EclectEcon

Recently I posed this question at Bill Polley's blog. I was serious and not trying to be flip. When I was a student, the Harrod-Domar growth models never made a lick of sense to me, and the Solow model seemed sterile and useless. Bill replied,

Same reason we teach the Ricardian model of comparative advantage.

Even though it oversimplifies reality to nearly the point of absurdity, it contains many useful insights that are vital to understanding more sophisticated models and policy discussions.

It introduces a way of organizing one's thinking about the topic at hand. (Growth accounting, in Solow's case... a very important concept.)

It is a touchstone in the literature for an entire field. One cannot be considered to be educated in that field without an understanding of it.

It can be augmented and extended fairly easily to obtain more interesting and potentially useful results.

Despite all that, we know that it is a bit too simple to be the only tool in our arsenal. Indeed, to use it as the only tool in our arsenal would be dangerous.

Would not each of these statement apply to the Ricardian model as well as the Solow model?

Maybe. And Bill sure knows more about this stuff than I do, so he's probably right.

But when I look at countries that have grown rapidly and countries that haven't grown rapidly, it seems to me that things like prices and interest rates, along with institutions, property rights, transaction costs, and entrepreneurship are much more important than exogenous technical change.

Yes the models are are a good exercise. Yes the models are a great seive for filtering the students and putting them through the hoops. But I really don't think the models are worth spending much (any?) time on.

Recently a colleague asked me if I teach anything about growth in my intro course. I replied that I teach nothing explicit about growth theories, but I do teach the Coase theorem and the importance of property rights and transaction costs in understanding exchange and growth.

In contrast, Ricardian comparative advantage lies at the heart of exchange; some would argue it is the only argument we have in favour of free trade. It is indeed based on heroic assumptions, but in many instances these assumptions do not detract from the usefulness of the concept. And at least comparative advantage depends on such basic concepts as opportunity costs and relative prices.