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Posts tagged with economic growth


Since [2008], the [US] labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. [Out of 314M people.] Many people have left the labor force because they are discouraged … (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category)….
…Knowing the reasons why people have left (or delayed entering) the labor force can help us [guess] how much of the ↓ might … ↑ if the economy ↑ and how much is permanent. (For more on this topic, see here, here, and here.)

The chart … shows the distribution of reasons in the fourth quarter of 2013…. Young people [usually say they] are not in the labor force … because they are in school. Individuals 25 to 50 years old who are not in the labor force mostly [say they] are taking care of their family or house. After age 50, disability or illness becomes the primary reason [given]—until around age 60, when retirement begins to dominate.
…
Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below).

—Ellyn Terry

HT @conorsen
off-topic sidenote: the natural cohort —vs— year adjustments, like “the baby boom has shifted 7 years since 7 years ago” are an economic example of the covariant/contravariant distinction

Since [2008], the [US] labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. [Out of 314M people.] Many people have left the labor force because they are discouraged … (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category)….

…Knowing the reasons why people have left (or delayed entering) the labor force can help us [guess] how much of the ↓ might … ↑ if the economy ↑ and how much is permanent. (For more on this topic, see herehere, and here.)

The chart … shows the distribution of reasons in the fourth quarter of 2013…. Young people [usually say they] are not in the labor force … because they are in school. Individuals 25 to 50 years old who are not in the labor force mostly [say they] are taking care of their family or house. After age 50, disability or illness becomes the primary reason [given]—until around age 60, when retirement begins to dominate.

Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below).

Ellyn Terry

image

HT @conorsen

off-topic sidenote: the natural cohort —vs— year adjustments, like “the baby boom has shifted 7 years since 7 years ago” are an economic example of the covariant/contravariant distinction


hi-res




Tyler Cowen says that super hackers will benefit from improving computer technology and reap the high wages of the post-recession economy.

I’m sorry to say I too have used the lazy robo-programmers metaphor. That was uncareful non-thinking on my part.

Trying to be more logical, what should we really conclude from the assumption that observed ↑ growth in “computer stuff” will continue apace?

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There are very few facts I think “everyone should know”. The huge income differences across countries are an exception.

image

Everyone should know that income per person in Burundi is about 1% of in the U.S. (yes, even though there’s a recession on).

image

And everybody should know a rough quantitative history of the world.

13 minutes by Tyler Cowen & Alex Tabarrok




In contrast to copper and tin, iron is very widely spread as the great archaeologist Gordon Childe put it “cheap iron democratized agriculture and industry and warfare too”. So the jump to Iron Age technology may have impeded the development of states in Africa by making it more difficult for elite to concentrate and monopolize power.

Africa never experienced the nascent period of political centralization that Europe did during the Bronze Age, perhaps also with a path dependent legacy.




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The Needham Question: why was China so culturally, intellectually, and economically dominant and then it was the UK / Dutch / Belgians / Portuguese who subverted the rest of the world fully 6 centuries after China developed 3-masted ships?

  • Gunpowder was developed by Daoists searching for the elixir of life…trying to subdue KNO₃ (viz, Alchemy discovering things; in general non-QM-level chemistry leading to inventions)
  • a mixture of sulphur, honey, and saltpeter (i.e., poop)
  • the idea of competing governments in Europe —vs— two in China. This is apparently due to Hume.
  • Needham mis-characterised Chinese thought as being either: Confucian (ethical concerns only), Buddhist (fleeing the world), or Daoist.

