## Economic Growth

### Compounding

In an update on an old story, an investment banker asks the client to pay by placing one penny on the first square of a chessboard, two pennies on the second square, four on the third, doubling the number on each square that follows. If the banker had asked for this on only the white squares, the initial penny would double thirty-one times to \$21,474,836 on the last square. Using both the black and the white squares, the sum on the last square is \$92,233,720,368,547,758.

People are reasonably good at estimating how things add up, but for compounding, which involved repeated multiplication, we fail to appreciate how quickly things grow. As a result, we often lose sight of how important even small changes in the average rate of growth can be. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in pennies, pounds, or pesos? For a nation, the choices that determine whether income doubles in one generation or two dwarf all other economic policy concerns.

## Clear Writing Produces Clearer Thoughts

The oral tradition at the University of Chicago attributed the observation that “sloppy writing reflects sloppy thinking” to Milton Friedman. Of course, it echoes George Orwell’s claim that “the slovenliness of our language makes it easier for us to have foolish thoughts.”

Neither Friedman’s word “reflects” nor Orwell’s phrase “makes it easier” go far enough. The right verb is “produces.” Clear writing produces clearer thoughts. Sloppy writing produces sloppier thoughts. This is a natural consequence of the fact that anything stored in connections between neurons is part of a biochemical and electrical dynamic feedback loop. When we access one of these loops, we change it and connect it to other loops. To use an analogy from computer science, accessing neurons is never just a read. It is always a read and a rewrite.

## Human Capital and Knowledge

To me, one of the ways in which my 1990 paper, Endogenous Technological Change, was a step forward relative to the first round models of endogenous growth was the explicit distinction that it allowed between the stock of human capital H and the stock of knowledge A. To be sure, this was a very small step. In the model, they interacted the simplest possible way. Human capital H was an input that could be used to produce new knowledge A.

Stated in words, this sounds trivially obvious. But with mathematical theory, you have to think carefully to say even things that are trivial and obvious. Things such as what, precisely, do we mean by human capital?

I am a big fan of micro-foundations; provided, that is, that they are true. What has given a reliance on micro-foundations a bad name is letting people get away with using ones that are false and claiming that this has anything to do with science.

## Nonrival Goods After 25 Years

Joshua Gans has a generous post that notes the 25th anniversary of the publication of my 1990 JPE article. I could not agree more with his observation that “there is more to be done …” in understanding the economics of ideas.

His post helped me see how to respond to a conversation I had this summer. I’ll use the excuse of the anniversary to focus for the month on such basics as the meaning of the phrase nonrival good. Doing so will be a shift for this blog, which until now has been concerned primarily with economics as a science and incidentally with my day job, which focuses on the interaction between urbanization and development.
Continue reading “Nonrival Goods After 25 Years”

## Let them come and they will build it

In an op ed last week, Steve Hilton, a former advisor to the government in the UK, boiled the policy dilemma in Europe down to its essence:

Policy paralysis over the refugee crisis is convulsing Europe: Of course we want to help, but if we’re too generous, more will come.

To understand what Hilton means, it helps to use a model, an abstract representation that captures the essence of a complicated situation. Abstraction simplifies by stripping away inessential detail. It also helps us think logically, which in this case requires that we turn down the dial on our emotions.

So imagine that a service station offered customers who pull up to the pump a one-in-ten chance at a free tank of gasoline. What would happen? Cars will queue up.

## Botox for Development

In a talk at the World Bank that I gave last week, I repeated a riff that I’ve used before. Suppose your internist told you:

The x-ray shows a mass that is probably cancer, but we don’t have any good randomized clinical trials showing that your surgeon’s recommendation, operating to remove it, actually causes the remission that tends to follow. However, we do have an extremely clever clinical trial showing conclusively that Botox will make you look younger. So my recommendation is that you wait for some better studies before doing anything about the tumor but that I give you some Botox injections.”

If it were me, I’d get a new internist.

