to keep the wheels of the economy turning and employment to remain high.
However, he reminds us that during the pandemic, all monetary policy decisions related to money and interest rates were made in technocrat-led central banks without daily political guidance.
Now that guidance of the political system and economic policy decisions would be needed to support the innovations of the green transition.
– The problem with these political decisions is that they make you wait.
You can discuss the topic on 11.2. until 23:00.