I think TFP is not really ideas. It is deployment of production methods. New ideas give us new production methods, but they don’t really help us deploy them. For deployment, we need a lot of effort (1% inspiration, 99% perspiration) and also high-quality institutions.
How do you explain the TFP drop in Venezuela? Did they suddenly lose a bunch of ideas? No, their institutions deteriorated and their deployed production methods declined in quality.
Same in the US. The creation of the NRC reduced the quality of the production methods we could deploy. NEPA too. Lots of other things one could cite. Simply letting us use the ideas we already have as effectively as possible would increase TFP significantly.
So explaining your three data points:
Institutions really improved pretty significantly over the last 1000 years (Magna Carta, reductions in violence), leading to superexponential growth.
At a very crude level, the basic framework of economic institutions have been mostly static over your second period, leading to plain exponential growth. (NB: to make this fit, I would start counting after the end of slavery, and still would not wish to deny the importance of improvements in social institutions leading to greater racial and gender equality).
Since 1970, our legal and economic institutions have declined in quality somewhat, leading to slower TFP growth. Mystery solved.
Another way to put it is: are ideas getting harder to use? We know that if we put the magic rocks together, they get hot and can be used to generate steam and electricity. But if we’re not allowed to make effective use of that information, it screws us almost as much as if we didn’t have it in the first place.
I think that story fits, too. And Romer/Jones would seem to be sympathetic as well. From the “New Kaldor Facts” paper mentioned above (emphasis added):
There is very broad agreement that differences in institutions must be the fundamental source of the wide differences in growth rates observed for countries at low levels of income, and for the low income and TFP levels themselves. In any model, bad institutions will distort the usage of rival inputs like labor and capital (Abhijit V. Banerjee and Esther Duflo 2005; Diego Restuccia and Richard Rogerson 2008; Chang-Tai Hsieh and Klenow 2009). Our point is that one must allow for the possibility that they also distort the adoption and utilization of ideas from leading nations. The potential for ideas to diffuse across countries can significantly amplify the effects of institutions.
The interaction between institutions and idea flows is easy to illustrate in familiar contexts. For example, until 1996, opponents successfully used the local permit process to keep Wal-Mart from building stores or distribution centers in Vermont. This kept Wal-Mart’s powerful logistics ideas, such as cross-docking, from being used to raise productivity in retailing in the state. Such nonrival ideas must have been at least partly excludable. This is why Wal-Mart was willing to spend resources developing them, and why competitors were not able to copy them. All this fits comfortably in the default model of endogenous discovery of ideas as partially excludable nonrival goods.
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The pure public good approach also makes it very difficult to address one of the most striking episodes in modern history. By about 1300 AD, China was the most technologically advanced country in the world, with a large integrated population. According to the Lee model, it should have persisted indefinitely as the world technology leader. The explosive dynamics of the virtuous circle between population and ideas suggests that such technological leads should never be lost. Only a remarkable and persistent failure of institutions can explain how China fell so far behind Europe. A model in which institutions can stifle innovation could explain why China lost the lead, but it takes a model in which institutions can also stop inflows of ideas from the rest of the world to explain why, for more than 500 years, ideas developed in the west were not more systematically adopted in China.
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There is much interesting work that tries to explain why inefficient institutions can persist and why efficient institutions can be difficult to establish (Daron Acemoglu and James A. Robinson 2006; Avner Greif 2006; Douglass C. North, John Joseph Wallis, and Barry R. Weingast 2009). As that work progresses, it seems reasonable to insist that models of growth and development allow for the possibility that political and regulatory institutions like those used in Vermont can sometimes be used in different countries to keep out technologies like cross-docking. At the other extreme, it also seems reasonable to allow for the possibility that in some countries (think of Haiti or Somalia as extreme cases) ideas like cross-docking are sometimes not brought into a country because its institutions cannot assure even the most basic elements of personal security and protection of private property.
I am curious to hear from people who are skeptical of the crucial role of institutions, or who ignore it, and I’m curious what evidence would resolve the disagreement.
That would make a good topic for a separate post/debate somewhere! In any case, the models discussed here don’t have terms for institutions, so clearly there is something important they’re not yet capturing…
I think TFP is not really ideas. It is deployment of production methods. New ideas give us new production methods, but they don’t really help us deploy them. For deployment, we need a lot of effort (1% inspiration, 99% perspiration) and also high-quality institutions.
How do you explain the TFP drop in Venezuela? Did they suddenly lose a bunch of ideas? No, their institutions deteriorated and their deployed production methods declined in quality.
Same in the US. The creation of the NRC reduced the quality of the production methods we could deploy. NEPA too. Lots of other things one could cite. Simply letting us use the ideas we already have as effectively as possible would increase TFP significantly.
So explaining your three data points:
Institutions really improved pretty significantly over the last 1000 years (Magna Carta, reductions in violence), leading to superexponential growth.
At a very crude level, the basic framework of economic institutions have been mostly static over your second period, leading to plain exponential growth. (NB: to make this fit, I would start counting after the end of slavery, and still would not wish to deny the importance of improvements in social institutions leading to greater racial and gender equality).
Since 1970, our legal and economic institutions have declined in quality somewhat, leading to slower TFP growth. Mystery solved.
Another way to put it is: are ideas getting harder to use? We know that if we put the magic rocks together, they get hot and can be used to generate steam and electricity. But if we’re not allowed to make effective use of that information, it screws us almost as much as if we didn’t have it in the first place.
I think that story fits, too. And Romer/Jones would seem to be sympathetic as well. From the “New Kaldor Facts” paper mentioned above (emphasis added):
I am curious to hear from people who are skeptical of the crucial role of institutions, or who ignore it, and I’m curious what evidence would resolve the disagreement.
Not to be a double contrarian, but I am also skeptical of a lot of econ research on institutions. Ha!
That would make a good topic for a separate post/debate somewhere! In any case, the models discussed here don’t have terms for institutions, so clearly there is something important they’re not yet capturing…