growth theory
July 14, 2009 2:00 AM   Subscribe

The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital [pdf] - "For now, we think that progress is likely to be most rapid if we follow the example of the neoclassical model and treat institutions the way the neoclassical model treated technology... Further out on the horizon, one may hope for a successful conclusion to the ongoing hunt for a simple model [1] of institutional evolution. Combining that with the unified approach to growth outlined here would surely constitute the economics equivalent of a grand unified theory..." [2, viz. previously] This might, as it were, be a subset of collective cognition (or, possibly, autism [3]).
posted by kliuless (9 comments total) 17 users marked this as a favorite
Wow interesting topic.

We've come a long way since Kaldor; in fact, many researchers with these interests are now working in the field New Institutional Economics

Disclaimer: I'm not an economist by education or profession - actually an econometrician with a strong focus in capital markets - but as coincidence would have it, I'm writing up a case study on NIE for an MBA economics class I took just 'cause I wanted to learn more economics (aka "glutton for punishment").

A good introductory reading list for NIE would include: And a little deeper into the material:
  • Alchian, A., A., Demsetz, H., (1972), “Production, Information Costs, and Economic Organization,” American Economic Review 62:5 (December 1972), pp. 777-795
  • Benham, A., Benham L., , "Measuring the Costs of Exchange," in Ménard, Claude, Institutions, Contracts and Organizations: Perspectives from New Institutional Economics, Edward Elgar, 2000, pp. 367-375.
  • Breit, W., Hochman, H., Saueracker E., (1971) Readings in Microeconomics
  • Coase, R., (1937), "The Nature of The Firm ," Economica, November 1937, pp. 386-495
  • Coase, R., (1960), "The Problem of Social Costs," Journal of Law and Economics, October 1960, pp. 1-44
  • Coase, R. H., (1988), The Firm, the Market and the Law, The University of Chicago Press, 1988.
  • Keefer, P., Knack, S., (1997), "Why Don’t Poor Countries Catch Up: A Cross National Test of an Institutional Explanation," Economic Inquiry, 35:3 (July 1997), pp. 590-602.
  • North, D., C., (1993), "New Institutional Economics and Development." working paper [ .pdf ]
  • North, D., C., (1995) "Five Propositions about Institutional Change," in Explaining Social Institutions, Jack Knight and Itai Sened, eds., University of Michigan Press, 1995, pp. 15-26.
  • Williamson, O., (1979), "Transaction Cost Economics: The Governance of Contractual Relations," Journal of Law and Economics, 22 (October 1979), pp. 233-261
  • Williamson, O., (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, The Free Press, 1985
  • Williamson, O., Winter, S., (1993), The Nature of the Firm: Origins, Evolution and Development, Oxford University Press, 1993.
  • Williamson, O., (2000), "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38 (September 2000), pp. 595-613.
Great post! As if I didn't already have more than enough in my summer reading list ....

Thanks for this.
posted by Mutant at 3:20 AM on July 14, 2009 [2 favorites]

Do you realize how many tabs I already have open? And the fact I am at the border of understanding with this stuff means the tabs resulting from this may never end up getting closed. What are you trying to do with this excellent post !?!?!?! And it's quite obvious where Mutant's loyalties lie in the War on Tabs...
posted by palidor at 4:45 AM on July 14, 2009

posted by Potomac Avenue at 4:47 AM on July 14, 2009

It's a great paper. If non-economists have been wondering what on earth macro folks have been up to given that they seem to have been ignoring - even assuming away - fluctuations such as we are experiencing at present, this should give you a good idea.

As a young economist, understanding the idea that capital accumulation could not be the explanation for continued growth in living standards (as shown in the Swan-Solow model) was a revelation. The new stylised fact that despite the massive increases in the ranks of the educated their relative wage is not showing any sign of falling is a similarly huge deal.

And in case anyone thinks that debates about intellectual property rights regimes are just about people wanting to see films for nothing, this quote (p7) should make it clear that the issue is pretty much at the heart of questions of long-term economic development:

"As just one example, recall that the increasing returns to scale that is implied by
nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas. Efficiency in use dictates price equal to marginal cost. But with increasing returns, there is insufficient output to pay each input its marginal product; in general, price must exceed marginal cost somewhere to provide the incentive for profit maximizing private firms to create new ideas.1 This tension is at the heart of the problem: a single price cannot simultaneously allocate goods to their most efficient uses and provide the appropriate incentives for innovation.

