Ooh those tricky poverty lines

Noah Smith had a rather exasperated blogpost (or newsletter post) out recently about Jason Hickel.

Hickel, an anthropologist by training, has two major theses about the world:

He believes that global poverty reduction is a myth, and
He believes that degrowth is the best solution to environmental problems.
Both theses are wrong. And not just wrong in the “Ackshually, sir, you don’t have the facts quite right” sense, but wrong in consequential, potentially dangerous ways. In this post I’m only going to push back against the first of these two narratives; I promise I will write more about degrowth later, and in the meantime you can read this and this.

https://noahpinion.substack.com/p/against-hickelism

As usual, please do read the whole thing.

In that post, Noah Smith refers to an article by Hickel in The Guardian a couple of years ago. Here’s an excerpt:

What Roser’s numbers actually reveal is that the world went from a situation where most of humanity had no need of money at all to one where today most of humanity struggles to survive on extremely small amounts of money. The graph casts this as a decline in poverty, but in reality what was going on was a process of dispossession that bulldozed people into the capitalist labour system, during the enclosure movements in Europe and the colonisation of the global south.
Prior to colonisation, most people lived in subsistence economies where they enjoyed access to abundant commons – land, water, forests, livestock and robust systems of sharing and reciprocity. They had little if any money, but then they didn’t need it in order to live well – so it makes little sense to claim that they were poor. This way of life was violently destroyed by colonisers who forced people off the land and into European-owned mines, factories and plantations, where they were paid paltry wages for work they never wanted to do in the first place.

https://www.theguardian.com/commentisfree/2019/jan/29/bill-gates-davos-global-poverty-infographic-neoliberal

I honestly don’t know where to begin in terms of refuting just this excerpt, let alone the rest of the essay, but thankfully, I don’t really need to. Noah Smith takes on part of the burden in his essay already, and Max Roser also pads up in this essay:

You can see this more clearly in the chart below. Clicking on the ‘relative’ button shifts the chart from absolute numbers to percentages. Whilst the proportion of the world’s population living in extreme poverty has been falling consistently since 1820, it is only in recent decades that this has translated into a decline in the number of people living in extreme poverty.

https://ourworldindata.org/extreme-history-methods
The chart above is absolute numbers, while the one below is in percentage terms. Both charts are from the essay by Roser linked to above. Here is the link again.

Look, much remains to be done in our battle with poverty. Much, much more. The fight is nowhere close to finishing, and we still aren’t sure about how to best reduce poverty – and by we I mean even the best of economists, no matter how you measure “best”. But this fact is incontestable: the world is better off today than it was a century ago, and that by various measures. One of which is the fact that poverty levels are down. By how much, by which yardstick, for which country and why – all are questions worthy of debate. Your answer about the magnitude of reduction in absolute levels of poverty might differ from mine, as might your choice of poverty line. It might also differ in terms of proximate cause.

But not the direction. Your answer about the direction when it comes to reduction of poverty ought to be the same: lower.

So You Think You’ve Understood Macro…

Warning: this post actually isn’t “for everybody”.

Teaching macro is hard enough. Teaching macro to non-economists is all but impossible, because things get really messy really quickly – and I cannot emphasize how messy, and how quickly. The simplest way to teach macro to non-economists is to say that macroeconomics attempts the impossible – it tries to analyze too many variables at the same time in a gloriously inadequate framework, with not enough attention being given to how to understand, measure and forecast risk uncertainty.

And that’s before we’ve even touched the concept of time and inherent unknowability!1

Shackle went on to write that what the market equilibrium conception showed was a world of perfect knowledge frozen in time. It thereby negated itself as being of any use in a world where knowledge of the future is impossible and time moves in one direction. In such a world the action of human beings must be in part based on reason and in part on imagination—specifically, imagination with respect to what various individuals imagine the future might be or even should be. Shackle wrote that neoclassical economics rested on a teleological or pre-determined future and thus left no space for human choice which was inherently tied up with a human being’s capacity to freely imagine what might be in store in the future.

https://en.wikipedia.org/wiki/G._L._S._Shackle#Equilibrium_versus_time

I’m going to sound very woo-woo when I say this, but if at the end of your macro semester you think you’ve understood the subject, then both you and your prof haven’t done a very good job. Macro is hard, and the macroeconomy is inherently unknowable, and yes, I’m willing to die on this hill.

