Modern Principles: Macroeconomics, Economic Growth

by on May 5, 2009 at 7:38 am in Books, Data Source, Economics, Education | Permalink

In the United States, diarrhea is a pain, an annoyance, and of
course an embarrassment. In much of the developing world, diarrhea
is a killer, especially of children. Every year 1.8 million
children die from diarrhea. Ending the premature deaths of these
children does not require any scientific breakthroughs, nor does it
require new drugs or fancy medical devices. Preventing these deaths requires
only one thing: economic growth.

That’s the opening paragraph of The Wealth of Nations and Economic Growth, Chapter 6 in Modern Principles: Macroeconomics.  Does the opening make you a little bit squeamish?  We hope so–we wanted an opening that would jar students out of complacency and remind them how vital economic growth is to human life.  

Due to its importance, we have more material on growth and development than any other principles text.  In Chapter 6 we lay out the key facts and the basic framework for understanding economic growth.  I think we do an especially good job explaining that the proximate causes of growth, increases in capital, labor, and technology must themselves be explained.  Why do people save?  Why do people invest?  Why do people research and develop new ideas?  It’s these questions which connect macroeconomics to microeconomics and point to the fundamental importance of incentives and institutions.  These questions also foreshadow future chapters on savings, investment, financial intermediation and the economics of ideas. 

For a limited time, you can read Chapter 6 at the link above (and do enjoy the pretty color pictures before you print!).  Tyler and I will be writing more about Modern Principles: Macroeconomics this week; you can also find more information at www.SeeTheInvisibleHand.com.

1 nabla May 5, 2009 at 8:06 am

The table on page 13 lists Switzerland among the 10 least corrupt countries. Yet, in Fig. 6.7 it scores about average along the horizontal axis. What gives?

2 Slocum May 5, 2009 at 8:30 am

Excellent. I might have said it was maybe a little too non-technical for university level instruction, but then I remember Robert Frank’s results showing that conventional introductory econ courses have no lasting effect whatsoever:

http://www.econtalk.org/archives/2007/10/robert_frank_on.html

There’s no way to put it in the text book, I know, but if I were teaching intro econ, one thing I would definitely do would be to have the students watch Hans Rosling’s development talk:

http://www.ted.com/index.php/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen.html

Which, of course, is very much in line with your chapter.

The other thing that struck me is that you present the ideas in a very cheerful, straightforward way as if there could be nothing more obvious in the world (and I agree that should be so). But, of course there are a whole lot of (misinformed) people at universities who firmly believe that poor nations are poor because of colonialism and exploitation and capitalism and globalization and the greediness and selfishness of rich (white) people, etc. How did you decide to simply sidestep these controversies? Or are they addressed elsewhere in the text?

3 Neal May 5, 2009 at 8:42 am

Which prevents deaths from diarrhea: economic growth, or the redistribution of wealth? 😉

4 sleepy_commentator May 5, 2009 at 8:56 am

And just to remind everyone, we’ve set up a website where people can direct their complaints about laissez-faire economic solutions to global problems, http://www.TalkToTheInvisibleHand.com.

(No, not really, I’m still on jokes.)

5 The Other Eric May 5, 2009 at 9:36 am

Will you please ask the publisher to translate this into Spanish as soon as possible so that you can give it to Hugo Chavez as a gift?

On a slightly more serious note: I will buy this text even though I don’t teach econ. It sounds like something that might clarify some of my unsystematic learning over the past 20 years.

6 D. Watson May 5, 2009 at 10:19 am

Malnutrition is a large part of why children die of diarrhea. Haddad and Smith (2002) and Haddad et al. (2002) show that, while economic growth DOES reduce malnutrition directly and indirectly through improved infrastructure and women’s life expectancy, it does not do so at observed rates to solve the problem by itself. Additional measures are needed.

As big a fan of ec. growth as I am, it’s too easy for policy makers to sit back and ignore the problem with the simplistic solution that growth will sovle all the problems. Particularly if that growth does not reach the poor until after the significant lags for trickle down to work.

It needs to be targeted itself.

7 Al Abbott May 5, 2009 at 10:51 am

Much better than the textbook I had about 50 years ago.

Typo on page 4, second line from bottom. “give” should be “given”

8 Chris May 5, 2009 at 11:19 am

Neal: Neither. What prevents deaths from diarrhea is the existence of modern water and sewer systems, which are a public good.

Economic growth does not necessarily result in the provision of more public goods.

9 keesvanderleigh May 5, 2009 at 11:37 am

After watching your TED talk, and reading some more of your blog posts, I’ve concluded that you must be the biggest Whig historian in the world today.

People sure do love snake oil, that’s for sure.

10 Enda May 5, 2009 at 11:50 am

In fact the more I think about it, economic growth is neither a necessary nor sufficient condition for the prevention of these deaths.

Perhaps it would be better to contrast living conditions pre-Industrial Revolution living standards to today, focusing on life expectancy in particular (which appears to be linear in GDP).

