pgs 382-383

Teaching Economics

In this section of the book the author again mentions the exhibits at the San Francisco Hilton on January 5^th, 1996. Many well known Economists were at this with the author focusing on that of John Taylor and his approach.

A portion of this section also goes into reasons why economists write texts including, “they want to make a lot of money, they love to teach, because they want to influence the way the subject matter of economics is generally understood, etc. According to the author at this time, namely the meetings in 1996, the hunt for a successor to Paul Sameulson’s text was “well under way.”

pg2 274-276

274-276

Romer’s “crazy explanations” paper in 1987 created more of a confusion than a help on the debate that ravaged the topic. Many felt that convergence was to big of question to adequately be answered at the time. The author brings out that the first bit of 1987 were tough on Romer with him not having much success up to that point and him seriously considering dropping economics to become a political consultant working for his father who was Governor of Colorado

pgs 219-223

219-223

Allyn Young’s lecture, “Increasing Returns and Economic Progress” comes into the forefront of this section. In this lecture Young basically brings out that Adam Smith “missed the point” in the Pin Factory. He didn’t bring out the relationship of the pin factory and it’s neighbors.

To me it seemed like this section was trying to bring out the idea of how technological growth, growth in the industries, as well as other factors in growth was something that you couldn’t see inside one single industry. But rather you needed to look at the relationship that industry had to all the neighboring ones as well. He used the examples of dis-integration rather than integration, specialization, and also how other economists had just taken growth for granted as a naturally occurring thing of the time rather than looking back and seeing that there were periods of little growth as well as those with greater growth.

Pg 201-203

201-203

This section talks about how Romer took the opposite side of the growth argument of other economists during the 1970’s. The majority of economists had a doomsday idea of it all. The author talks about how it wasn’t quite as bad as the Great Depression or other times in history but it was still a common feeling. Romer took the opposite approach bringing out that there had been growth over the recent history and that he felt it would continue. He stated that he was trying to cause a problem but rather he was trying to reconcile a contradiction in ideas and things he was seeing in economic beliefs and the data he had.

The Robert Lucas effect

p. 235-237

At the age of 48, Robert Lucas had become of of the most influential economic theorists in the world. His views on the importance of model altering and forward-looking on human behavior was as key point that the rising generation of macroeconomists thrive on. After teaching at the University of Chicago for about 12 years, he headed for Cambridge England to lecture there about his theories. One of the biggest conflicts he had was his arguments about alternative modeling strategies that he often had with Robert Solow about his model and what needs to happen to improve it.

The Modern City Puzzle

p.245-247

Why do big stay together so well? A city is simply a collection of factors of production-capital, land, and labor- and land seems to always be less expensive outside the city. Yet people don't spread out as fast evenly over the landscape. Robert Lucas was troubled by this phenomenon as well. To help answer this curiosity he had, he turned to the work of an economist named Jane Jacobs. Jacobs claims that a city is a settlement that produces its own growth. It thrives off of building new work onto the old. It also is seen as having a higher social status if you live in the city. For example, people are willing to pay a lot of money to have the title of living in Manhattan, even though it doesn't really benefit them that much more other than being close to shopping.

Two halfs of a whole

p. 250-253

When Robert Lucas traveled to Tel Aviv to present his new ideas on the spill overs of human capital, he came into contact with Paul Krugmans paper on increasing returns and trade. On the surface, the papers could not be any more different. But at the heart was a model that entire countries got ahead on the basis of manufacturing specialties usually incorporated only at the firm level. It helped bring to light that the spill overs arose from the history of any particular neighborhood rather than from the increasing returns of monopolistic competition characterized in Krugmans work in trade. The result of Marshillian spillovers.