But that does not mean it is not worth studying! Quite the contrary, in fact: it is precisely this reason – the inherent unknowable nature of macro – that makes it so fascinating to study.2

And if you are somewhat familiar with macro – say you’ve spent a semester or so studying it, maybe a bit more – then a good way to check if you have “understood” the subject is to read this lovely little essay by Trevor Chow. (Please, be warned, if you have not had a course in theoretical macro, this essay will make very little sense, and you absolutely should not read it. )

Description: The goal is to bring you up to speed from knowing nothing about business cycle macroeconomics till you know everything you want to know about it at an intermediate macro level within a single post. We’ll mess around with the notion of goods and money market equilibrium to see where it takes us, though if you want to get to the interesting stuff and already know enough about IS-LM etc, feel free to skip to Part 4 and onwards. This is probably, even more than my growth series, the hardest I’ve tried at making things accessible and clear, so please do get in touch if you think there are things which are underexplained or could be rewritten. And check out Miles Kimball and Nick Rowe, whose ideas I borrow very generously from in this post.

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

It’s very simply written, and is easily understandable – and trust me, that is hard to do when it comes to macro. It covers a lot of useful concepts, and there is a lot of back and forth between various schools of thought in macroeconomics.

My favorite excerpt was this one:

Macroeconomics is itself quite difficult, because even in the simplest business cycle models we are interested in all sorts of things: output, consumption, investment, the real interest rate, the nominal interest rate, prices, the money supply and inflation. Squeezing all of this into a static model is nigh impossible. Although I do think the canonical IS-LM model can be a bit deceptive with respect to interest rates, the idea of reconciling the goods and money markets is a useful approach. And by putting the IS-LM model through its paces, we’ve already illustrated some important ideas:

That the short run is a monetary question and not one of price adjustment
That there can be indeterminacy or unstable equilibria with bad monetary regimes
That liquidity traps and debt deflation can cause problems, but liquidity traps are really expectations traps
That there are good reasons for the Taylor rule and the Taylor principle

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

Again, let me reiterate my basic point: if you are left with the feeling that you “get” macro, beware. Read more, and keep asking how you might be wrong in your understanding of the subject. And excellent places to begin would be Frank Knight and GLS Shackle – even the Wikipedia articles are more than enough to get started!

Bonus reading material: Snowdown and Vane.3

I’ve said it before, and I’ll say it again: macro is hard!

  1. I’m genuinely curious: if you’ve been taught a course in theoretical macro, did G.L.S. Shackle ever come up for discussion?[]
  2. Quite like studying theology, no?[]
  3. These prices make no sense whatsoever. Pah.[]

What is common between the AER and markets in Nashik?

Not a joke, that is a genuine question.

The AER, by the way, is the American Economic Review. Getting published in the AER for an economist is like a cricketer getting to a century in a Test at Lords. Although drawing this analogy does remind me of what Harsha Bhogle said about Sachin and the Lord’s honours board.1. Nashik, of course, is a city in Maharashtra.

So what’s the reason for the title of today’s blog post?

Exhibit A:

Exhibit B:

Amid rising Covid-19 cases in Maharashtra, the Nashik district administration has now issued new restrictions to limit people from visiting the markets unnecessarily. The people in Nashik will now have to pay ₹5 per person for an hour every time they visit any market in the city. news agency ANI reports.

https://www.livemint.com/news/india/new-covid-19-restrictions-in-nashik-now-pay-rs-5-for-hour-long-market-visit-11617154785051.html

In the boring but functional language of the economist, no free entry in these markets anymore.2.