11 Slocum May 5, 2009 at 12:13 pm

“In fact the more I think about it, economic growth is neither a necessary nor sufficient condition for the prevention of these deaths.”

And yet the correlations are very strong. How many examples do we have of wealthy countries that have failed to invest in water and sewer systems and continue to see many deaths of this kind? Similarly, how many examples of poor countries do we have with very low levels of infant mortality despite their poverty?

Growth may not be either an complete guarantee or an absolute necessity, but it certainly does appear to be the most common, most reliable route to improvements in various measure of public health and well-being.

12 Alex Tabarrok May 5, 2009 at 12:26 pm

Slocum nails it.

Do note that we cover income distribution, public goods, tragedy of the commons, externalities and many other topics elsewhere in Modern Principles (especially in Micro.) Pedagogy is important and MR readers are much more informed than students.

13 Alex Tabarrok May 5, 2009 at 12:53 pm

Enda, pedagogy but also a larger truth. Economic growth is close to sufficient if we don’t nitpick. Is it necessary? Yes and no. In theory, no. In the real world, mostly yes. After all, “we” could have eliminated diarrhea deaths anytime in the last 50 years if we simply think about the problem as a matter of resources but *in point of fact* the big gains have come from economic growth. I think it’s important to get at this truth. Still, your point is well taken and I will think whether a slight rewording would not satisfy all claims.

14 Slocum May 5, 2009 at 1:33 pm

“The lessons are clear: the benefits of economic growth can prevent these deaths.”

But it’s more than that — it’s also the case that it turns out to be very hard to prevent these deaths without economic growth (via aid, for example). Why? Because so much aid is siphoned off and wasted by corrupt leaders and inefficient governments. Couldn’t you have poor country that had good, clean, efficient government that was able to use aid effectively in promoting public health? In theory, yes you could, but you don’t see it because countries that have efficient, non-corrupt governments, clear property rights, the rule of law, etc — countries that have these things do not remain poor.

15 Alex May 5, 2009 at 1:57 pm

I’m mildly skeptical of the claim that economic growth is the only thing necessary to prevent the hugely negative tolls caused by diarrhea. Particularly when health outcomes are expanded beyond the single instance of diarrhea, there are other important factors. A relevant quote from Michael Kremer’s article “Pharmaceuticals in the Developing World.” Link (http://www.jstor.org/stable/3216915) is behind JStor wall, though the relevant quote is on pg. 2 if interested.

“Indeed, analysis of worldwide health trends in the twentieth century has found that
most improvements resulted from technological advances rather than from income
growth. Using the cross-sectional relationship between income and life expectancy,
Preston (1975) estimated that income growth accounted for only 10 to 25 percent
of the growth in world life expectancy between the 1930s and 1960s and suggested
that the diffusion of technological advances was a major factor for the increase in
life expectancy at any given income level.”

16 mulp May 5, 2009 at 3:01 pm

Quoting Diamond:

“The name ‘malaria’, meaning bad air, was coined during the colonial era to describe a disease that struck without warning and without discrimination. This single disease was the most serious obstacle to European conquest of the tropical world, responsible for thousands of settler deaths throughout the eighteenth and nineteenth centuries.

“Yet, mysteriously, the immigrants’ African neighbors seemed to survive. Cattle and horses imported from Europe also seemed to drop dead as soon as they entered the Tropics. So what allowed African cattle, as well as their owners, to survive these tropical germs?

“The answer was simple evolution.

“Over centuries of exposure to parasitic infections like malaria and sleeping sickness, tropical Africans and the livestock they bred had developed degrees of resistance – and even immunity in some cases.

“The African way of life was designed to avoid mosquito-borne infection. Africans made their homes in high, dry areas when they could, away from the natural habitat of the mosquito. Also, African communities remained fairly small, which limited the level of disease transmission.

“Unfortunately, the arrival of colonizing Europeans, with their steam trains, machine guns and dreams of industrial wealth, wreaked terrible damage on these centuries-old mechanisms of survival. Torn from their villages, forced to live and work together in massive numbers and in unsanitary conditions, tropical Africans fell ill as never before. The scourge of malaria throughout Africa today is, in part, the consequence of the destruction of a way of life which had existed for thousands of years.”

More at http://www.pbs.org/gunsgermssteel/variables/malaria.html

I believe Diamond references Nigeria, like your chapter 6 does, but in a rather different light. From a summary of his chapter 19:
” “Blacks” occupy most of S. Sahara and sub-Saharan Africa. They mostly speak non-Bantu and Bantu versions of the Niger-Congo languages (which arose in W Africa: Cameroon and Nigeria) with some pockets remaining of Nilo-Saharan languages. The Bantu farmers dominated as they spread c. 3000 BC to 500 AD due to superior plant and animal domestication (incl. crops which like summer rains). They also had iron and bronze. They extended their range to Natal on the East coast and, as the Xhosa people, extended their range to the Fish River 500 miles east of Cape Town. Dutch white colonists at S. Africa 1652 faced only the poorly defended Khoisan, since the Bantus were far away, and brought crops well adapted to the climate.”

