20101006+slides - Economics 1: Fall 2010 J. Bradford...

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Unformatted text preview: Economics 1: Fall 2010 J. Bradford DeLong, Michael Urbancic, and a cast of thousands... hAp://delong.typepad.com/econ_1_fall_2010/ Ladies and Gentlemen, to Your i>Clickers... •  Were Chinese living standards on average? –  A. Higher in 1820 than in 1968, and higher today than in 1968. –  B. Higher in 1820 than in 1968, and higher in 1968 than today. –  C. Lower in 1820 than in 1968, and higher in 1968 today? –  D. Lower in 1820 than in 1968, and higher today than in 1968? Administrivia •  PresentaUon arUcles –  SecUon 13 (October 11 ­13) •  People making choices under constraints •  “Box ­office revenue up for 2009: It's not just higher Ucket prices: More people are going to the movies, even as the recession has depressed consumer spending in nearly every other category,” by Ben Fritz. Los Angeles Times (December 14, 2009) hAp://laUmes.com/business/la ­fi ­ct ­ boxoffice14 ­2009dec14,0,5678666.story –  SecUon 14 (October 13 ­18) •  A complex division of labor coordinated by a market: •  Leonard Read (1958), "I, Pencil" <hAp://www.econlib.org/library/Essays/ rdPncl1.html> (ac. June 7, 2010) –  SecUon 15 (October 18 ­20) •  Supply and demand •  “Food Prices Are Rising Worldwide: Weather, Oil Costs among Factors,” by Katherine Corcoran, Boston Globe, (March 30, 2008) hAp://Unyurl.com/ 8qkgnb –  SecUon 16 (October 20 ­25) •  IncenUves and rewards •  “In Praise of Price Gouging,” by John Stossel. Posted at Townhall.com, September 7, 2005. hAp://www.townhall.com/columnists/JohnStossel/ 2005/09/07/in_praise_of_price_gouging Administrivia •  By now you have read the first 264 pages of Seabright, The Company of Strangers... –  What do you think of the argument that large ­ scale human socio ­economic cooperaUon is an interesUng puzzle that needs to be explained? And what do you think of Seabright’s aAempted answers? –  By the start of lecture on October 13, write a short two ­page essay intended to explain what Seabright’s central argument is to somebody who has not read the book, and giving your evaluaUon of his central argument. Economics 1: Fall 2010: Economic Growth II J. Bradford DeLong September 27, 2010, 12 ­1 Wheeler Auditorium, U.C. Berkeley Guessing at Some Numbers •  Growth rates of populaUon –  –  –  –  HG: 0.01%/year AS: 0.05%/year EM: 0.2%/year >1800: 1.0%/year •  Growth rates of technological and organizaUonal knowledge –  –  –  –  HG: ???? AS: 0.01%/year EM: 0.09%/year IS: 2%/year –  –  –  –  AS: 0.05%/year EM: 0.2%/year EIS: 1.4%/year IS: 3.4%/year •  Growth rates of global GDP Convergence to 2009 Why Divergence to 1968? •  The agrarian legacy –  China’s populaUon has grown by a factor of 7 since 1800 –  Egypt’s by a factor of 30 –  If most of your people are sUll unmechanized farmers, that is a huge set of headwinds •  The infrastructural task –  Even if most of your people aren’t unmechanized farmers and live in ciUes, a rapid populaUon growth rate means a large investment burden •  DifficulUes of technology transfer •  DifficulUes of government –  Communism –  CorrupUon Why Convergence Aqer 1968? •  •  •  •  End of High Communism Expansion of world trade Technology transfer But if you look at it, the big difference between before 1968 and aqer 1968 is the different desUnies of two countries –  China –  India –  If you count one ­country ­as ­one, rather than one ­ person ­as ­one, it is hard to see a paAern Ladies and Gentlemen, to Your i>Clickers... •  What number should you have in your head for global living standards before 1500? –  A. $100 per capita per year –  B. $500 per capita per year –  C. $1000 per capita per year –  D. $7000 per capita per year –  E. $55000 per capita per year Factors of ProducUon and Economic Growth •  •  •  •  Physical capital and resources (K) Labor (L) Human skills, acquired via educaUon and experience (H) Factor income version of the circular flow: –  Y = rK + wL + sH •  Difference it: –  ΔY = r(ΔK) + w(ΔL) + s(ΔH) –  What would you expect an extra lathe to be worth? Well, about what the average lathe is worth. –  Thus this equaUon tells you what you would expect the rate