Grew-some Growth
When I left a comment at Bill Polley's blog yesterday and then posted more about the Solow growth model, I didn't expect to set off a barrage of discussion, but here's more fuel for the fire.
First, let me make clear (I would hope this would be unnecessary for Bill and Gabriel) that I have had correspondence with both Bill (anyone who takes up curling must be a good guy) and Gabriel off and on over the the past year or three, and I have enjoyed every bit of it. Mike I've known for off and on for over a decade and I have great respect for his intelligence and knowledge. Gavin's blog is a superb resource that helps highlight the insights that Adam Smith's work continues to provide.
Second, the basics of economic growth are extremely important: consumption uses scarce resources that cannot then be available for producing capital goods; saving allows investment, which means more will be available for consumption in the future. We all (I hope) teach something like this in our intro courses when we show that saving today shifts the production possibilities frontier outward for the future.
With those points made, I have two basic responses to Gabriel, Bill, Gavin (who also questions the teaching of the Solow growth model), Mike (who quite obviously did not take a course in law and economics from me) and anyone else who might have entered the fray.
1. Learning the Solow growth model just so I can learn more complex growth models that have little, if any, more relevance for the real world makes no sense to me. I remember all the papers of the late 60s and early 70s about "optimal growth", "turnpike theorems", etc., and they not only seemed pointless then, but I wonder if society would have been better off using them as mulch for people's roses.
2. More seriously, too many policy makers of the 60s and 70s used the Solow growth model (and its progeny) to justify throwing capital at developing countries, saying, "All they need is more capital to get above the minimum threshhold..." and of course the capital was rarely, if ever, used productively in those situations.
The best growth model, if you can call it that, I have seen says to create institutions that provide freedom of contract and let markets work smoothly (for example, see the work by Tim Harford and "Doing Business", which, a la the econ/law literature, emphasizes the importance of reducing transaction costs). We don't need the mathematical growth models; in fact, I wonder if they have a negative social product (other than the sorting mechanisms I mentioned in my original posting).
First, let me make clear (I would hope this would be unnecessary for Bill and Gabriel) that I have had correspondence with both Bill (anyone who takes up curling must be a good guy) and Gabriel off and on over the the past year or three, and I have enjoyed every bit of it. Mike I've known for off and on for over a decade and I have great respect for his intelligence and knowledge. Gavin's blog is a superb resource that helps highlight the insights that Adam Smith's work continues to provide.
Second, the basics of economic growth are extremely important: consumption uses scarce resources that cannot then be available for producing capital goods; saving allows investment, which means more will be available for consumption in the future. We all (I hope) teach something like this in our intro courses when we show that saving today shifts the production possibilities frontier outward for the future.
With those points made, I have two basic responses to Gabriel, Bill, Gavin (who also questions the teaching of the Solow growth model), Mike (who quite obviously did not take a course in law and economics from me) and anyone else who might have entered the fray.
1. Learning the Solow growth model just so I can learn more complex growth models that have little, if any, more relevance for the real world makes no sense to me. I remember all the papers of the late 60s and early 70s about "optimal growth", "turnpike theorems", etc., and they not only seemed pointless then, but I wonder if society would have been better off using them as mulch for people's roses.
2. More seriously, too many policy makers of the 60s and 70s used the Solow growth model (and its progeny) to justify throwing capital at developing countries, saying, "All they need is more capital to get above the minimum threshhold..." and of course the capital was rarely, if ever, used productively in those situations.
The best growth model, if you can call it that, I have seen says to create institutions that provide freedom of contract and let markets work smoothly (for example, see the work by Tim Harford and "Doing Business", which, a la the econ/law literature, emphasizes the importance of reducing transaction costs). We don't need the mathematical growth models; in fact, I wonder if they have a negative social product (other than the sorting mechanisms I mentioned in my original posting).
Category: Economics Posted on
Thursday, April 3, 2008 at 11:29am
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I didn't take your law and economics course and I think it shows. The prof I have learned the most from as far as the Coase Theorem goes is Dan Usher at Queen's, author of "The Coase theorem is tautological, incoherent or wrong." (Economics Letters 61 (1998) 3-11).
There are several of the Coase theorem and none of them (IMO) are particularly enlightening (or correct). I agree with Prof. Usher when he writes:
"Interpreted to mean that costless bargaining promotes efficiency in the economy, the Coase theorem is a tautology, for a bargain among rational people must make each person better off than he was before and, with costless bargaining, self-interested people bargain again and again until no
mutually-advantageous bargain remains."
That seems to be the interpretation most people use. If that's the case, then the Coase theorem both lacks unique insight and isn't really about externalities at all (since the Theorem is generalizable to non-externality cases).
Does Coase really add anything that isn't in Smith and Ricardo?
It's like when two academicians debate and they start off by saying how erudite and successful is the other, just before proceeding to "ripping a new one".
Anyways, you're an awesome dude too! And my response post will be up sooner rather than later!