Chapter 24: 328-333

For years,William Nordhaus tried to put R&D into the Solow growth model using monopolistic competition, but was unable to succeed. In 1974, when oil prices spiked, he became concerned about the energy problem. Thanks to his dissertation, Nordhaus understood that a common response to these high prices would be a change in technology. Nordhaus believed that technological change would have the biggest effect on future prices and availability of oil and he wanted to design an experiment to help illustrate his ideas. In the experiment, Nordhaus wanted to measure the uses of products made from petroleum as well as their outputs. He called this measure the true cost of living index because it only measured the goods and services actually wanted. But then he realized that measuring output would be very difficult because of the presence of changing technology. His solution was to focus on a good that hadn’t changed much over the years, the cost of illuminating a room. What he was most interested in with this experiment was to look at the “improvement in the sheer efficiency of its provision over the years, both of finding fuel and turning it into light.” What he found was that over the years, light had become easier and cheaper to obtain. He then realized that this could be likened to the larger, more important, oil crisis. So, with his experiment he wrote Do Real Income and Real Wage Measures Capture Reality? The History of Lighting Suggest Not and presented it at the Conference on Reasearch in Income and Wealth.