California Vacation/ Ski Lift

p. 276-278

Barro took his family to Disneyland in California. The economic problem that he came home with was, why did the park have such long lines for rides? To Barro it was obvious, market failure caused the long lines at the theme park. He concluded that if Disney raised their prices, they would do better as a supplier. Barro and Romer were avid skiers and compared this to the lines to get on the ski lifts. They concluded that maybe the operators should charge to ride the life to solve the problem of free use for a scarce resource. They concluded that they were looking at the wrong aspect of it. They needed to look at the price per ride, instead of the daily lift ticket.

Augmented Solow Model

p. 318-321

With the new developments of adding on human capital onto the Solow growth model by Mankiw, Romer, and Weil, everyone thought that all observations of the differences of the wealth of nations had been accounted for. Many thought that convergence truly was important to the steady state after all. Alwyn Young discusses the different approaches of the island states of Hong Kong and Singapore. Instead of having a more laissez-faire attitude like Hong Kong, Singapore picked favorites among industries, thus stunting their economic growth even though the were spending double of their annual GDP compared to Hong Kong.

The Open Source Movement

p. 363-365

A new threat out side the legal system emerged against the company of Microsoft. It was an operating system known as Linux. What separated this system from any other operation system is the ability it has to change. It was the start of an open-source software movement that helped Linus Torvalds create a system that could be freely modified an thus become more robust as time went on. Very much an anti-Bill Gates ideal ( Gates wanting a Windows system code that could not be cloned or modified).

Ch 27. Pages 392 - 395.

There comes a time in everyone’s life when the sun shines down and bestows a blessing of good fortune. For some, it comes in the form of health, fortune, or fame. For me, it was writing the last blog post of the semester.

My hands sweat as the pressure mounts to write the final conclusion, a summary of all that we have learned. I am nervous that the dew of my fingertips may some how destroy my keyboard, or give me some sort of shock. As if that wasn’t enough, I am nervous I’ll write something stupid that shows that I don’t know what I am talking about. What if something just slips out and I write something that I don’t really mean, like “Romer is an idiot and he doesn’t know what he’s talking about.” Could all my blog posts be re-graded as D’s?

Maybe it’s because I have that summer fever, but I just want to be done. I want to say “the end” and call that a conclusion to it all. I just feel my last section was a little anti-climatic for the last post - a little boring. There’s no exciting Hollywood ending, more of an unfinished story, one that is still to be written (which could include any of us). So here is the summary for the section:

- Romer has a plan for Aplia

- Aplia was another major gamble of Romer

- He took a two-year leave of absence from Stanford.

- As with most things, Romer was also a good business man

- Romer went into a “near-total stealth” as he built his platform and business

- With Aplia, Romer was creating a system to corner this whole textbook/student segment. Giving a nonexclusive license to publishers, more information to students and a more convenient way to teach, Romer would get $30 from every Econ student. His own piece of a $3.9 billion a year business.

While I’ve learned some things I will soon forget, there are many things that I won’t; especially that we study and learn these things to not only better our lives, but for all of those around us. To make the world a better place.

Chapter 27 Pages 390-392

During his time as governor of Colorado and in his work after, Paul's dad Roy Romer focused on education policy. Roy chaired the National Education Goals Panel, may have been a candidate for Al Gore's secretary of education had Gore been elected, and sought out the position of superintendent of schools in L.A. Deemed "the Donald Rumsfeld of education," Roy Romer was more interested in doing something than being someone. Weary of publisher's "expensive and uninspiring" texts which were only useful with master artisan teachers, Roy Romer contracted a company to create achievement-based math tests and set about administering the tests every ten weeks. His system was intended to enable teachers to react quickly to students who weren't learning.