What should we anticipate in terms of effects of such policies? Why? Are these policies good, or bad?

  1. Frivolous visits to both markets become rarer than before. In both cases, that was the intended outcome.
  2. In Nashik’s case, the price isn’t just 5 rupees, but also the time that you will have to spend waiting in line before you can cough up the fie rupees. Plus, the fine print says that if you end up spending more than one hour, you will have to pay 500 rupees as an additional fine.
  3. 1000 dollars is steep even by American standards. It is just completely out of reach for most of the rest of the planet. 5 rupees is nowhere close to being a back-breaking amount for most Indians. Does that make the AER price too high and the Nashik price too low? I think so, but that then begs the question of what the price should be in each case.
  4. You’ll “bunch together” a number of separate visits to the market. You won’t just pop down to the market to buy half a litre of milk in the morning and then pop back later in the day for some onions. You’ll combine the two trips. That is the intended outcome, so this is a good thing! But in the case of the AER entry fee, you’ll want to “get your money’s worth” – which means there is a chance that your paper will end up being longer than would otherwise have been the case. This is nobody’s idea of a good idea!
  5. Neighbours might get together and deputize one person to go get the shopping done. Again, that’s wonderful! Authors will get together too, that is, co-authorship will go up. Free <cough> rider <cough> problems?
  6. At the margin, sellers in Nashik’s markets are incentivized to figure out home delivery options. Again, wonderful! Since getting published in the AER is anything but a perfectly competitive market (just the one seller, by definition), AER has no such incentive. But the substitution effect will come into play, no? Other journals will see more papers being submitted. And if those journals raise prices, then fewer papers will be submitted all around. Personally, I don’t see this as such a big problem.3

(Here’s Tyler Cowen on other, related points about the AER pricing.)

As a student of economics, you should be able to see the similarity between both of these pricing calls, and also see the differences. That allows you to begin to think through whether these will, in fact, be good ideas or not, and why. I’m sure that there are many other points to think about in both cases.

If you are a student of microeconomics (and who isn’t, really), it might be worth your while to think about what I am missing in my analysis. Please, feel free to let me know!

  1. Sachin famously never managed to score a century at Lord’s, and therefore his name isn’t up on the Lord’s honours board. Harsha Bhogle apparently asked whose loss it was, Sachin’s, or Lord’s[]
  2. To be clear, the AER thing was an April Fool’s joke.[]
  3. To be clear, research may not go down. The attempt to publish that research will. And I’m ok with that![]

The Heider and Simmel Animation

What did you think was being shown here? Now read this blogpost!

Sylvia Plath’s Food Diaries

Seems like such a mundane tweet, unless you know who Sylvia Plath was, of course. The entire account is just “Everything Sylvia Plath ate, according to her journals, her letters, her poems, The Bell Jar, and other miscellany” It has been lovingly curated.

So who was Sylvia Plath?

Sylvia Plath was one of the most dynamic and admired poets of the 20th century. By the time she took her life at the age of 30, Plath already had a following in the literary community. In the ensuing years her work attracted the attention of a multitude of readers, who saw in her singular verse an attempt to catalogue despair, violent emotion, and obsession with death. In the New York Times Book Review, Joyce Carol Oates described Plath as “one of the most celebrated and controversial of postwar poets writing in English.” Intensely autobiographical, Plath’s poems explore her own mental anguish, her troubled marriage to fellow poet Ted Hughes, her unresolved conflicts with her parents, and her own vision of herself.

https://www.poetryfoundation.org/poets/sylvia-plath

Here is her bibliography on Wikipedia, and here is NY Times coverage of Sylvia Plath.

Via the truly excellent splainer.in

(I am anything but an expert on poetry, and you should keep that in mind!)

Doing a PhD

Abhishek had a pretty interesting question on last Friday’s post:

“Is doing a PhD still worth it?”

I don’t know (and deliberately haven’t asked him) what he means by “still”. I am going to interpret that to mean “in recent years”. And my answer is the same as any other economists’ answer: it depends.