Diamond isn’t opposed to development, but he thinks the explanations for the successes and failures of development are very complicated.

And it is the failures of development which most concern him. And me. If we don’t understand why development failed repeatedly in Africa according to the European model, nor understand what happened on Easter Island, to argue economic growth anddevelopment solve all problems is dangeous.

Personally, I don’t want my trash to be excavated in a thousand years with anthropologists debating what my trash says about my cicilization and why it collapsed.

17 q May 5, 2009 at 4:18 pm

“In the discussion of property rights and rule of law, I would note the American economic development was based on taking the property of others and engaging in massive land redistribution that favored white immigrants.”
You need to reread the chapter. The text makes it clear that capital (the land itself) and efficient allocation of capital are distinct concepts. Property rights and the rule of law are necessary institutions for the latter. The Great Leap Forward wasn’t disastrous because the communists confiscated land from the previous landowners; it was disastrous because they put communal farms on them. Of course, confiscation from your own government cuts against the rule of law, but there was no expectation of such in during the colonial period once the land was reallocated under the fairly simple rule of “First come, first serve (only if you’re European).”

So, yes, Americans stole land from the natives. But that wasn’t a necessary nor a sufficient reason for their economic growth.

18 Mr. Econotarian May 5, 2009 at 6:42 pm

“Bringing clean water to half of those that don’t currently have access to it would cost $10bn – about 0.07% of US GDP. Economic growth by itself is not needed; it can easily be achieved by re-distribution.”

Money doesn’t build water systems. Money may pay for the raw materials and labor for a water system, but in a poor and corrupt country the raw materials will be stolen by government officials and resold for their own profit, and labor costs will be funneled to a small number of members of the ethnic minority that runs the government. See the Lesotho Dam for example.

Money must be matched by the institutions, and if the institutions are working, you won’t need any external money because economic growth will occur and you won’t be poor any more.

19 shooter242 May 5, 2009 at 9:31 pm

I see Delong isn’t the only one that scrubs inconvienient comments. What is it with you people?

20 Sandwichman May 5, 2009 at 10:18 pm

See also Groupthink:
Collective Delusions in Organizations and Markets
by Roland Bénabou, especially:
1. Preposterous probabilities;
4. Information avoidance, repainting red flags green and overriding alarms;
6. Reversing the burden of proof; and
7. Malleable memories: forgetting the lessons of history.

21 Andrew May 6, 2009 at 4:54 am

It is complicated. That’s why we must use things like “growth” as a proxy for the innumerable complications therein. It is not separate from its parts. We need something to look for, why not look at the thing that has a very strong correlation across nearly all cultures? Yes, there are fits and starts ranging from spreading disease to spreading too much housing.

I haven’t read Diamond’s book yet, but the notion that we are where we are simply as a result of stringing together a succession of historical oddities would imply there is no reason to look for solutions. Not only should we not be so arrogant as to try to plan economies, we shouldn’t even try at all. That strikes me as a nihilistic view. I’m more intrigued with the chicken or the egg question, though I think the point would be that health is but one indicator that correlates well with growth and there are many others that could be presented. Do all bad situations cause low growth? To an extent, but not really, because bad situations in varying degrees have always been around and growth, in the modern sense, is a new phenomenon.

Also, I don’t think Alex and Tyler favor growth for growth’s sake. Tyler has made many comments about the “fetishization” of measured GDP, perhaps while he was contributing to that chapter. We need to steal back the term “smart growth” from the central planners.

If I’d read this book in high school, I’d probably have majored in economics.

22 happyjuggler0 May 6, 2009 at 1:16 pm

Hope about we all agree that preventing deaths from diarrhea requires previous economic growth from somewhere.

Diarrhea deaths bad, therefore economic growth good.

23 Neal May 7, 2009 at 3:21 pm

More seriously than my post on the previous page, growth is probably necessary, because the country in question has to be productive enough to bear the cost of creating the infrastructure. In the meanwhile, making sure that everyone has access to said infrastructure is also important, and requires some redistribution of wealth (in fact, you might argue that, in short-run economic terms, government functions as nothing but a massive wealth redistributor).

I would think that the more immediate and, in the long-run, humane solution would be a transfer of wealth from the first to the third world to construct and maintain said public infrastructure – but, for a variety of reasons, this has not spontaneously happened. The chief to my mind are third-world corruption and first-world reluctance to give. So, from a pragmatic point of view (which I believe Dr Tabarrok espoused on the previous page), the best way to deal with diarrhea is by encouraging investment in third-world countries that will result in growth.

24 Marco Moreno May 10, 2009 at 3:18 am

Congratulations on the job. Is necessary a book with the New Keynesian economics, and the real business cycle. I hope to read soon

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