    I bet this is where Kenneth Clark (or was it James Burke) got his silly sinology: saying that “the Chinese mind” wanted to “go with the flow” rather than Europeans who want to change the world to suit themselves. (Rubbish.)
  • But Buddhists were also interested in science. 8th cent mathematician/astronomer: “We have to get the secular stuff right, or people will think we are stupid”
  • Invention of the printing press: “The ruler [in Japan] was able to produce large numbers of holy objects [scriptures of the Buddha]” which was great for his image.
  • canals, ceramics; trading with Japan, SE Asia
  • Trade: “What went out from China was eagerly sought; what was brought back was trinkets and frippery for the rich to enjoy”
  • Tang dynasty (600-900 A.D.) markets were more tightly controlled than laissez-faire past. People move more freely and freer markets during Song Dynasty. Banknotes.
  • "Too successful for its own good?" Complacency.
  • Paper in lavatory, wallpaper, clothing, decorations. Not only printing paper.
  • 19th century Sinologists wanted to “look for the reasons for failure” — but it’s ahistorical to read the past in terms of what happened later.
  • Christian Jesuits in China. The Indians had been tolerant simply because India is tolerant of so many G-ds. Why not one more? (oops)
  • Natural theology. The Chinese must have inherited the good order and right thinking of Eden. (medieval) “All we need to do is let them know about Christ” As opposed to how savages were treated.
  • Jesuits beating Islamic astrologers at prediction; teaching maths to the Emperor in his own chamber.
  • Sinophilia in Europe, Chinese perceived as more enlightened
  • The governance of China (imperial bureaucracy) surprised Europeans. Not hereditary aristocrats nor paying for the post.
  • a career open of talents (where the British Civil Service came from) #meritocracy
  • silk, porcelain, agriculture, lochs & canals; hydraulic China
  • Diderot, Leibniz, Hume all took a negative view of China
  • "Those foolish Chinese don’t understand Science! That is, they don’t know the world is composed of four elements (due to Aristotle). They think it’s composed of five! The nincompoops!"
  • The West finally got a technical lead with steam power.
  • Lord Macartney had been seducing Catherine the Great.
  • diving bell, hot air balloon, telescopes, burning glasses,
  • Qen Leung emperor “We have no need of your toys”
    — partly because Jesuits had sold science previously as a fascination or entertainment (rather than, say, military application)
    — partly because Qen Long was well informed about British intrusions into India. First “We just want to trade” and then they’re all up into the Chinese border of Nepal. No, thanks, I’d rather not have the trade and keep you outta my Kingdom.
  • awful Western medicine killing Chinese orphans in the countryside. Rumours: “Westerners need a baby’s eye to create a mirror. That’s why they take and kill them” “Westerners need to put a dead baby under each sleeper in order to build a railway” (for me this is reminiscent of Guatemalan rumours about white North Americans stealing Guatemalan babies … maybe the mother didn’t want to admit she gave it up for adoption because that’s shameful, so when confronted she said the adoption agency took it)
  • Lu Gwei Jen was the woman behind Joseph Needham’s work.
  • a Chinese book in 1922 Why China Has No Science — they’d missed their own history
  • Like Frank Wilczek’s advice for success: Needham was looking at new data — rather than measuring with devices that had never been used before, he was reading books that everyone had ignored.
  • "There are different ways of looking at science. 'Science' doesn't just mean 'modern Western science' but achievements in other cultural contexts” (Indian, Chinese, Muslim)
  • invention versus science (science having roots in Greek philosophers)
  • Chinese ways of abstract thinking were very different”
  • "Once there’s one industrial revolution—with all the power, military & commercial, that that gives—there’s no room for another"
  • "If the Seung navy had sailed up the Thames sometime in the 13th century, brought us gunpowder and compass and printing presses and completely swept us away into the Chinese culture…there might have been some Chinese historians saying ‘But look at all that interesting stuff those Greeks did…why didn’t they have the Seung Industrial Revolution first?”
  • pirates on the East China coast were quick to acquire the latest ballistics
  • "People are already beginning to write narratives of Chinese history that try to depict even the 19th century as a ‘success story’"
  • Einstein said the Chinese lagged because they never had Euclidean geometry and the idea of proving things. But the better question isn’t why didn’t they start proving things: rather why did anybody start proving things?

