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2. Technological Change, Population, and Growth The mystery of economic growth and the role of models in economics Explaining growth: Allen's model Explaining stagnation: Malthus' model Summary Principles of Economics1 2. Technological Change, Population, and Growth Giuseppe Vittucci Marzetti2 SCOR Department of Sociology and Social Research University of Milano-Bicocca A.Y. 2018-19 1These slides are based on the material made available under Creative Commons BY-NC-ND © 4.0 by the CORE Project , https://www.core-econ.org/. 2Department of Sociology and Social Research, University of Milano-Bicocca, Via Bicocca degli Arcimboldi 8, 20126, Milan, E-mail: [email protected] Giuseppe Vittucci Marzetti Principles of Economics 1/37 The mystery of economic growth and the role of models in economics Explaining growth: Allen's model Explaining stagnation: Malthus' model Summary Layout 1 The mystery of economic growth and the role of models in economics The Industrial revolution Economists, historians, and the Industrial Revolution Economic models Four key ideas of economic modeling 2 Explaining growth: Allen's model Modeling technology Firm's choice: isocost lines and cost minimization Relative prices, innovation and profit Innovation incentives in the British Industrial Revolution 3 Explaining stagnation: Malthus' model Production function and diminishing average product of labor Malthusian economics The Malthusian trap Escaping the Malthusian trap 4 Summary Giuseppe Vittucci Marzetti Principles of Economics 2/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Real wage and population in Britain over seven centuries Rapid growth in real wages and population in the last 2 centuries Stagnation in the centuries before that. Figure: Real wages over seven centuries: Wages of craftsmen (skilled workers) in London (1264-2001), and the population of Britain Giuseppe Vittucci Marzetti Principles of Economics 3/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling The mystery of economic growth New (general-purpose) technologies introduced in textiles, energy and transports (e.g. James Watt's steam engine) in Britain in the middle of the 18th century and its cumulative character led to the Industrial revolution. This marked the beginning of the permanent technological revolution, that is behind the recent rapid, sustained increase in income and living standards, in spite of the striking increase of the population. These major changes started very suddenly, 200 years ago. How did the technological revolution start? Why did it happen first in the 18th century, on an island off the coast of Europe? The Industrial Revolution was a complex combination of inter-related intellectual, technological, social, economic and moral changes. Giuseppe Vittucci Marzetti Principles of Economics 4/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Explanations of the Industrial Revolution Mokyr (2004), a historian of technology, stresses the role played by Europe's scientific revolution and its Enlightenment century, which brought the development of new ways to transfer and transform elite scientific knowledge into practical advice and tools. Landes (2006), a historian, emphasizes the political and cultural characteristics of nations: Europe ahead of China because the Chinese state was too powerful and stifled innovation, and Chinese culture at the time favored stability over change. Clark (2007), an economic historian, also attributes Britain's take-off to culture: along the lines of Max Weber (1905), success due to cultural attributes such as hard work and savings. Pomeranz (2000), a historian, claims that superior European growth after 1800 was mainly due to the abundance of coal in Britain and Britain's access to agricultural production in its New World colonies fed the expanding class of industrial workers. Allen (2011), an economic historian, gives a central role to the relatively high cost of labor, coupled with the low cost of local energy, in Britain at the time. Giuseppe Vittucci Marzetti Principles of Economics 5/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Economists, historians, and the Industrial Revolution Scholars will probably never completely agree about what caused the Industrial Revolution. Different explanations not necessarily mutually exclusive. Historians and economists disagree about the relative importance of the different factors: Historians (e.g., Pomeranz, 2000) tend to focus on peculiarities of time and place: the Industrial Revolution happened because of a unique combination of favorable circumstances (although they may disagree about which ones). Economists (e.g. Allen, 2011) are more likely to look for general mechanisms that can explain success or failure across both time and space. Historians vs. Economists: Often historians' arguments are not precise enough to be testable using a model. Historians may regard economic models as simplistic, ignoring important historical facts. Giuseppe Vittucci Marzetti Principles of Economics 6/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Models in economics Economic theory is essentially a collection of models. (Krugman, 1997) A model is a particular stylized representation of a phenomenon, i.e. a relatively stable and general feature of the world that is interesting from a scientific point of view. Why do economists use models? What happens in an economy depends on the actions and interactions of millions of people. Economists use models to \see the big picture". Models necessarily omit many details. This is their feature, not a bug. Giuseppe Vittucci Marzetti Principles of Economics 7/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Krugman on the the aim and scope of economic models The objective of the most basic physics is a complete description of what happens. ... But most things we want to analyze, even in physical science, cannot be dealt with at that level of completeness. The only exact model of the global weather system is that system itself. Any smaller-scale model of that system is therefore to some degree a falsification: it leaves out many aspects of reality. And how do you know that the model is good? It will never be right in the way that quantum electrodynamics is right. At a certain point you may be good enough at predicting that your results can be put to repeated practical use ...; in that case predictive success can be measured ..., and the improvement of models becomes a quantifiable matter. In the early stages of a complex science, however, the criterion for a good model is more subjective: it is a good model if it succeeds in explaining or Paul R. Krugman rationalizing some of what you see in the world in a way that you might (1953) not have expected. [...] The important point is that any kind of model of a complex system { a physical model, a computer simulation, or a pencil-and-paper mathemat- ical representation { amounts to pretty much the same kind of procedure. Nobel Memorial You make a set of clearly untrue simplifications to get the system down to something you can handle; those simplifications are dictated partly Prize in by guesses about what is important, partly by the modeling techniques Economics 2008 available. And the end result, if the model is a good one, is an improved insight into why the vastly more complex real system behaves the way it does. (Krugman, 1997) Giuseppe Vittucci Marzetti Principles of Economics 8/37 The mystery of economic growth and the role of models in economics The Industrial revolution Explaining growth: Allen's model Economists, historians, and the Industrial Revolution Explaining stagnation: Malthus' model Economic models Summary Four key ideas of economic modeling Building a model To create an effective model we need to distinguish between: the essential features of the economy that are relevant to the question we want to answer, which should be included in the model; unimportant details that can be ignored Process of model building 1 Construct a simplified description of the conditions under which people take actions. 2 Describe in simple terms what determines these actions. 3 Determine how each of their actions affects each other. 4 Determine the outcome of these actions. This is often an equilibrium (something
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