To be sure, researchers would always prefer data from randomized treatments if they were available instantly at zero cost. Unfortunately, randomization is not free. It is available at low or moderate cost for some treatments and at a prohibitively high cost for other potentially important treatments. Our goal should be to recommend treatments and policies that maximize the expected return, not to make the safest possible treatment and policy recommendations.

## The Transcendent Differences of Politics

An article in The New York Times Magazine has a nice quote from a beltway insider about how politics works:

‘‘Diplomacy is about minimizing differences,’’ he told me. ‘‘ ‘Pol Pot and the Pope — surely there’s something they can agree on.’ A political campaign is exactly the opposite. It’s about taking a minor difference and blowing it up into something transcendent.’’

In my paper on mathiness, the human pattern of interaction that I set in opposition to politics was not diplomacy but science. Diplomacy is closer to politics in the sense that both activate the powerful moral modules that evolved to encourage cooperation within an in-group when confronted with a threat from an out-group. The power of these mental modules suggests that during the Pleistocene, one of the biggest threats to survival and replication that any human faced was other humans. (See Jon Haidt’s book The Righteous Mind for an elaboration of this interpretation of human psychology.)
Continue reading “The Transcendent Differences of Politics”

## An Indicator of Tribalism in Macroeconomics

Consider these two statements:

1. The model in Lucas (1972), Expectations and the Neutrality of Money, made a path breaking contribution to economic theory. It is comparable in importance to the Solow model and the Dixit-Stiglitz formulation of monopolistic competition.

2. The model in Prescott and Kydland (1982), “Time to Build and Aggregate Fluctuations,” has no scientific validity.

As an experiment, I’d like to try working with people who can solve technical issues that arise in my research and policy work. At the moment, the types of expertise that would be most useful are:

– Programming with Mathematica
– Typesetting with Tex
– IT, including Linux server administration

I’d like to organize work around specific tasks. As they arise, I will send out an email to a list and include a desired turn-around time. In some time-sensitive cases, this might be as short as a day or two. For others, it could be several months. If someone gets in touch to say he or she is interested and seems qualified, this merely gets the person on the list. If he or she turns out to be busy or does not see anything interesting, there is no obligation. But if someone has free time and sees a task that looks interesting, they can put in a claim, and if I agree, start work.

I’ll make an estimate of the time required to complete a task and will offer a graduate student RA rate of \$25 per hour. Some of the estimates will probably turn out to be on the low side, and if so, we’ll renegotiate task extensions. The minimum unit for a task will be one hour of effort, so I’m calling these meso-tasks to distinguish them from much smaller micro-tasks, which has come to mean tasks that pay pennies.

To be eligible, a participant must have a dot edu email address and a PayPal account that I can use to send payments. To sign up for the group I’ll use to manage the email list, someone will also need an account with Google (but of course can continue to use any existing email account.)

In general, doing this kind of work will be a better fit for someone in a graduate program in economics or with experience doing research in economics. Someone with this background will be more likely to understand the context for a task and more likely to learn something useful along the way. For example, I assume that the only reason that someone who has the skills to contribute on IT tasks would agree to work for RA wages is because there is a chance to learn something in parallel that is related somehow to economics.

The background in all of these areas is not conceptually difficult. All it takes to get up to speed is a willingness to invest some time, so extensive experience is not a prerequisite. Two personality traits that are predictors of success are patience and attention to detail. Evidence in support of these traits (e.g. mastery of some other aspect of IT, programming, or mathematics) will be a plus.

If you would like to be on the list, or if you know economists who might be interested, the way to get in touch is by following me on Twitter, @paulmromer, and sending me a tweet that includes “meso.” I’ll respond by following back and then replying with a direct message.

## The Clinical-Bench Science Distinction in Macro

I had hoped to find time to offer a more thoughtful response to Simon Wren Lewis’s most recent comments on the way forward in macroeconomics but life is intruding, and I now I owe a response to Ray Fair (after I look at the work that he points to.)

For now, I’ll go ahead with what I hope is a suggestion that could encourage some kind of consensus:

Perhaps the discussion about macro would benefit from a distinction like the one in biomedicine between bench science and clinical work.