No mention of this other story I heard which was, rather than broad historical determinism, specifically just that the eunuchs in the 13th century sabotaged all the ships in the harbour to fight their enemies, the Mandarins. Local maximum achieved; global maximum put off for at least another 7 centuries.

(Source: BBC)




I don’t think so, for the following reasons:

  • Companies are still run imperfectly.
  • Costs are still not as efficiently optimised as possible.
  • Workers don’t produce output at the highest conceivable rate in their current occupation.
  • Plenty of potential engaged in low-productivity work, unemployed, or otherwise not producing (e.g., in school).
  • People do wrong, imperfect things all the time. So there’s room for improvement.

I realise this argument is incomplete. Just because there’s room to grow doesn’t mean we’ll get there. However I think this line of reasoning may prove productive even if my version of it doesn’t get quite there. So let’s press on.

Half a century after Solow, many economists and rest-of-us still think of economic growth as an exogenous “magical” process driven by abstract words such as “technology” or “skill” or “trade” or “innovation”—rather than as the macro sum of correct micro decisions taken by individuals at the company two towns over.

Solow growth model

Some of that surely is to blame on things like Y=C+I+G+NX. Everything “the government” spends is G—regardless of whether it’s spent on a really good idea, implemented well, or on a pie-in-the-sky promise of a half-price incinerator with huge cost overrun. This is like "economists’ K working to constrain our thinking". Or like the Mpemba effect where one first assumes temperature is one-dimensional (false) and then infers that “you have to go through here to get to there”.

 

I prefer to think about a time-varying graph

image.

  • Most of the people (nodes) in the graph I do not trade with directly.
  • The stores I shop at are “popular” nodes. Everyone in my neighbourhood hops 1 to our grocery store. And the grocery store hops 1 or 2 to many many suppliers all over the country (and outside our country).
  • Salaried people have one very-very thick edge connecting to their sole employer.
  • And so on.

With this model it’s less tempting to use abstract words like “technology” without getting more specific. Clearly this new highway will reduce transit times for many of the transaction-edges. And therefore reduce costs broadly, ergo growth. But its effects are (a) localised to those who touch that edge (or an edge that touches that edge) (b) helping some more than others (even hurting a few on net) and [c] rather than being inevitable, come from the good work of individuals, who could have screwed it up. Now it’s tempting to, rather than wish for some magical entrepreneurs or inventors, look at ordinary decisions; not divide the world into “government vs private enterprise”; consider the individuals in particular places who are helped or hurt rather than an average … basically I find this much more grounded and less prone to theoretical histrionics.

Instead of focussing on growth as a 1-D number (Mpemba), trying to correlate it with size of government or regress it against “trust index” or “ethnofract index” or other abstract highfalutins, the GDP number can only be gotten by integrating all the micro elements—which is, I think, as it should be. Then instead of counting on the magical 2% number to stay around 2% year after year, it’s nicely surprising if the total value of transactions this year was again at its record historical high. And when people can squeeze even a higher total of value throughput through the year (out of what? out of natural resources? out of ingenuity? out of Saudi muppets?) you have to wonder where that growth came from—if it was from a sequence of very old “industrial revolutions” or from many companies doing things a little better this year than they did last year. (¬∀, but on net.)

 

Will smart machines make low-wage jobs redundant?

P Krugman asserts in his blog post about Robert Gordon’s paper

machines may soon be ready to perform many tasks that currently require large amounts of human labor. …[I]t’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant.

So: yes, armies of back-office pencil-pushers have been replaced in the IT revolution by computers. Thank goodness: what a boring, repetitive worklife. But besides record-keeping and verification and copying and automated checking of things, what is it that humans do that’s been replaced by machines? Travel agents? Brick-and-mortar stores with poor selection and high prices? A lot of things computers are good at, like spidering the web, is not something that we previously paid humans to do.

For example Indeed.com, a billion-dollar company created within the last decade, uses electronic computation, networks, and O(100) software engineers to usefully index job search results from disparate sources across the Web. Who lost that job? This is basically a billion-dollar free lunch vis-à-vis unemployment.