An important unresolved policy question is therefore the optimal design of institutions
that support the production and distribution of nonrival ideas. In practice, most
observers seem to agree that some complicated mix of secrecy, intellectual property
rights that convey partial excludability, public subsidies through the institutions of science, and private voluntary provision is more efficient than any corner solution like
that prescribed for rival goods. We are, however, very far from results we could derive
from first principles to guide decisions about which types of goods are best served by
which institutional arrangement."
posted by hawthorne at 6:19 AM on July 14, 2009 [1 favorite]

<plaintive>Can anyone translate this into non-economist-speak?</plaintive>
posted by cstross at 12:05 PM on July 14, 2009

well, from what i can gather, in a sense it's actually sorta like a description of a (post-)singularity economics :P or, rather, an attempt to formally describe a flexible enough way to span (neo-)classical and post-scarcity worlds!*

per hawthorne, whereas economics in some respects is the study of how to maximise production under resource constraints, how does one optimise a system that exhibits increasing returns to scale?** viz. linear programming...
a mathematical model developed during the second world war to plan expenditures and returns in order to reduce costs to the army and increase losses to the enemy. It was kept secret until 1947. Postwar, many industries found its use in their daily planning
[cf. jones & romer: "as long as these transformations are governed by convex production possibilities" (pg. 10)] vs. nonlinear programming:
A typical nonconvex problem is that of optimizing transportation costs by selection from a set of transportion methods, one or more of which exhibit economies of scale, with various connectivities and capacity constraints.
the key, regarding NIE, appears (buried in the 'treat institutions' link) to be "The Grand Equivalence Version of the Coase Theorem," which allows:***
the Coasean maximum-value solution [to become] a benchmark by which institutions can be compared
re: nonrivalry, also see delong on "Speculative Microeconomics for Tomorrow's Economy," specifically wrt the 'technological' prerequisites of the market economy:
The ongoing revolution in data processing and data communications technology may well be starting to undermine those basic features of property and exchange that make the invisible hand a powerful social mechanism for organizing production and distribution. The case for the market system has always rested on three implicit pillars, three features of the way that property rights and exchange worked.
re: the optimal design of institutions, also see delong & summers (yes that l.summers) wrt 'gov't patent buyouts'...
New institutions and new kinds of institutions -- perhaps even some that have been tried before, like the French government's purchase and placing in the public domain of the first photographic patents in the early nineteenth century (see Kremer (1998)) -- may well be necessary to achieve the fourfold objectives of (a) price equal to marginal cost, (b) entrepreneurial energy, (c) accelerating the cumulative process of research, and (d) providing appropriate financial incentives for research and development. The work of Harvard economist Michael Kremer (1998, 2000), both with respect to the possibility of public purchase of patents at auction and of shifting some public research and development funding from effort-oriented to result-oriented processes (that is, holding contests for private companies to develop vaccines instead of funding research directly), is especially intriguing in its attempts to develop institutions that have all the advantages of market competition, natural monopoly, and public provision.
and varian (google's [1,2,3] chief economist) wrt 'differential pricing and efficiency':
The classic prescription for economically efficient pricing -- set price at marginal cost -- is not relevant for technologies that exhibit the kinds of increasing returns to scale, large fixed costs, or economies of scope found in the telecommunications and information industries. The appropriate guiding principle in these contexts should be that the marginal willingness to pay should be equal to marginal cost. This condition for efficiency can be approximated using differential pricing, and will in fact, be a natural outcome of profit-seeking behavior. [/em added]
*perhaps, at long last, joseph 'creative destruction' schumpeter's "Concept of Social Value" realised: For the system of economic science the main importance of this theory lies in the fact that, if distribution can be described by means of the social marginal utilities of the factors of production, it is not necessary, for that purpose, to enter into a theory of prices. The theory of distribution follows, in this case, directly from the law of social value.

**cf. nordhaus & kremer (also cited by jones & romer)

***apparently: "US authorities have issued an arrest warrant for Cheung on tax-evasion and conspiracy charges. Cheung fled to mainland China from Hong Kong; China has no extradition treaty with the US." [/hehe]
posted by kliuless at 9:18 PM on July 14, 2009

great links guys!
posted by stratastar at 11:11 PM on July 16, 2009

Paul Romer update
Paul Romer's blog
posted by kliuless at 7:52 PM on July 27, 2009

Paul Romer on Charter Cities
posted by kliuless at 10:40 AM on August 6, 2009

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