Robert Whaples and the Modern Principles

A blog on my teaching with Modern Principles of Economics by Tyler Cowen and Alex Tabarrok

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Archive for the ‘Ch 07 Growth, Capital Accumulation and the Economics of Ideas: Catching Up Vs. The Cutting Edge’ Category

Growth Triumphant: The Chapter That Got Me to Switch

Posted by Robert Whaples on November 12, 2009

Yesterday I began Cowen & Tabarrok’s macro chapter 7, “Growth, Capital Accumulation, and the Economics of Ideas: Catching Up vs. the Cutting Edge.” (The title is a bit of a mouthful, so let’s call “Growth Triumphant” for short.)  This is the chapter that finally convinced me to switch to T & C, when I read it about a year ago.

The heart of the chapter is a student-friendly version of the Solow Growth Model. I’ve used the Solow model in my intro course for years because it shows the sources of growth so clearly and pushes students to think abstractly.  Some other intro textbooks invoke it (usually behind the scenes), but they typically are afraid of it — fortunately T & C aren’t.  They demonstrate the model with a three equation framework:  (1) Y = the square root of K; (2) I = 0.3Y; and 3) Depreciation = 0.02K.  After setting up the model, they use it to demonstrate fundamentally important concepts including catch-up growth, the post WWII miracles of bombed-out Germany and Japan, why capital alone cannot be the key to economic growth (because we reach a steady state), what happens if investment rates differ, conditional convergence, and how “cutting edge” growth (i.e. increases in total factor productivity/technology) drives long-term growth.   The framework is simple enough that one can easily solve for the steady state in class.

The chapter closes with an excellent discussion of the economics of ideas — including an aside about how culture influences entrepreneurship and how John Kay, eighteenth-century inventor of the flying shuttle, had his house destroyed by machine breakers.  The crowning touch is an optimistic conclusion about the future of economic growth.  Tyler and Alex conclude that the supply of new economically useful ideas is a function of population x incentives x ideas per hour.  Standing Malthus and neo-Malthusians on their heads, a rising population is good because there are more human brains around to hatch new ideas.  Likewise, it doesn’t appear that the law of diminishing returns applies well to the creation of new ideas.  This section mirrors my own long-term optimism about the global economy, an optimism shared by the bulk of the profession.  As reported in “Collapse? The ‘Dismal’ Science Doesn’t Think So: Economists’ Views of the Future,” The Independent Review, 11 (2), Fall 2006, the cross-section of economists I surveyed are very optimistic about the long-term growth of the U.S. and global economies.

At the end of the lecture, I began to show how the Solow model can incorporate the Malthusian model — changing the axes from Y and K to Y/L and K/L and demonstrating Malthus’s dismal predictions that population growth will drive mankind inevitably back to the subsistence rate.  On Friday, we’ll explore how we moved from a Malthusian world to a Solovian world to a Romerian world.

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