Productivity Growth and the Steady State

The idea of diminishing marginal returns is a key founding block in economics. We assume that as one adds each additional unit of something, the additional product of that unit decreases unless all other inputs are increased by the same amount. This is not always the case, but for many real world examples, diminishing marginal returns (DMR) hold.

Over the past couple centuries, the amount of growth the world has seen has been tremendous. On all known levels of human development, there has been significant progress even at the average level. Granted, some nations have fared better than others (that’s another story), but the industrial revolution has been a net positive for humanity. Within the United States, this rate of growth peaked in the mid 1920s, but high levels of growth continued in the subsequent decades. Many of the highest impact inventions were created during this time: radio, television, cellular technology, semi-automated home appliances, the early versions of the internet, nuclear energy, solid state electronics, transistors, and integrated circuits. All of which, are still with us, but this rate of progress did not continue. It is common knowledge, amongst economists and infovores, alike, that developed countries have experienced on average lower growth in productivity and technological change since the 1970s.

Much of this decline in technological change reminds me of growth models encountered in my first year grad courses. In these models, all economies converged on a steady state growth path where the rate of change in their respective productivity growth became zero. For many of these models, this stationary state implies some sort of equilibrium; however, I’d argue that the world is in a constant state of disequilibrium while trending towards some unknown target and each of these inputs has DMR. The path towards equilibrium in many of these models contains well-specified criteria and variables, but in the real world, everything is a variable.

A small goal of mine is to come closer to understanding this slowdown in growth. Many people question it, including recent Nobel laureate, Paul Romer, but it isn’t the mainstream topic of our time outside a few, well-specified circles.

Some thoughts moving forward in an inquiry into the nature and causes of productivity growth:

  1. Innovation is a form of social violence against the current technology and producers.
  2. Complacency is a human downfall?
  3. The current set of research has reached saturation to the point of DMR
  4. Institutions, both social and legal, have changed to maintain the status quo.
  5. Leisure is to cheap relative to work (credit: SP).
  6. We are no longer engaging in basic research.
  7. We have gathered the low-hanging fruits.

Changing it up: What is Economics?

Economics pervades everything we as humans and our institutions do.

In the last couple months, I have struggled to find something to write about. It hasn’t been that I’ve had nothing to write about, quite the opposite, I’ve had far too much to write about. My notebooks and planner have been overflowing with ideas about blog posts, op-eds, and scholarly articles. Unfortunately, I didn’t have a system in which I could divulge this ever-growing heap of ideas and prompts into something others could comprehend. Thanks to the suggestion of a good friend, I’m going to focus on putting many of these ideas on Optimal Economics (OE). Starting with this post:

What is Economics?

If you’re reading this blog, I assume that you have an idea as to some of the things that describe economics. It’s the Dismal Science, the study of the economy, a study of scarcity, etc., etc…

Unfortunately, those descriptions barely scratch the surface of what economics is; in fact, economics is everywhere. Economics pervades everything we as humans and our institutions do. (Many, like Walter Williams, would say that even animals observe the laws of economics because even insects and vermin are utility-maximizers.) Every choice you make has an economic undertone. Every choice is made from you weighing your options and then acting upon them. Even if you act upon impulse, you’ve made the choice of not carefully thinking about your next more; therefore, you’ve decided that weighed your option to weigh other options and went with the most immediate plan of action.

Through the course of my academic career, I have often heard the field of economics described as being one the following:

  1. Economics is the study of scarcity and how people make choices in a world of scarcity.
  2. Economics is the study of how people mitigate risk.
  3. Economics is the study of human action.

Which one of these is the correct definition for economics?

The answer is all three of them. Every choice a person makes is an action, specifically, a Human action. Every action must be made within a realm of constraints. Our world, having a limited amount of mass, area, and resources, is by definition one of scarcity. In order to deal with this scarcity, humans must determine the associated risks with using any number of scarce resources to satisfy their means, or actions.

If we lived in a world without scarcity, such as the Marxist utopia, the laws of economics need not abide; however, such a world is not only inconceivable, it is impossible according to the current laws of physics (the First Laws of the Conservation of Mass and of Energy). We do not possess the technology or the universe-altering techniques to allow our world to be free from scarcity, thus free from risk, thus free from human action.

From the view of the innocent bystander, I do not think we would want to live in a world where there was no human action. Yet, we do not live at the other extreme proposed by Thomas Malthus. Humans are inherently creative and solve seemingly insolvable problems. Every individual has the ability to make a sequence of choices, that combined with their own creativity, can make the world a better place. The choice to save a larger percentage of one’s income could lead to a bank lending out more money which in turn would lead to capital investment and potentially higher standard of living for everyone within a given economy. Your choices impact not only today, but tomorrow, the day after that, the day after that and so on. Human minds, social constructs, and institutions are not directly bound by the laws of physics, and every choice has the potential to be far-reaching in its consequences. Furthermore, being self-interested has so far, on the aggregate, been found to be beneficial to society. It’s because of our great capacity to overcome that we were able to rise above the limits set by Malthus and that we as humans will be able to overcome whatever issues we as a species will face next.

Economics tells the how and the why we have succeeded at becoming the dominant species on the Earth.

 

North Korea, Presidential Wars, and Trump

Trump is simply taking a similar path to that of his predecessors’.