of economic growth to be as a result of factor accumulaUon Factors of ProducUon and Economic IncenUves •  A growth equaUon: –  ΔY = r(ΔK) + w(ΔL) + s(ΔH) •  IncenUves –  Capital: incenUves to save and invest –  Skills: incenUves to go to school, and to pay aAenUon on the job •  Benefits of a private market system: –  Pushes the decisions about factor accumulaUon out to the periphery –  Gives people at the periphery the right incenUves The Solow Residual •  A growth equaUon: –  ΔY = r(ΔK) + w(ΔL) + s(ΔH) •  Plug in numbers for the U.S. today in an average year –  ΔY = rK(ΔK/K) + wL(ΔL/L) + sH(ΔH/H) –  ΔY = (0.3)(3%/year) + (0.3)(0.7%/year) +(0.4)(1%/year) –  3%/year ΔY ≠ r(ΔK) + w(ΔL) + s(ΔH) = 1.5%/year •  Half of all economic growth—2/3 of all growth in output per capita—does not come from factor accumulaUon, but from something else •  This is why Bob Solow won the Nobel Memorial Prize in Economic Sciences Total Factor ProducUvity •  Sources of the Solow Residual –  Technology –  Business organizaUon –  Market organizaUon •  And here we have a big incenUve problem –  Those who invent and innovate new technologies, new organizaUons, and new markets are enormous public benefactors –  But they don’t get the rewards of what they do—the rewards spillover –  Patents and copyrights •  In the U.S. ConsUtuUon •  Resolve the problem •  But at the cost of creaUng another problem... How Much Does TFP MaAer? •  Go back to our historical guesses: •  Growth rates of technological and organizaUonal knowledge –  HG: ???? –  AS: 0.01%/year –  EM: 0.09%/year –  IR: 0.9%year –  MIS: 2%/year (world average) Market OrganizaUon •  We have a “natural experiment” •  High Stalinist central planning –  Marxian suspicion of markets –  Hence we won’t have any •  Reproduce the Rathenau ­Ludendorff World War I Imperial German war economy –  Communes, economies of scale, GOSPLAN, etc. –  Overall producUvity? 20% of market economies •  Military producUvity is another story—at least during WWII •  You throw away a five ­fold amplificaUon of producUvity by eschewing the market –  SUll, we have a 18 ­fold worldwide TFP gain since 1800 –  A 72 ­fold worldwide TFP gain since 8000 BC Business OrganizaUon and Technology •  So mixed together that they are very hard to separate •  We have a 18 ­fold worldwide TFP gain since 1800. –  If one doubling of that is due to “extent of the market,” then we have a 9 ­fold worldwide TFP gain from business organizaUon and technology •  A 72 ­fold worldwide TFP gain since 8000 BC –  If markets are responsible for a 5 ­fold increase, that gives us a 14 ­fold worldwide TFP gain from business organizaUon and technology •  And if we could get everyone up to San Francisco Bay standards –  That would be a further 7 ­fold amplificaUon Followership: The Importance of InsUtuUons Leadership: A Much Lower Speed Limit •  Silicon Valley •  Not just technologies, but technologies people would like to use •  Not just technologies people would like to use, but delivered at an affordable price •  Plus the innovators have to be able to make a profit –  Without imposing very large restricUons on the social uUlity we derive from their innovaUons –  Google Books... Ladies and Gentlemen, to Your i>Clickers... •  What share of U.S. growth in an average year is due to total factor producUvity improvement? –  A. 1/10 –  B. 1/3 –  C. 2/3 –  D. 3/4 –  E. All Ladies and Gentlemen, to Your i>Clickers... •  What share of Chinese growth since 1975 is due to total factor producUvity improvement? –  A. 1/10 –  B. 1/3 –  C. 2/3 –  D. 3/4 –  E. All Test Your Knowledge •  What is the average rate of worldwide improvement in TFP over the past century? •  Why do we fear that the market economy is not a good social calculaUng machine for producing the “right” amount of TFP growth? •  How much damage does High Stalinist aboliUon of markets do to an economy? •  About how much beAer is our technology here in San Francisco Bay today than technology in Gilgamesh’s Uruk back in the early days of agriculture? ...
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This note was uploaded on 07/15/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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