Published on September 18, 2024 2:05 PM GMT
Hi everyone! I’ve written an article I’m rather happy with on the history of endogenous growth models, and on the influence of intelligence on country level outcomes. As it is quite long, I will excerpt only a part — I sincerely hope you read the whole thing.
https://nicholasdecker.substack.com/p/endogenous-growth-and-human-intelligence
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ii. The History of Macroeconomic Growth Models
Macro growth models start in earnest with Solow, who connected capital accumulation to growth. Capital is taken to have diminishing marginal returns, in contrast to the cruder Harrod-Domar model. There exists a rate of savings which maximizes long run consumption, and given a particular technology set consumption will reach a constant level. (This rate of savings is called the Golden Rule level of savings, after Phelps). We assume perfect competition in production. (Monopoly distortions can be subtracted from the steady state level of consumption). Initial conditions have no effect on the long run rate, which is the same for all places and much lower than our present living standards. It is therefore necessary to invoke technological change, which is taken to be growing at an exogenously determined rate. As Arrow wrote, “From a quantitative, empirical point of view, we are left with time as an explanatory variable. Now trend projections … are basically a confession of ignorance, and what is worse from a practical viewpoint, are not policy variables”
The formulas are simple and clean, and you can make meaningful predictions about growth rates. Still, this clearly does not very well describe the world. There are large differences in per capita income across the globe. If there are diminishing marginal returns to capital, and that is all that matters, then capital should be flowing from developed countries to developing countries. It isn’t. In fact, more skilled people (who can be thought of as possessing a kind of capital, human capital) immigrate to more skilled countries! (Lucas 1988). Even if there are bars to capital flowing between countries, no such barriers between southern and northern states in the US. Barro and Sala-i-Martin (1992) found that, with reasonable parameters, the return to capital should have been five times higher in the South in the 1880s. Yet, most capital investment took place in New England states.
The bigger problem is that it predicts that growth rates should be declining over time. They are not. If anything, they are increasing over time. Even if the growth rate is constant and positive, that implies that the absolute value of growth is increasing over time. Appending human capital to the model can allow you to estimate the contribution of skills, in contrast to just tools and resources, but it is just a subset of capital and won’t lead to unbounded growth.
Enter Romer.
Discuss