What does it depend on, you ask?

  1. Don’t do a PhD to learn a topic, or master one. That happens by working on a topic in the real world for many years. It doesn’t happen by studying a topic for many years. Some of the brightest people I know do not have a PhD, and unfortunately, that statement also makes sense the other way round.
  2. Do a PhD to get a job. We have this idea, both here in India but also the world over, that only a PhD has the moral authority to teach on a full time basis. I call bullshit on that idea, but it is not an idea that is going to go away anytime soon. So if you want to be employed by a university on a full time basis as a teacher, do the PhD.
    1. If you want to teach in an Indian university, you can get away by getting a PhD from an Indian University.
    2. If you want to teach abroad, I’d strongly recommend getting a PhD from abroad.
  3. A PhD is a useful signaling device. If you want a leg-up in your career after a decade of working, or if you want more “cred” in your workplace, at seminars and conferences and what not, then get a PhD. A “Dr.” in front of your name is a wonderful signaling device.
  4. It’s got fairly decent “Sharmaji ka beta” powers too. Not, of course, as good as the IIT-IIM badge, but still, it will impress family. The same point at 3., really, but in a non-academic/non-corporate context.
  5. Bottomline: it buys you optionality, and if you think your career is going to be remotely associated with academia in one way or the other, it’s probably, still, a good idea. But it is expensive in terms of time, and has recently become more expensive in terms of dancing through hoops.

But if you ask me, I completely agree with the idea that we should just ban PhD degrees.

Along those lines, I have a modest proposal. Eliminate the economics Ph.D, period. Offer everyone three years of graduate economics education, and no more (with a clock reset allowed for pregnancy). Did Smith, Keynes, or Hayek have an economics Ph.D? This way, no one will assume you know what you are talking about, and the underlying message is that economics learning is lifelong.

https://marginalrevolution.com/marginalrevolution/2019/09/how-to-reform-the-economics-ph-d.html

It’s never going to happen, because we all love signaling far too much, but hey, one can dream.

And you may also want to read this book, Abhishek.

And on an entirely related note, please, anybody reading this: call me Ashish.

The Long Puts of our Civilization

I don’t think I’ve (yet) explained on these pages what options theory is in detail, but I have mentioned it in passing. I might come back to writing basic explanatory posts about the four basic kinds of options (long call, short call, long put and short put) some time later. The basic idea, however, is this:

It is always a good idea to have options.

You can complicate it by asking what kind of options under what kind of circumstances for what purposes – and that opens a rather large can of worms – but at is heart, options theory is really telling you that if you have choices to make, consider making a choice that opens up other choices later.

At it’s simplest, this is why Indian parents are so fond of saying take science in the 11th standard. They’re asking you to make a choice that gives you more options later.1

Let’s talk for a while about the long put. A long put is – this is the technical definition – the purchase of an option to sell something for a fixed price down the line. Here is one way to think about it.

A Very Bad Man is hired to go put a bomb on the maiden flight of a brand new aeroplane, due to fly out of Miami airport. If that bomb had gone off as per plan, it’s safe to assume that the stock price of the airline in question would nosedive whenever markets opened next. So what, you ask? Here’s a simple example.
Say pre-successful-explosion, the stock price of the airline in question was a hundred dollars. Le Chiffre, the villain in Casino Royale, would buy an option today to sell a share of the firm tomorrow at maybe ninety-nine dollars. What Le Chiffre has purchased is known as a long put. Translated into English, it is the purchase of an option to sell something at a predetermined price. Let’s say that this purchase of the option happens for the price of one dollar.
If the plane blows up, the price of that same share tomorrow may well be fifty. Le Chiffre, because he has the option to sell at ninety-nine, can make a whole lot of money by buying the share in the spot market at fifty, and selling it at ninety-nine, pocketing a cool forty-nine dollars in the process. And if forty-nine seems like a very non-Bond-villain number to you, buy one hundred million long puts.

https://www.thinkpragati.com/housefull-home/housefull/6740/how-many-options-does-007-have/

Watch the movie after reading this, by the way. How many times do you get to watch Casino Royale and get to claim that you’re studying finance, eh?