Another example that comes to mind is the auto-scan machines at the grocery store. These machines actually make a single clerk more productive. Not that her wages went up necessarily, but the efficiency of the economy did.

So why do peole think automation will replace low-wage jobs? If it’s based on evidence rather than me sitting on my couch and spitballing I’m willing to listen. But from my armchair I see people computing electronic tasks that no human used to do, Siri computing what the iPhone users said, Toyota and NewBalance augmenting humans with machines, machine learning/AI/statistical forecasting making digital things better but again not disemploying anyone.

Despite the appeal of using widespread unemployment as a basis for dystopian fiction, I don’t see anyone scrambling at the profit opportunity to make window-washing droids, janitorial droids, pizza-delivery droids, anything that requires operating in a broad ambiente. The machines seem to be great for repeating the same task in a well-defined scenario, same as factory robots at the Toyota since decades ago.




In discussions with @gappy3000 and @groditi over the past few weeks I made an argument as to why economic parity should lead to faster economic growth than great inequality. As I googled and found blogular discussions about this recent paper, I couldn’t find anyone making the same points I did. So I’ll state them in case I’m the only person who thought of this (though how could that be?):

  • From a supply-side perspective, a more-homogeneous population is easier to produce for.
  • In planning a new business, less variation in customers makes it easier to answer the necessary question: “Who is the customer going to be?”
  • For “blue chip” businesses, greater efficiencies of scale are possible in a broad market.
  • Taking the example of housing (which constitutes the lion’s share of most people’s lifetime spending): it’s easier to build the same house 10 times than to build 10 different kinds of houses for 10 different people.
  • Positional goods should account for a larger share of the economy in more-unequal economies than in economies closer to income parity. Take for example rents in Manhattan.
  • As William Vickrey argues, micro ≠ macro so whilst ↓ 10% of your income would make you 10% worse off,if everyone in Manhattan ↓ 10% of their income it might mostly ↓ the price of housing, since an auction is a better model for that market than a posted-offer.
  • Yet the option for businesspeople to cash in on easy money by producing exclusively for the rich must crowd out other uses of capital. Why work hard to insulate 10⁹ homes owned by people without much dosh to hand over, when there’s so much more of a market base making stuff for the people who have plenty?
  • ↓ economic profits to providing positional goods would decrease the producer surplus without a deadweight loss (since the trades would still take place but at a ↓ price), but the £10,000,000 that went to counter-bidding against other top-wealth people would instead be owned by lower-wealth people and go toward purchasing goods they previously couldn’t afford, incenting ↑ production levels.
  • As an add-on: this wouldn’t show up in GDP, but utility per pound spent should ↑ if the incomes are more homogeneous because the people who most value things would get them rather than people who just have more to spend.

One final thought. Which do you think is more possible: to ↑ the output of someone making £2/day, or to ↑ the output of someone making £500/day? To me the person making £500/day is likelier to be near his peak output than the person making £2/day. The person ganando £2/day is not efficiently plugged into a “system” or hooked up to capital such that her abilities are amplified the way the £500/day person is.

So according to me, economic growth should be easier to obtain by ↑ the productivity of the least productive individuals than by ↑ the productivity of the most productive individuals. This is consistent with the observation that growth rates are ↑ in developing countries (where ∃ more poor people) than in rich countries:

  

The counter-argument is about incentives. Lesser rewards make it less attractive to work all the way to the top, if indeed it’s work that takes you to the top.

As @gappy3000 says, the evidence is mixed on elasticity of labour supply at high incomes. However, based on my own subjective anecdotes, my beliefs are the following:

  • Pay is strongly related to negotiation power and less strongly to output.
  • Motivation and utility are derived from rank as well as from absolute earnings/spending. To the extent this is true, if tax levies do not reorder wealth levels they leave those individuals’ utilities alone.
  • Most well-paid people are replaceable. Convexities in pay are more common than convexities in talent.
  • Elasticity of labour supply is very low around the high income levels. These people either have a driven personality (easily bored if not working), competitive personality (rank-based utility), or logarithmic utility in money (so linear reductions in money reduce utility concavely).

