Akhilleus: You look morose.
Glaukon: It's 99.9F degrees out.
Akhilleus: So you are thinking of Suzanne Vega?
Glaukon: No, the chocolate bar I keep in my backpack has melted all over my backup portable disk drive. But that's not why I am morose.
Akhilleus: So why are you morose then?
Glaukon: Because, looking back over my syllabus this semester, I realized that I spent five full weeks--one third of the semester--teaching them the Solow growth model...
Khelona: It's a fine model...
Glaukon: And yet when the rubber hits the road, it doesn't do us any good. It doesn't tell us anything first-order about the world--aside from post-WWII Japanese convergence from a bouncing-rubble B-29 testfield to a prosperous OECD economy.
Khelona: Actually, I don't think the Solow growth model explains that...
Glaukon: You don't?
Khelona: Post-WWII Japan converged to the OECD norm. And the Solow growth model has some convergence in it--if you start out really poor because your economy's capital stock has been turned into rubble or worse by B-29 strikes, you will grow fast because a low capital stock gives you a high social marginal product of investment and depreciation cannot be a drag on growth if there is no capital to depreciate. But these have always struck me as second- or third-order mechanisms in the story of post-WWII economic growth. Trade. Technology transfer. Institutional reform. The survival of the economic-mobilization components of the fascist Tojo dictatorship. The destruction of the other components of the fascist Tojo dictatorship. The ability of large firms to strike high-productivity bargain with their core workforces by shifting risks onto small-scale producer-suppliers and secondary-sector workers. The neocolonial origins of comparative development--that for Cold War-fighting reasons the U.S. was willing to cut Japan an enormous amount of slack in terms of market access that it was not willing to cut Mexico or Argentina or anyone else outside NATO. You know the story. You know the story better than I do.
Glaukon: Great! So now you've depressed me further--you have gotten me down from one example of the model at work telling us something interesting down to zero.
Zeno: I wouldn't be so depressed. It may be a small step, but it is a step, and steps add up...
Akhilleus: You are the wrong person to say that small steps add up!
Zeno: I have learned how to do limits properly in the past 2400 years...
Khelona: But it does provide a useful service: it is a tractable model that teaches students this mode of thought, and when you apply it to the world it teaches you that--with some caveats--capital accumulation is not the most important thing to study when you focus on growth...
Glaukon: So then why did I spend five weeks on it?
Akhilleus: Ummm... What did you teach, exactly?
- The Solow growth model: setup, balanced-growth equilibirum, convergence
- Raw materials and natural resource scarcity in the Solow model
- Endogenous population growth and the Malthusian equilibrium
- Transition to modern economic growth: the invention of invention and innovation via the industrial research lab
- Modes of organizing research and development:
- State--distributing the R&D for free, and having a central bureaucratic process make the decision about what to work on
- Nonprofits--distributing the R&D for free, and having a decentralized desire to win the tenure game make the decisions about what to work on
- Private companies--intellectual property protection and selling the products of R&D, and having profit-seeking companies decide to work on what they can sell
- The Great Divergence of the world economy from 1850-1975: western Europe and Pacific Asia but not much else have converged, U.S. now 30 times richer than Kenya
- DeLong and Summers: equipment investment, high marginal product of investment as a reality or as a statistical illusion
- Post-1975: China and India stand up; Africa falls behind
- The golden rule and the "optimal" national savings rate
- From the Solow model to the Ramsey model: more sophisticated takes at optimal savings rates
Khelona: Sounds like a smashing success to me...
Glaukon: But the bottom line is that we don't have good explanations at any deep level for why the U.S. today is and stays 30 times richer than Kenya.
Akhilleus: Or, rather, that we have good explanations but they are historians', political scientists', and sociologists' explanations--not explanations in which a facility with the differential calculus is terribly helpful and thus not explanations instrumentally useful to a sect of academics who want to use their facility with the differential calculus to impose a form of hegemonic domination over social science in general.
Glaukon: And we can say that you will grow fast if you have lots of research and deveiopment--both your own and also do a good job of transferring technology in from outside. But we can't say how much is optimal. Or how it should be organized. Or what legal system should underpin it. We have to decide whether R&D is going to be done by centralized government bureaucracies and freely distributed, by guildmasters working at nonprofits on projects they think of as intellectually interesting and then freely distributed, or by profit-seeking companies with some degree of intellectual property protection giving them monopoly power. But we can't say anything coherent and convincing about what the mix should beand what the degree of intellectual property protection should be.
Akhilleus: But surely there is value in being confused about the issue at a higher and more sophisticated level...
Khelona: I agree: too arrive at the point where you can say that these are the most important issues to think about is a very important achievement...
Thrasymakhos: Especially if it leads immediately to higher funding levels for universities...