Health insurance is another way of understanding the concept of a long put. Health insurance is effectively a bet that you will not fall ill, but if you do, the health insurance company picks up the tab. All that the health insurance company asks is that you pay them some money for them taking this bet. This is, of course, the health insurance premium. But like I said, in essence, a long put.

A long put in and of itself isn’t bad! Sure, a Bond villain can use it, but so can your parents when they purchase health insurance. Blaming options for a financial crisis is like blaming the atom for the atom bomb. It all depends on what you do with it.

Now, the question that I really wanted to ask: where are the long puts of our civilization?

What are we going to do, as a civilization, if we fall “sick”? Have we purchased insurance? Sick could mean mad climate change – so what happens if there is a catastrophe? Is there a “health insurance” scheme that we have purchased? As it turns out, yes, a rather extreme one.

A group of scientists are proposing that the inhabitants of Earth build a “lunar ark” as a global insurance policy against total annihilation. The idea, reminiscent of a backup hard drive to reboot a dead Earth, is to create a vault on the surface of the moon that would store the cryogenically frozen genetic material of our planet’s 6.7 million species of plants, animals and fungi, reports Harry Baker for Live Science.

https://www.smithsonianmag.com/smart-news/sending-dna-earths-67-million-species-moon-safeguard-life-180977256/

So for really and truly extreme events, there is at least talk of providing insurance. That’s good!

But I would argue that for other not-so-extreme events, we are not providing insurance. For example:

To get the giant container ship blocking the Suez Canal unstuck, engineers needed the stars to align. Actually, the sun, Earth and moon.
After several days trying to dislodge the Ever Given cargo ship, which had veered off course and embedded itself in the side of the canal, the salvage team pinned their hopes on this week’s full moon, when, beginning Sunday, water levels were set to rise a foot-and-a-half higher than normal high tides. That would make it easier to pull the 1,300-foot vessel out from the side of the canal without unloading a large number of the 18,000 or so containers it was carrying.

https://www.livemint.com/news/world/how-a-supermoon-helped-free-the-giant-container-ship-from-the-suez-canal-11617101603114.html

If, in the 21st year of the 21st century, our long put consists of consulting the lunar calendar in order to get big ships unstuck, then I’d argue that we are not quite doing things right. We need better plan B’s.

And so the question, worth thinking about at both the individual and the civilizational level: where are our long puts?

And another point, especially applicable as a student of economics: don’t get bogged down in the diagrams and minutiae of options pricing theory alone. That stuff is fun to learn, and cool to explore, sure. (Of course, if you are not a finance nerd, it is the exact opposite, and you can’t wait to be done with the subject. But then my point is even more applicable.)

Ask, instead, where else I can apply the idea of options theory, outside of finance. A lunar ark on the moon, a ship stuck in a canal and a Very Bad Guy in a James Bond movie are all great ways to learn about long puts – and certainly more entertaining than the ninth and the tenth chapter of John C Hull.

No?

  1. “But you can always do arts after the 12th! This way, all three options are available two years down the line!” Yeah, right.[]

Notes from a paper about behavioral sciences and public policy

The title of the paper is “Overcoming behavioural failings: Insights for public administrators and policy makers“. The authors are Gulzar Natarajan and Dr. TV Somanathan. I found the points in the paper applicable in my own life, and suspect most of you will as well.

  1. Most modern advances in what is referred to as “new public management” focuses, they say, in institutions, processes and protocols. “Missing is the individual”.
  2. They focus on two areas: personal and professional. My notes today are form the first half of this paper, that is, the personal:
    1. Read and digest basic management principles from any one ‘standard’ text. Keep referring to this book throughout.
    2. Do not lick upwards and kick downwards.
    3. Classify work into three categories – the important, unimportant, and the rest. Be assiduous in following-up the important, ruthless with ignoring the unimportant and letting the system take care of it, and use judgement to delegate and intervene only when essential in case of the rest. Be prepared to accept reasonable or satisfactory quality in unimportant matters but seek excellence in important matters.
    4. Learn that you are part of a team, and work accordingly.