Earlier today, my four-year old son caught a snippet of the news in which they exaggerated the current status of the relations between North Korea and the United States. Being classic “shock doctrine,” this bit of news created more than just sparks of fear in my son’s mind. It took a bit of reassurance from his mother, but eventually my youngest calmed down and [hopefully] forgot all about the North Koreans who were going to “kill everyone.”

What is the deal with Trump and North Korea, anyway?

I want to preface the rest of the post with this: I didn’t vote for Trump, much like I didn’t vote for Clinton; I saw them both as being equally bad choices, and therefore no choice at all. Douglas Adams once wrote, “… it is a well-known fact that those people who must want to rule people are, ipso facto, those least suited to do it … anyone who is capable of getting themselves made President should on no account be allowed to do the job.” I stand in firm agreement with that statement.

War, not just with Korea, is inherently American (I’d argue, even human). The United States was born out of war, re-solidified after the Civil War, and became a major global power due to its actions during the Second World War. There is some patriotic about fighting for your nation, almost as if the tales of Greek and Roman warriors have been passed through the ages and those feelings of glory and honor still gild military action the world over. Perhaps, those on the outside see war, and those fighting on their side, as Henry Fleming in The Red Badge of Courage who likened the thought of going into battle as the of the glory found in the epics of Homer. Only, Henry found that there were more horrors to war than what were found in the stories of old.

Think for a moment on the greatest presidents in United States’ history. You may find yourself thinking of George Washington, Abraham Lincoln, or Franklin Delano Roosevelt. What do all of these figureheads have in common? War. Respectively, the Revolutionary War. the Civil War, and World War II. While the Revolutionary War was not fought during Washington’s time in office, it did pave the path to his presidency in its aftermath. Both Lincoln and FDR rode the wave of war to successive terms in office and better public opinion. It can be said that Bush II, albeit not a great president by historical standards, used the popularity of the War on Terror and operations in the Middle East to his advantage. Obama showcased a photo of the late Osama bin Laden during his 2012 re-election campaign to help boost his image. In America, war binds the country together.

Trump is simply taking a similar path to that of his predecessors’. (Pointing out Obama’s drone strike legacy is not part of this post, but maybe a future one.) War with North Korea has a decent chance of boosting Trump’s poll numbers and maybe even leading him to a second term in office. Even though he hasn’t been in office an entire year yet, it’s not too early for him to plan for the future. With the lackluster poll numbers he’s had so far, it may take something as drastic as war to improve his odds.

So, why North Korea? The country maybe on the last bastions of 20th Century “Communism,” but their economic output and relative threat are greatly dwarfed by that of the United States. It’s almost as if the biggest kid at recess is looking to punish one of the scrawniest kids in the yard… and it’s exactly that. Dictatorships do not get into more wars than democracies; rather, democracies are more selective about which conflicts in which they engage.

If you know much about North Korea, whether it be their outlandish news reports or the impoverished state of their people, a full on assault by the United States could wipe out the country’s leadership within a week (assuming China or Russia does not provide aid). The people of the country are so impoverished that they could not withstand the invading force. Knowing this, Kim Jong Un attempts to deter foreign military action with bravado, but in the real world, the combined strength of the United States’ military is an impressive force, second only to the US Dollar.

In response to Un’s botched foreign policy, most of the world seems to ignore him with the exception of the United States. Here, much attention to the dictator’s tantrums and selected voice clips is paid; fear is a powerful force. The fact that the source of the fear is far away and poses little actual threat to a world superpower makes it an even better target for exploitation. By making himself look as if he is standing up against “evil” and those that would “destroy America,” Donald Trump succeeds in using a proven presidential tactic.

Will this move pay off for Trump in the end? That’s hard to say, but he has history in his favor.

Will America go to war with North Korea? I think that’s doubtful considering the role of China in today’s world, but underestimating the impulsiveness of Trump’s potential decisions would be folly. On this one, we will have to wait and see.

What am I doing here?

Glass half-full… Or is it half-empty? Maybe it’s just optimized for its given set of circumstances. In any case, I’m going to be drinking it.

As I begin to write this first blog port, I have realized that there are so many unknowns. For instance, I am unable to explain what exactly all the things I want to achieve with this blog. Nor do I know who my readers will be, from where they originate, what passions they have, and how they stumbled upon my blog. I do not know how often I will write: I expect that much of my writing will happen on a whim. There are however two things of which I am quite sure:

  1. The original title of the blog was going to be “The Tragedy of the Commons,” but after some consideration, I found that to be both too long and kind of depressing. (I like to think of myself as being somewhat of an optimist; plus, the whole idea of economic optimization is exciting.)
  2. I am going to lie to you. This is inescapable; there is far too much information, misinformation, and changing of ideas for me to promise to tell nothing but the truth, even though I will strive to do nothing less.

One last note, or a couple (I free write most of the time and…), I am being brave (perhaps, it’s hubris?) by calling myself an economist, but at the time of writing this I am a month away from entering grad school. Next, the title of the blog comes from economic optimization which deals with the using up scarce resources in most effective way given a set of constraints; I can’t think of a better way to explain exactly what’s going to happen in this blog.

Until I decide to write my first substantive post, ciao.

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