Stalled. Michael Hlinka

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СКАЧАТЬ a western suburb of Toronto. When I was very young, our family bought a window air conditioner. We were one of the first families on the block to have one. Within a few years, who didn’t? About a decade after that, we had central air conditioning installed — an astonishing luxury that soon became commonplace.

      Progress could be measured in an even more tangible way. In the 1950s, the average North American home measured less than 1,000 square feet. That increased to 1,200 square feet by the 1960s, 1,800 by the 1980s, and 2,400 by the year 2000.1 And as the houses were getting bigger, the average family was getting smaller — the best of all worlds! Quality of life was improving.

      This wasn’t always the case in the human experience. The Dark Ages, a period spanning the fifth century A.D. to the fifteenth century A.D., was termed such because there was little improvement (if any) in the lives of average citizens. Since then, economic growth has been uneven, but for most citizens in the developed world life has improved immeasurably. This was particularly true in the half-century following the end of Second World War.

      Because our DNA requires a framework within which to understand what we observe empirically, we’ve come up with theories to explain economic growth, in particular what has lifted the standard of living of those in the developed world. The Cobb-Douglas production function is central to “growth accounting” and the neo-classical framework. The phrase itself implies that there’s a way to quantify (or account for) economic growth. Some of the mathematical functions operate at a high level, but I’m far less interested in the fine details than I am with the broad brush strokes … and they go something like this.

      Three factors drive economic growth:

       quantity of labour (think number of hours worked productively);

       amount of capital employed (think machinery used);

       total factor productivity (an encompassing phrase that captures both technological advances and the possibility that we can organize ourselves more perfectly to produce more, given the same hours worked and the same amount of capital employed).

      Let’s think about the Cobb-Douglas production function with the help of a very simple model. There’s a village of two hundred people. Twenty are senior citizens who can’t contribute much output at that advanced stage of their lives. Twenty are children who aren’t expected to work, either. That leaves 160 people to support the community.

      Eighty are men and eighty are women. Eighty toil on farms and the remaining eighty are split equally between doing manufacturing work and performing various services. Everyone is productive: the unemployment rate is zero. The standard work week is thirty-five hours.

      One day they come together as a community and agree that everyone will work longer. They extend the work week to forty hours.

      QUESTION 8

      Everything else being equal, do you think that the decision to increase the work week will increase economic output?

      ☐ Yes.

      ☐ No.

      I don’t know how you answered, but Cobb-Douglas believers would have marked “Yes.”

      Next question. The work week has increased. Then everyone begins buying machinery to help them do their jobs better. The farmers replace their horses with tractors. The tradesmen trade in their hand tools and buy power tools. The service sector throws out its pens and gets typewriters.

      QUESTION 9

      Everything else being equal, do you agree that as more machinery is used economic output will also rise?

      ☐ Yes.

      ☐ No.

      I don’t know how you answered, but Cobb-Douglas believers …

      The work week is longer. More capital equipment is being used. And not only is the capital equipment improving as technology advances, the townspeople are figuring out how to organize themselves better. Technicians are specializing rather than being jacks of all trades. Time-motion studies help manufacturers work more efficiently.

      QUESTION 10

      Everything else being equal, would you agree that the greater the total factor productivity the greater the economic output?

      ☐ Yes.

      ☐ No.

      I don’t know …

      There are just a couple of more things to say before leaving the Cobb-Douglas production function and neo-classical growth theory.

      First, increasing hours worked can only get you so far. Yes, this year the village can move from thirty-five to forty hours and maybe next year from forty to forty-five hours. But there is only so much time in a day. You can’t grow the economy forever by continuing to increase the work week.

      The next important implication is that, in the vernacular of Cobb-Douglas, capital deepening can also only get you so far. Let’s keep it simple with this example: There are three carpenters working together, framing houses. Right now, they are all using hand tools. Carpenter One buys power tools and his productivity goes up. Then Carpenter Two follows suit and ditto with his productivity. Carpenter Three is last to the party — but he joins in. It stands to reason that after capital is fully employed, they will be working more efficiently. With hand tools, each framed five houses a month. That has increased to ten … but as they upgrade their equipment with new and somewhat improved tools, their productivity will exhibit diminishing marginal returns.

      Diminishing marginal returns is an important economic concept and one that every recreational runner is familiar with. It’s a nice day, so you go out for a thirty-minute run. You cover six kilometres, which means one every five minutes. If you decide to stretch your run out to an hour, it’s highly unlikely that you’ll cover twelve klicks. Rather, in that time you might run ten. That’s an example of diminishing marginal returns. As you add increments (in this case thirty-minute blocks of time), your output (distance) increases, but at a diminishing rate. In that second half-hour, it’s taking you seven and a half minutes to cover a kilometre while it took you only five minutes previously.

      This teaching from neo-classical growth theory has important implications for a developed country like Canada that is already “deep” in capital. Neo-classical growth theory would predict that we can’t rely on capital accumulation alone to drive progress. It will have to be other things: either number of hours worked, total factor productivity, or some combination of both.

      One final point: let’s say there are two villages that are virtually identical, except Village Two has a better climate. Its growing season is longer, which means that there is more agricultural output per hour worked and per unit of capital. Moreover, Village Two has denser forest around it, providing fuel that is both abundant and cheap. Under those circumstances, wouldn’t we expect that Village Two’s citizens would enjoy a higher standard of living than Village One’s? Absolutely. Yet, at the same time, those natural advantages wouldn’t translate into a higher growth rate. Village Two’s people would be better off, yes, but the gulf between the standard of living of the two villages would not widen over the years.

      Neo-classical growth theory allows for the fact that even if hours worked, capital employed, and total factor productivity are equal, certain jurisdictions — if they’re endowed with resources — can and in fact should be better off than another locale not similarly blessed.

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