      (What this means in practice is that it is the institutional work that matters, not your own personal glory or legacy.)
    5. Writing is a skill which can be learnt and improved. Devote time and attention to improving your writing. Do write and re-write important drafts on policy matters until they convey exactly what you want them to convey. Think of possible ways your writing might be misinterpreted and change the wording accordingly to avoid ambiguity.

      (Write!)
    6. Be as courteous as possible as consistently as possible in your personal and professional life. Courtesy is twice blessed: It helps those who meet you, and enhances your professional effectiveness.
    7. To the extent that any decision is an exercise of judgement, benefitting one party or favouring one viewpoint, it is perfectly reasonable and fair for democratically elected governments and hierarchical superiors to make their informed choices even if contrary to the views expressed by us. As long as the due process has been followed, and there is no illegality, it is our duty to respect the decision and act on it. We need to move on with doing our work.

      (I am not sure I agree with this point. Or at least, I remain conflicted about how to think about it.)
    8. Never stop learning!
    9. Set up ways for feedback to reach you as quickly as possible, as anonymously as possible and as often as possible.
    10. Internships matter.

      They make the recommendation for IAS officers, but it is oh-so-true for academia! That is, more people in academia should step out of their cocoons and see how the real world works.
    11. Build out your network. Nurture it, grow it, tend to it.

      I am really, really bad at this!

Why is Growth Clumpy, and Should we Attempt to Change Its Clumpy Nature?

In last Wednesday’s post, I ended by saying this, in the context of recent scientific advancements:

But on a personal level, the past year has also taught me this, and I have Morgan Housel to thank for the central insight: the seeds of calm are planted by crazy.3
So when things are really bad and grim (and again, this is not over yet), look to the bright side. And not just because it’s a good thing to do! But also because the bright side is likely to be brighter precisely because of everything else being so goddamn dark.
Tomorrow, I’ll attempt to answer a question I have, and I am sure you do as well: why?

https://econforeverybody.com/2021/03/24/whats-up-with-the-world-outside-of-covid-19/

I didn’t write the follow-up post, not because I forgot to, but because I couldn’t figure out how to think through what to write about. It turns out that I am still not sure! But in this post I’ll try and tell you why I’m not sure, what I’ve been thinking about, and what I’ve started reading to help me think through aspects of growth.

First, I think I’ve understood the central message of Tyler Cowen’s Stubborn Attachments, and agree with it: growth matters.1

Which then begs the question: how should we promote more growth, and more learning?

More learning, for me, means dramatically changing (or perhaps entirely discarding) the way higher education is currently handled, and that’s something to think about for years to come.

More growth, for me, means trying to understand the nature of growth, why it occurs at all, how it occurs, and what factors contribute to and hamper growth. And this topic is, well, a rather large one. It is large in terms of building out an edifice around which I can attempt to learn more about the subject, let alone the actual learning itself.

Here is what I mean by that: when I think about growth, and find myself wanting to learn more about growth, I want to be systematic about the process. If I say I want to learn mathematics, for example, I’ll want to divide, in my head, different branches of the subject. Then learn about the topics, and the mathematicians associated with those topics, and drill down accordingly.

How to do that with growth?

Should we begin by analyzing all of human growth over all of its (available) history? Watch videos like this Ted Talk, go through courses such as this one, and read books such as this one? Or focus on one country/civilization and examine it’s growth over time? Say, the Indian civilization over time? Or modern India, since 1947? Or focus on a group of countries over a period of time, such as say Joe Studwell’s How Asia Works? Or all of the above?

The answer is, obviously, all of the above, but then in that case where to begin?


Hopefully you have been through the same process for different things/projects/concepts in your own life – that feeling of where to start, even?2

Here is how Robert Pirsig helped me understand the answer to that question:

A memory came back of his own dismissal from the University for having too much to say. For every fact there is an infinity of hypotheses. The more you look the more you see.

