Growth and Miracles in Economics

1. Rashid on Growth and
Miracles
Gaurav Sukhija, IITGN
March 13, 2014

2. Administrative Issues
• Office address: Room 305, Shed 5
• Collect papers between 12 pm - 2 pm
• Logistical issues. Quizzes delayed.

3. • Solow’s framework
How do we measure
economic growth?

4. The fallacy of
composition
• What is true of the parts is true of the whole
• Examples:
• Farmer with bumper crop
• Keynes’ paradox of thrift

5. The neoclassical
production function
• Sure individual firms have a production
function
• Does this imply that the economy has a
production function?
• Non-trivial because of the fallacy of
composition -- Cambridge critique

6. Total Factor
Productivity
• Suppose we own a farm
• 10 workers in year 1 and we produce 100
units of a crop
• In year 2, we still have 10 workers, but how
much do we produce?

7. Total Factor
Productivity
• The extra production isn’t due to growth
of inputs
• This is TFP

8. Units of TFP
• Y: Machines per year
• L: Man-hours per year
• K: Capital-hours per year
• A: ?

9. The pitfalls of TFP
Source: Rashid (2000) pp. 151

10. The pitfalls of TFP
• In short. Not a robust measure

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12. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible

13. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible
Okay
Debatable

14. Why is efficiency key?
• Can’t produce more with the same inputs
unless you’re more efficient
• This is a given

15. On TFP measurements
Source: Rashid (2000) pp. 152

16. On TFP measurements
Source: Rashid (2000) pp. 155

17. The theory isn’t ready
for policy

18. Ronald Coase (Nobel 1991)
• “In my youth it was said
that what was too silly
to be said may be sung.
In modern economics it
may be put into
mathematics.”