For these reasons and maybe a few more, when well-paid people threaten to work less if they are taxed more I either don’t believe them, or think that if they did quit then the world’s output would be very little affected.




memeengine recently asked a question which has probably been on a lot of newshounds’ minds, as it has been on mine:

  • The picture we are now getting in “the news media" is of rich economies (US & Europe) that have ground to a halt, are not producing jobs, median wages stagnating and lower class wages possibly worse.

    In short even though the GDP growth is continuing, the gains have not been widely shared. (This has been going on for decades but we just talk about it now, which I think is interesting but a topic for another time. Just bear in mind that [a] any statistics you hear in support of an investment are always based on past performance, and [b] we seem to be discussing the past as if it’s the present.)

    So then you have to wonder, what would a capitalist economy look like with very high wages for a small group (like the people who control the robots who make everything) and very low wages for almost everyone (the people who pay for the robots’ services and change the bedsheets of the botmakers)?

I think I have, if not a definitive answer, a useful pespective to share on the question.

  

But first, a detour into theories of economic growth. The first theory I learnt in school was Robert Solow’s equation

Solow growth model

which interprets growth as an increasing function of savings rate (think China) and says that eventually things will peter out.

Since things weren’t petering out in the 50’s when Solow made the theory (and in fact US growth happens in a  constant corridor), Solow added a “cosmological constant”. (It’s called a technological constant but it serves the same role as Einstein's famous fudge factor).

Solow growth model picture

(Is that what’s happened to the USA now? Its period of Solow growth has finally petered out—just like Einstein’s equation, Solow was right all along and shouldn’t have fudged? I bet some of their intelligentsia are asking themselves that.)

There is a bunch of fun mathematics to do with the step functions and plotting K_t versus K_{t+1} but then realising that the K_1955 on the one axis needs to equal the K_1955 on the other axis so the 45° line becomes the stringer board girding the stairs of the step function and … well, you can look up a tutorial on Solow. I’m just sharing that so you have one story of how growth happens in your head, it’s a fairly sensible one, should be valid, and people do think about it.

In summary: savings (sacrifice) creates investment which increases capital which increases productivity which causes growth.

  

Now I’m going to contrast that fable with something I just made up (not to say someone else hasn’t independently also made it up), which I’ll call the Tacking Growth model.

tackingimage

It’s based on this story I read on the Victorian England webpage, where they observe that:

  • In 1800, hardly a man in England wore socks. But in 1900, hardly a man was without them.

That gave me the following idea of growth. What if economic growth proceeds through reductions in price of some random good—not necessarily something people deeply wanted—but then the substitution and income effects take place. Then growth stops again until the next cost reduction.

Newcomen steam engine

Nobody controls which thing will be innovated on next—whether it will be kevlar, steam, FCOJ, weaving technology, turbine manufacturing efficiency, or putting a metal spiral through the leaves of your notebook.

a turbine (I think at a nuclear power plant)

This fits not only with the story of sox in 19th-century England, but of petrol in Oman, limestone in Indiana, processed food in South Dakota, mp3’s in the post-Napster era — all of the well-studied economic cases where the price of something drops and then its usage increases.

The only difference is I’m relying on the income effects of those price drops in individual goods to cause the broad-based measured economic growth. I think this story has a nice sub-i sub-j feel to it, and it argues that not all growth is equivalent.

If the internet becomes cheap and suddenly everyone spends all day on tumblr, well that’s nice and it may be the optimum within the price regime they’re actually living with, but it’s not what people would have wished for 100 years ago. (They would have wished for “pure income” — to have the wealth of the richies from their own time and have the things that rich people had like hot baths, not necessarily futuristic things like VCR’s. How new goods add utility versus improvements to old goods is another topic for another time.)

http://farm4.static.flickr.com/3205/2760292671_abe8574375.jpg

The Tacking Growth story also has an implication for the question I posed at the beginning, which is what does capitalism look like in a rich world with many people making low wages?