She really wasn’t looking and yet somehow didn’t understand this.

He told her angrily, “Narrow it down to the front of one building on the main street of Bozeman. The Opera House. Start with the upper left-hand brick.”

Her eyes, behind the thick-lensed glasses, opened wide. She came in the next class with a puzzled look and handed him a five-thousand-word essay on the front of the Opera House on the main street of Bozeman, Montana. “I sat in the hamburger stand across the street,” she said, “and started writing about the first brick, and the second brick, and then by the third brick it all started to come and I couldn’t stop. They thought I was crazy, and they kept kidding me, but here it all is. I don’t understand it.”

Pirsig, Robert M.. Zen and the Art of Motorcycle Maintenance (p. 171). HarperCollins e-books. Kindle Edition.

The brick that I have chosen to begin with is Robert Gordon’s book, The Rise and Fall of American Growth. It is a rather large brick, at 784 pages, and I am only one chapter in, but it is already worthy of a blogpost.

Consider this chart, for example:

Gordon, R. J. (2017). The rise and fall of American growth: The US standard of living since the civil war. Princeton University Press.

The book focusses on the period 1870 through until 2014, and attempts to explain the cause, the nature and the effect of growth on the United States of America for that period. As I said, a rather large brick. And the chart above shows that most of the growth during this period occurs in fact between the period 1920-1970, when measured in terms of output per hour and output per person. Growth went up, in other words, the most in this period.

And what caused this growth?

](https://firebasestorage.googleapis.com/v0/b/firescript-577a2.appspot.com/o/imgs%2Fapp%2FEFEPosts%2Ft7MtC-9D73.png?![
Gordon, R. J. (2017). The rise and fall of American growth: The US standard of living since the civil war. Princeton University Press

It wasn’t education-augmented labor, or more machinery, but rather, Total Factor Productivity. Here’s a previous post about the Solow Model, if you want to learn more about TFP.


This, of course, begs the obvious question: why?

Why was growth so very impressive in that period? As a prospective answer, at least in that first chapter, Gordon supplies a hypothesis that we are familiar with here on EFE: Paul David’s essay about the dynamo and the computer.

So quite simply, it takes time for us as a society to accept, internalize and then optimize for a new technology. The invention of a new technology doesn’t necessarily imply its adoption. For example, and this is a true story, we still get invites for faculty meetings at my Institute by hand, not online calendar invites.

And so growth is clumpy for at least the following reasons:

  1. The discovery of a new technology doesn’t necessarily mean it’s immediate wholesale adoption
  2. This is partly because of inertia, resistance to change and the sunk cost fallacy
  3. And it is partly because we as a society simply take time to try and figure out how to make best use of the new technology.

This involves job losses, restructuring, adjustments – and not all of these processes are smooth or even remotely pleasant. The long run consequences of adopting new technology are beneficial, while the short run adjustments are anything but. Focusing on reducing short term pain might well induce more long term pain, but focusing on long term gain is an impractical solution for politicians and policy-makers on the ground, unless a crisis makes it imperative and (at least somewhat) acceptable.

Think driverless cars today (per the link above), or think 1991 economic reforms. Selling either of these things without the crisis of that particular time would have been harder than it already was. As Morgan Housel says, crazy plants the seed of calm.

Leading me to ask myself the question: is growth necessarily lumpy? Might we be worse off for attempting to change it’s lumpy nature? I don’t know the answer to these questions, but they are questions worth keeping in mind as I proceed with Gordon’s book.

  1. As I wrote towards the end of that post, the spread of learning is what I would want to maximize, but that learning contributes towards growth, and more growth leads to more learning, so we’re on the same page for the most part[]
  2. I was tempted to use the excavator/Ever Given meme here. Please congratulate me for resisting the temptation.[]

Mona Lisa Smile

Not just her smile, of course – there is so much more going on on this video.