Sunday, November 15, 2009

William Easterly's The Elusive Quest for Growth - Chapter 3

The key to this chapter is that Solow argued that technology is the critical indicator of long-term economic growth. He argued that Capital Fundamentalists had a flawed argument due to the idea of diminishing returns to investment. Increased benefit per machine continually decreases as more machines are added.
What economists are really looking for is greater production per worker, termed labor productivity. Income from machines is estimated to be about 1/3 of GDP, which is clearly smaller than from labor income (intuitively 2/3 of GDP). The way that diminishing returns effects on machines is eliminated is through technological advances. Essentially, labor becomes a more efficient resource, so returns continue to increase.
Easterly lambasts critics who dislike technological advancement on the grounds that it reduces labor demand. However, “labor-saving technology” can be termed “increased-output-per-worker technology.” Technology, he says, doesn’t mean a reduced labor force, but rather increased production.
Others criticize countries for allowing GDP growth to be higher than employment growth. He mentions that this simply means incomes are rising.
Easterly says that all countries were essentially poor at one collective time. Thus, the ones that made advancements first should be expected to still be leading economically today.
William Baumol theorized that poor countries grow fast than rich ones due to a study of about twenty countries that he followed. But data is generally only available from richer countries, so his theory was implicitly biased by his following of countries with data. Easterly argues that poor countries do not grow faster than rich countries.
I appreciate how he puts critics in their place discussing the positives of technological advancement. People in developed countries such as the one we live in shouldn’t be afraid of technology advancing. It’s people like the Taliban that don’t like high technology.
I understand that it can be assumed that most technology advances have come from America and other highly developed countries. But I’m curious as to how the technology level is quantified.

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