The O-Ring Model of Development

Michael Kremer’s Nobel prize (with Duflo and Banerjee) reminded me of his important paper The O-Ring Theory of Development. I also rewatched my video on this paper from Tyler’s and my online class, Development Economics. This was from our powerpoint and iPad days so there are no fancy graphics but the video holds up! Mostly because it’s a great model with lots of interesting implications not just for development but also for the structure of the US economy. See also Jason Collins on Garett Jones’s extension of the model.

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Yup, all those zero marginal productivity workers.

I don't mean to be critical but this is rather obvious isn't it. Do you really think all the math and 19 minutes of explanation is necessary to state the obvious?

If it's obvious, why are so many companies still blending high quality and low quality workers? Why are liberals freaking out about income inequality if it's an obvious and natural side-effect?

Because for many industries the penalty is not as bad as the article implies AND because 80% of workers are not perfect or close to perfect. It is simply the real world solution to the real world problem given the real world situation.

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The wikipedia summary in part:

"Kremer thinks that the O-ring development theory explains why rich countries produce more complicated products, have larger firms and much higher worker productivity than poor countries."

Thus arguing for big government. There are no rich countries that didn't have big government first. (Measured against contemporaries.)

Sure, they got big governments AFTER they became rich....

China, Japan, South Korea, Singapore, and Taiwan all got big governments first and then became rich. The Asian dictatorship to democracy path is a historically proven one except of course the very stubborn CCP.

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No, the model would argue that rich countries should have higher quality governments, and then you substituted size for quality.

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The United States is a rich country that had a small government while it got rich (except during wartime, federal spending never exceeded 5% of GDP until the New Deal, by which time the US was already the world's richest country).

Other small-government countries in the past failed because they were militarily conquered and plundered by big-government ones. In the relatively peaceful times since the end of World War II, the great economic success stories have tended to all have small governments (relative to contemporaries).

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Top class video. Thank you.

Production of useful YouTube videos should follow an O-ring model, so this one is quite an accomplishment. That it’s free to watch indicates something remarkable.

That economists are so desperate to be considered a legitimate science that they will misrepresent facts?

Fascinating to see that deletion is not actually based on content, per se.

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The O-Ring Theory of Development.
--
An example of our abstract algebra.

Consider supply and demand for skills. Some workers have four skills, some two some 1 some 3. If you have multiple skills you walk through multi-state task, performing each skill in turn. The factory manager organizes the task queues, grouping the multi-skilled workers together. with implies that the steps through the queue are minimum.

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A good concept to apply to the present "legal liability" created electrical blackouts in Ca. Yes, we can put UPS (uninterruptable power supplies) on all our businesses, but the cost is huge and the risk associated with the fuel and fuel distribution is an additional fire risk. To make them reliable with automatic switching, etc. the capital cost approaches the capital cost for the existing electrical grid at replacement value, not book value.

Imagine the number of biotech firms that didn't have enough backup power for their freezers full of decades of biology effort and the number of "O" ring type production functions that also crashed.

However, lots of lawyers and politicians benefited while the citizen's meat rotted.

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This was fascinating, thanks Alex. Though I'm a non-economist, I've been following economic thought as an amateur throughout my 35-year career in the financial industry and this is the first time I've come across the O-ring model. But it's amazingly powerful. I'm astonished I haven't seen it mentioned given all the discussion of income inequality these days. Thanks and well done!

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you are sadly mistaken if you think that the o-ring which failed on the Space Shuttle cost anywhere near 10 dollars. You probably are conflating a 37 foot long aerospace component with the thing that fits on your garden hose.

But this is not material to your main point. I enjoyed the video.

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Is there a generalised proof of the mix versus match equation for higher numbers of tasks / workers?

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