Himself somewhat weary of publisher's and their antics, Paul Romer decided to begin his own publishing company to market his online learning creations. So, while his father crusaded for the L.A. school system, Paul began Aplia with a $11.2 million commitment from Swedish venture capitalists.

pg. 386-388

In the 1990’s there was a publishing battle between Greg Mankiw and Paul Krugman on who was to be the leader of the new intermediate textbook in economics. The goal was “to integrate the insights of both New Classical and New Keynesian economics.” Mankiw decided to switch things up by publishing a book that began with the growth theory and making his text book significantly shorter than his predecessors. He also decided against using his former publisher and instead, put the book up for auction. It was bought by Harcourt Brace Jovanovich for $1.4 million dollars, making Mankiw the leader in economic textbooks. Everyone was expecting Paul Krugman to overtake him, but because of a move back to MIT and a new job as a columnist at The New York Times, his textbook publication was put on hold. In 2005 he was finally able to publish his book.

Pg. 388-390

In 1996, Romer encountered a new problem in behavioral economics. Romer struggled to get his M.B.A. students at Stanford to keep up with the material in his macroeconomics classes. He made this discovery by "cold-calling" in class, and decided that his students were in need of a coach, or a person who knew "wanted them to succeed" and knew various shortcuts of the game. School is a lot like a sport in that the student gets as much out of their education as they put into it. Romer was able to improve class grades and participation by assigning more homework, before class, that would be graded via a server online, and by giving more quizzes. He also used current invents in the classes problem sets. Afterwards, students were more confident, better prepared , and learning more while other business professors soon began requesting to use his teaching tools.

The Invisible Revolution p.372-376

I found these pages pretty interesting, not only for the poor editing (see p.373 on John Nash) but because it points out some key flaws in the way we deal with history and discovery.  The point made here is that scientists continue to edit discovery to deal with what they believe as relevant and important.  We never get to see the ideas and discoveries that are discarded; "Science thus is portrayed by the texts as cumulative, linear, as if scientists built their understanding one brick, one discovery at a time." (p.373)  After commenting on this, it delves into the Nobel Prizes of Economics and the men who won them; such as: Robert Lucas, Robert Merton and Myron Scholes, John Nash, Joe Stiglitz, etc.  While acknowledging the men who won honors for economics, the author contrasts that to Romer who he says never sought public fame, and repeatedly turned down prestigious offers from MIT, University of Chicago, and possibly Harvard. "Romer was something of a stealth presence in the economics profession." (p.376)

Pg. 379-381

Elhanan Helpman was one of the foremost economists in the field of increasing returns. His book, The Mystery of Economic Growth, defined what was known and what needed to be learned to increase understanding about economic growth, more specifically why growth was so uneven throughout the world. The book was split into six chapters about how accumulation, productivity, innovation, interdependence, inequality, and politics affect growth. Helpman did not include population in his studies because it was not his field. Helpman's book is considered a success due to its clarity and cleverness. It reveals to outsiders what it means to think like an economists, and it details to insiders the general consensus on research.

Chapter 26 Pages 370-372

The significance of a knowledge economy started taking off in the 1990s. Peter Drucker in the early 1980s had begun to stress the point. In 1990 Michael Porter of the Harvard Business School reintroduced Marshallian ideas about clusters of related industries in The Competitive Advantage of Nations. Other books like Working Knowledge, Intellectual Capital, The Invisible Continent, The work of Nations and The Wealth of Cities were all published and consulting and accounting firms were boasting of their knowledge practices. The idea of Increasing returns of knowledge was taking off.

By the mid 1990s a new economy had been discovered. In 1997 the market soared, and the Dow Jones industrial average gained nearly 2000 points. Business Week did a cover story entitled "the triumph of the new economy." This caused the usage of the term "new economy" to increase greatly. Other terms associated with the new economy began to be used as well; the "death of distance" the "frictionless economy," "the weightless society," the "flattened world." Romer appeared in several books including The New New Thing and The Earth is Flat. Even though it seamed the world was beginning to catch onto the idea of increasing returns to knowledge at the beginning of the twenty-first century there was still almost no hint of what had really happened.