I think it looks exactly like this: the poor people have a good standard of living in terms of absolute magnitude, but they have little freedom. With a tight budget constraint (near the origin) obtusely and extremely scalening off in various directions of cheap stuff (sox, packaged food with lots of preservatives, canned food [can o’ corn], modular homes, satellite TV, Budweiser beer, … brand-name oreos, ATV’s and Harleys? Well I didn’t say it makes total sense), the only way to live like a richie is to buy specifically the stuff that is cheap — even if, as measured by eg, your Engel curve, that’s not what you really want.

wildly scalening budget constraint in response to a precipitous price drop in one random good

That undermines the idea of growth-is-good and all-growth-is-the-same because now we’re talking about a “curved” growth path γ through goods space, with consumer responses complicating matters — since their responses change the business environment as Levi’s Jeans suddenly becomes a powerhouse. (Yet another topic for another time could be the transition from custom sewed clothing for everyone to impossible to find pants that fit or get anything repaired because it was all cheaply generated by machine. See my sheaf theory & leontief matrix post.)

what people used to do before the price of internet got so absurdly low

Perhaps consumers smooth a tack-forward-in-this-one-of-1,000,000-possible-dimensions into a more general kind of economic blessing or perhaps they’re just drawn into a weird corner (mixed blessing)—where you have socks coming out your ears, you use socks as rags, socks as lampshades, stitch socks together to make a dress—but what you really want is a bicycle! Or in a more modern context, sub in internet for socks and a trip to Thailand is what you really want.

and, the rich people do much more vacation travelling but still go to Thailand. scalene pricing doesn't matter so much because they have a wide budget, so they're free to do whatever (be closer to their Engel curve).

Now @UnlearningEcon might try to make me eat my shorts because this is so neoclassical and uses a single representative agent and is basically voodoo in many ways. But I just mean it as a sketch, not a full-bodied simulation. It’s also a much easier story to believe in a manufacturing economy than a service economy. Well, let me know if you can do it one better.

  

So I described the Solow model which is one of the usual stories of growth. Did that in order to contrast with the Tacking theory which I think sheds a light on the original question. And that was, what does a world with high productivity, low wages to many and high wages to some, look like?

  • Most obvious is envy. You are going to watch Americans go live like kings in Thailand, Brits go live like kings in Argentina, mansions in the Gran Canarias, chalets in Andorra and beach houses in Tahiti. All of this will be technologically possible but out of reach for you. So you will be aware that it’s possible and that somebody’s doing it and loving it, but not you.
  • Next is opportunity. The more money our robo-programmers make, the more they are going to want to free up their time and have every service done for them. Massage therapists, personal trainers, life coaches, psychotherapists, cleaners, cooks, upscale morticians, model organic farms that you can vacation on, drug dealers, hoteliers, sycophantic investment researchers, and personal assistants all have opportunities to form the perfect life for the robo-programmers, tending to their every need and desire, and get paid for it.Edit: This was an idiotic speculation on my part. I shouldn’t have suggested that contracts to serve the rich would be one-to-one. Plenty of the present-day examples of service-economy jobs split the innovation and the service-work itself. For example jobs at franchises. The rich store inventor came up with the idea of what rich people want, and the sandwich fillers just work there for low wages with no union or no idea of how to find a rich person in the world and get the rich person to pay them. My usage of “robo-programmers” was also cheap and narrow-minded. High labour productivity doesn’t necessarily come from doing productive stuff like producing more goods. It could also be from branding or marketing or dealmaking. Anything that raises revenues or cuts costs. Mitt Romney wasn’t a robo-programmer; he put together funding + buy low + sell high — find some capital that’s not being maxed to its full potential, take it away from those people and put it towards a higher-profit purpose. Not a robo-programmer at all but to the extent that money in the form of profits or GDP is good, he did a good thing and got rewarded for it. Now does he pay a lot for personal trainers and coaches and yoga instructors and personal assistants? I have no idea, and I have no idea if he does, how they convinced him to buy their services. The sad thing is I knew this bullet-point was lazy thinking when I first wrote it but posted it anyway. Service economy, ho!
  • Third is low cost of certain things. The robo-programmers only got rich because they figured out how to run half of the society from their mid-April apartment in Rio! Actually they did part of it on the red-eye from Rio to Mauritius — that’s a killer one, man, it’s better to just work through it and then go party when you get off the flight, and finally crash after you’ve had some fun. Anyway the robo-programmers are creating things for you and everyone else for cheaper than you used to get it before. However anything you want that doesn’t come out of the robo machine (like organic peaches) is going to suck up a lot of your income for something that’s just completely standard (like a fruit). So best to stick with the cheap stuff so that you can afford that vacation in Bristol.
  • Last, let’s think about what happened with the owners of factories or factors of production from mid-century to the modern day. Did they enjoy risk-free returns to capital forever? I don’t think so.

