Prometheus, Smith, and the Ultimate Causes of Long-run Growth

Ultimate cause

furthest removed in the causal chain from outcome

Proximate cause

nearest in the causal chain to outcome

aggregate production function

describes how total real gross domestic product (real GDP) in an economy depends on available inputs. Aggregate output is real GDP. Variables: L - Labor Supply, K - Capital Stock, X - land supply, A - technology.

ceteris paribus

all else equal

The Law of Diminishing Returns

Ceteris paribus, increasing a factor supply increases Y at a decreasing rate; there is diminishing marginal productivity in all factors

marginal productivity of x (ex: labor)

the additional output produced given an additional unit

Total Factor Productivity (TFP)

Measures how efficiently the economy combines labor and land to produce output

"Technology"

How inputs are combined to produce outputs

TFP Growth

More output for the same number of inputs

What is Promethean growth?

Growth through technological change (innovation).

Innovation = invention + diffusion + improvement

What is Smithian growth?

Growth through better organization. Better organization includes market exchange, specialization & division of labor; allocative efficiency; and institutions

Principle of Comparative Advantage

If individuals specialize in producing their respective comparative advantage (lower opportunity cost than others) and trade with one another, all benefit. Gains from trade raise real output per person.

counterfactual

measures what would have happened to beneficiaries in the absence of the intervention

Proper role for the State (Wealth of Nations)

Provide national defense and administer justice (property rights); provide true public goods

Alternatives to market

Mercantilism (non-competitive markets)

Heredity

Discrimination/segregation

Central planning

Why will alternatives to competitive markets almost certainly be worse?

State faces information problems - cannot achieve efficient allocation; culture is not economically efficient; there are additional social costs associated with alternative markets (they encourage rent-seeking, corruption, etc)

Capital-labor ratio (K/L)

capital per labor; illustrates law of diminishing returns as additional workers each have less capital to work with, so they do not increase output as much as previous workers (MP(L) goes down)

exogenous shock

change happening for reasons outside the model (causing N, K, and/or A to increase)

Examples of Exogenous shocks

1. China Foreign Direct Investment Boom (~early 1980s) - increasing Y from increased K

2. Italian population recovery (1400s-1600s) - decreasing y from increased L

Meiji Restoration (1868) - increasing Y & y from increased A

What increases GDP?

(Ceteris Paribus)..

Higher population

more capital

Higher TFP

What increases GDP per Capita?

(Ceteris paribus)...

Lower population

More capital

Higher TFP

Two types of economic growth (sustained increase in GDP)

1. Extensive growth

2. Intensive growth

Extensive growth

more factors of production -> more GDP. Eventually run into law of Diminishing Returns

Intensive growth

TFP growth (promethean growth & Smithian growth)

Solow Residual

A measure of total factor productivity obtained as a residual from the production function, given measures of aggregate output, labor input, and capital input.

Capital Deepening

Growth in capital-labor ratio (increased capital to labor)

Solow Model

Displays that capital deepening cannot sustain economic growth forever. Because of diminishing returns, extensive growth in living standards is eventually exhausted; TFP growth likely more important to long-run growth in living standards

Why was there no prosperity/growth in the 1500s despite same access to natural resources?

Limiting factor was lack of ideas and knowledge - insinuates that Promethean Growth drove the Great Enrichment

Kremer Model

Assumes Malthusian Economy and "more people, more ideas". Prediction: population growth rate is proportional to population size. Describes the global economy.

Implies larger populations have more rapid technology growth rates.

Malthusian Economy

population growth is restricted by the growth of technology and resources; there is a steady-state such that as tech rises, population adjusts to maintain y(superscript)M

The Ice Age Experiment

Divides human beings up into three experimental historical groups: Old World, Americas, and Australia. Kremer model predicts the Old World should have the highest tech level due to population. Eurasia had a head start.

(Comin et. al) Why does technological persistence occur?

Technological complementaries (MB goes up)

Recombination of old technologies (MC goes down)

Feedback: tech to science (MC goes down)

Feedback: tech to low access cost of knowledge (MC goes down)

Technological complementary examples

Compass; astrolabe; ocean-going ships

Economies of scale tech

only beneficial in high tech, high income countries where there is MB for tech adoption (larger output at cheaper price) i.e. assembly line, mechanical reaper

Economies of scope tech

Only makes sense to adopt in already high tech economies were there are many different applications for the tech (MB goes up and MC goes down) i.e. Electrification, Microchips

Comin et. al. economic theory

The Snowball Effect - relatively high tech in past leads to high tech today, high y today (differences in past explain differences today) namely bc of tech complementaries