Yale University professor William D. Nordhaus and New York University professor Paul M. Romer were awarded the 2018 Nobel Memorial Prize in Economic Sciences on Monday "for integrating climate change into long-run macroeconomic analysis," the Royal Swedish Academy of Sciences announced in a news release.
Messrs. Nordhaus and Romer were awarded the prize for designing models that address the creation of long-term sustained and sustainable economic growth.
"This year's laureates ... have significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge," the academy said in the news release.
Mr. Romer's research revealed how economic factors dictate companies' willingness to produce new ideas and innovations. It laid the foundation of the "endogenous growth theory," which explains how ideas are different from other products and need specific conditions to thrive.
Before Mr. Romer's work, the bulk of macroeconomic research argued that technological innovation was the main driver of economic growth. However, it had not factored how economic decisions and market conditions determine the creation of new technologies.
Mr. Nordhaus' work examines how society and nature interact. He was the first person to build a quantitative model to reveal the relationship between the economy and the climate. His model is used to simulate how these spheres co-evolve and impact one another.
Bruce Jacobs, principal at Jacobs Levy Equity Management, said: "Romer and Nordhaus were recognized for developing economic models that assess the effects of technological innovation and climate change, respectively, on long-term economic growth. Romer found that markets, on their own, do not fully reward creators of new technologies."
Mr. Jacobs added in the email, "Nordhaus pioneered the creation of models that incorporate empirical evidence from the natural sciences, including chemistry and physics, into economic models, allowing climate change to be analyzed in terms of costs and benefits."
"Investors obviously have an interest in sustainable economic growth, as it underpins the robustness of the stock market," Mr. Jacobs said. "Romer's work may enable them to discern the effects of policy choices on idea innovation, which can provide an edge in investment decision-making. Nordhaus' work holds obvious appeal for socially responsible investors."
In a press conference held by NYU after the announcement, Mr. Romer said, "The real value of these prizes is in celebrating the enterprise."
On a call with journalists after the announcement, Mr. Romer added he believes that "it's entirely possible for humans to produce less carbon. Once we start to reduce carbon emissions we'll be surprised that it wasn't as hard as we anticipated."
Regarding climate change, Mr. Romer said, "The danger with the very alarmist portraits that people are given ... is that it will make people feel apathetic and hopeless." He noted, however, that it's possible for the world to reduce its carbon emissions. "It's entirely possible for us to have better standards of living as far into the future as we can see."
Mr. Nordhaus could not be immediately reached for comment.