    This is something to research into but I believe a lot of the complicated financial instruments derived in some sense from decreased returns on basic resource production, leading to a demand for segmentation of capital, risks, responsibilities, contractual obligations and rewards. You can still observe that oil & gas is 10% of the world economy but a lot of that goes to paying capital bills (depreciation, from the Solow model) rather than just getting paid & getting laid.

As usual, feel free to call me out or react however in the replies/comments.

 

UPDATE: As is typical with “econ-only” explanations of things, I’ve unwittingly left out culture and threats of violence. Some people use the phrase “class warfare” to describe US President Obama talking about raising taxes on the rich. However, an impolite debate about marginal tax rates is nothing like warfare. Obama is no Robespierre, nor are any US Republicans Ríos Montt.

File:Robespierre exécutant le bourreau.jpghttp://upload.wikimedia.org/wikipedia/commons/0/0f/Shot.jpghttp://upload.wikimedia.org/wikipedia/commons/thumb/2/21/Execution_robespierre%2C_saint_just....jpg/1280px-Execution_robespierre%2C_saint_just....jpghttp://laura579.files.wordpress.com/2010/02/robespierre_guillotined_reign_of_terror_1794.pnghttp://espressostalinist.files.wordpress.com/2011/07/guatamala1exhumation-at-comalapa-a-former-army-base.jpg     

No-one is passing out flyers of Christ holding a submachine gun adorned with Biblical quotations about how the disciples gave up their worldly possessions and shared everything.

The left half of Guatemala’s civil war (16 years of peace, thank heavens, ojalá que siga) handed out pamphlets just like this—and both sides in that war literally did commit warfare—killing families and then killing in retaliation. Setting up patrols and then setting up parapatrols to countermand those patrols. Forcing people to choose sides ("Of course my side is right! if you don’t agree you are with the bad guys and deserve to die!"). And the cause, besides racial tensions between indígena and whites, was an economic gap and lack of economic mobility. O(10^5) deaths ~ 1% of the population.

"Class warfare", like "wage slavery", is a horrible exaggeration that’s offensive to those who have suffered actual war or slavery. But actual war over wage differentials is not unheard of in history. This goes beyond “regular economics-only” analysis into the stories we tell ourselves about ourselves, politics, and game-theoretic moves that people normally forgo.

It may be that such bitter struggles are less common once the poorest are far enough above a meagre subsistence—hungry people have a completely different psychology than non-hungry. Or it may be that the perception <that anyone can move upward in the economic strata through hard work and right action> keeps peace, as those moving forward set their efforts toward non-violent self-advancement: a culture of rising up by work and business, rather than by other means. I don’t know the formula for a peaceful, industrious culture. But, it would be foolish to take that for granted. Rather, peace is something to be grateful for.