Pages 349-354

This section introduces the history of the Internet. It begins with MIT attempting to create a computer simulator for Navy training during World War II. Before this point, computers functioned as “powerful adding machines” and operated using batch processing. In order for MIT to accomplish it’s goal, it needed to create a computer that operated in “real” time. This lead to a computer that operated using feedback principles. This ability for computers to slow down, speed up and stay ahead on single tasks led to further innovation. Soon the Semi-Automatic Ground Environment (SAGE) initiative took over the project and contracted out both the IBM Corporation and the Digital Equipment Corporation. Together they created the application software that allowed the computer to do multiple tasks and still keep up with operators.

Soon a man came along who had the idea to connect computers and have them work together. He called it “man-computer symbiosis.” His name was J.C.R. Licklider. A community created the Internet, but if one man could be called the chief architect, it was Licklider. He joined the Defense Department’s Advanced Research Project Agency (ARPA), which supplied monetary resources and the ability to take a risk. By the 1980’s the ARPANET, as they called it, got too big for a government program so Al Gore wrote legislation to privatize it. In 1991, the Internet Engineering Task Force (IETF) took over. At this point, geeks and programmers mostly used the Internet. It didn’t become mainstream until Tim Berners-Lee created the first “browser” and Marc Andreessen added graphics and made it more user-friendly. The rest is history; the Internet was the new big thing.

Chapter 25: 357-359

Netscape was not happy with the outcome of their rivalry with Microsoft and filed a lawsuit. This was a much different lawsuit than the one IBM filed against Microsoft years earlier. This time, Microsoft was caught red handed. Java and Netscape were able to provide documents that showed Microsoft’s illegal activity. This was bad news for Microsoft, a company with hardly any presence in Washington and no experienced lobbyists. The result of this case: Microsoft was found guilty of violating the Sherman Antitrust Act and was forced to divide up its company. To explain how the company was to be divided, Paul Romer was brought in due to his recent theory on how “incentives in the marketplace determined the rate of technical change.” Even without Romer’s theory it was common sense that competition in the market place would stimulate innovation. In the end, Microsoft was divided into two parts, a sector that supported the operating system and a sector that pursued various applications. And while one cannot precisely measure the magnitude of this breakup, economists assumed increased innovation around the world.

Chapter 25: 354-357

When Microsoft executives discovered people were tinkering with the internet, they immediately set out to incorporate internet capability into their systems. The Netscape browser was compatible with any operating system, so one didn’t have to own an expensive Microsoft computer to surf the web. Then a new programming language, Java, was created which was also compatible with any operating system. These new innovations were a problem for Microsoft because it would mean anyone could write applications and that anyone could access the internet, thus breaking up Microsoft’s monopoly. Bill Gates, Microsoft’s founder, decided to make sure this didn’t happen. When Gates declared war on Netscape, Netscape’s stock dropped drastically. Gates then threatened Netscape’s customers as well as created his own internet browser, Internet Explorer. This “browser war,” the feud between Microsoft and Netscape, lasted two years. Microsoft then did the same thing with Java when it licensed the company then created a language that worked only on Microsoft software. “Embrace the application, extend its functionality, and extinguish the rival” became Microsoft’s new business plan.

Pg. 343-344

The interaction of the Microsoft industry with the introduction of the Internet depicts the "principles of endogenous technological change". Microsoft took the world by storm. In the 1990's, it seemed as though Microsoft might be able to overcome the powerful forces of competition and challenge Adam Smith's theory of the Invisible Hand. Then, the invention of the Internet led to a battle of control over the basic machinery known as the "the browser war".

Pg. 338-342

Nordhaus's light experiment showed that a significant majority of the increased output could not be explained by the increases in capital and labor; therefore, output growth is due to technological advances. The issue Solow found with Nordhaus's model is that there is no way to know how much of national income should be spent on R&D, or what the national income would be without R&D. Lucas made the point that the model needed a variable for increasing knowledge. He supported this argument by noting how a large portion of the population drastically altered and improved their standard of living by not conforming to past traditions during the industrial revolution. This revolution was a period of "sustained income growth" and it was not predominantly influenced by a technological advance. Romer's issue was that the model did not include a variable for invention incentives because a country's laws for taxation, finance, banking, and patents affects the pace of technological change. Romer explained how Nordhaus's model followed the same path as all new studies in economics. When young economists are introduced to new studies, they are constricted by the unfamiliarity until new vocabulary and tools are introduced. Then, economists can use these tools to address a wide range of issues. For example, Solow discovered that rich countries continue to grow because they invest in and use capital and knowledge more productively than poor countries. Romer used these tools to explain that inventions are the engine of economic growth. Productivity, efficiency, and inventions are what led to affordable lighting used today.