I’m not saying that anywhere in the OECD is approaching a brink of civil war—it doesn’t seem like it and let’s hope not—but things in my fictional robo-programmer society could be much worse if “only economic” causes led to “beyond economic” action.




The fundamental mystery of capitalism, in my mind, is how a lot of locally zero-sum fights—over customers, over bread, over a job opening—can result in a globally positive-sum game like 2%/year economic growth over a century.

30 years of economic growth in a narrow corridor by ed leamer ... you can get pictures of the centuries on angus maddison or longer us economy on economagic

Just had a small maybe-insight into this question. Let’s take the case of a negative-sum court battle where the victim of a rollercoaster accident tries to recover damages in court. What’s being negotiated, at expense, is the transfer of wealth from one party to another—no growth here.

But, this suit constitutes a sample from the probability space of tort losses. The threat—in probability space—with low probability, of high expected loss—incents theme parks to take more precautions.

Maybe the precautions taken in response to the probabilistic threat are what causes the growth.

Agree? Disagree? Missing a wider point? On the right track?




memeengine replied to your post: Or can the influence of any ancestor ever fade down to zero? (Or, well… to arbitrarily small size?)

An AR[1] process can go arbitrarily ↓0 as time↑∞. But in real life the sins of the fathers set their childrens’ teeth on edge in a stiffer, more heriting, architectural way. (I was alluding to that with the new-parents post scriptum.)

I don’t know of any “grande classes of models” wherein you stay stuck from where the past put you, but for example you could say

  • if ($income >= 10 guineas) { $opportunities = 1000; } else { $opportunities = 3; }.
 

I’m neither an expert on history nor do I find the econometrics super compelling, but ∃ some theories of the past carving out a channel for the future.

  • In central Africa — the form of governance from 1000, 1500, 1800 AD still has an influence on GDP per capita today. Even once you statistically control for other “obvious” determinants of production power. (Here I learned the interesting term “ethnofract”—a measure of ethnic disparity.)
  • In the southeastern US — a county’s history of slave-holding has statistical relevance to. (Nathan Nunn is a co-author.)
  • In socialist Sweden — the class mobility from generation to generation is greater than in free-market United States.
  • According to Arvind Thornton, north-western European social norms of family size, structure, and intra-/inter-relationships set the stage for “industrial revolution” type anti-Malthusian family structures that inform major subcultures all over the OECD today. I.e., a small nuclear family wherefrom kids form their own families in a separate home; high value placed upon individualism; etc. 
  • In British-colonial Jamaica and French-colonial Haiti, an oligarchic political form in the 1700’s passed on poverty to its ‘fterbears. Sugar plantations financed European vacations, fine liberal educations, and leisure for the elites, but sugar is not an investment in the future. Indeed, growth markets might have overthrown the political structure by empowering the hands, so the positive-sum games were forestalled by the landed interests. (Story can be found on Daron Acemoglu’s website.)
  • (A similar argument has been applied to Europe in the Needham question: why did Europeans dominate the globe rather than Asians, when the Asians were ahead earlier on in the race? Perhaps because of the over-powerful Chinese government.)
  • In Louisiana, USA — juridical forms differ from the other 49 States. Since Louisiana’s French colonial history bequeathed it a civil-law rather than a common-law system of justice, not just its laws but the underlying reasoning for how they’re executed, differs orthogonally to other interstate legal variations.
  • Come to think of it: any common-law system, by design, to carve a river that the future will follow.

In all of the statistical examples we’ve got to ask if it’s possible to statistically control for parameter changes. To which the correct answer is: No. Well, maybe. Um, in a local sense any parameter change can be estimated as linear. If the underlying function is ≥once-differentiable. So, err. I’ll have to get back to you on that.

(I’ll look up paper links later…if you as a reader know the papers or related ones you could also do me the favour and post links in the Reply or Disqus Comments. =) )