A Short History of the Cost of Lighting p.337-338

The term "industrial revolution" was coined by the French and not really used until Arnold Toynbee in 1888.  Ricardo and Malthus had pretty much declared that there could not be an industrial revolution; however, economists were all but converted to the idea just a few years later (1890's.)  Two schools of thought came out of the industrial revolution: 1) those who saw the social, political, intellectual changes were the result of the industrial revolution, and 2) those who saw that the specialization of labor was the end result.  "The main line of descent from Adam Smith through...Thomas Kuhn, can be described as a preoccupation with the causes and the consequences of specialization." (p.338)

One of the strangest charts in economics history is Nordhaus’s Labor Price of Light: 1750 BC to Present. The chart illustrates the cost of lighting a room. For hundreds of years, there is hardly any movement at all, then around 1800, it falls at a nearly 90 degree angle. People used to have to work very hard for the small amounts of illumination they had. Then we discovered gaslight, which was cheaper than candles, and then we discovered kerosene which was cheaper than gaslight. All these new innovations caused the continual decline in the price of lighting, culminating with the discovery of electricity. Lighting had finally become so inexpensive and the wage rate had grown so much that people no longer had to worry about how they’d pay for light. This signified a large economic growth.

When Solow created his growth model, economist became worried about the definition of economic growth. Nordhaus warned that growth estimates were off due to the way “goods were linked into the index.” He argued that growth estimates were only good if the price estimates were correct, and price estimates, he stated, ignored technological innovation. There had been so many technological changes since the 1800’s that Nordhaus felt real output understated how much our standards of living have improved. His solution to this problem was to take samples of goods and have economists measure their prices against the cost of light.

Ch. 17 A Short History of the Cost of Lighting pg. 327-326

Warsh uses this section to introduce the significance of this chapter. He begins by explaining that in physics, Einstein’s E=MC squared wasn’t universally accepted until the first nuclear fission bomb. Since there are not many “real world” experiments in economics, many theories are not proven or agreed upon. In 1993, however, there was such an experiment, which provided hard data that settled the Solow and Romer growth model debate. There were many unanswered questions when it came to this debate so its settlement was comparable to a nuclear explosion.

Chapter 24: 328-333

For years,William Nordhaus tried to put R&D into the Solow growth model using monopolistic competition, but was unable to succeed. In 1974, when oil prices spiked, he became concerned about the energy problem. Thanks to his dissertation, Nordhaus understood that a common response to these high prices would be a change in technology. Nordhaus believed that technological change would have the biggest effect on future prices and availability of oil and he wanted to design an experiment to help illustrate his ideas. In the experiment, Nordhaus wanted to measure the uses of products made from petroleum as well as their outputs. He called this measure the true cost of living index because it only measured the goods and services actually wanted. But then he realized that measuring output would be very difficult because of the presence of changing technology. His solution was to focus on a good that hadn’t changed much over the years, the cost of illuminating a room. What he was most interested in with this experiment was to look at the “improvement in the sheer efficiency of its provision over the years, both of finding fuel and turning it into light.” What he found was that over the years, light had become easier and cheaper to obtain. He then realized that this could be likened to the larger, more important, oil crisis. So, with his experiment he wrote Do Real Income and Real Wage Measures Capture Reality? The History of Lighting Suggest Not and presented it at the Conference on Reasearch in Income and Wealth.