Monday, March 28, 2011
Ch. 18 Pg. 240-242
Lucas continues to discuss the idea that some markets have a "suboptimal" outcome because a lock-in pattern is occurring. Lucas focuses on the phenomenon of the global distribution of income that has a contradictory reaction compared to the forecasts of Solow's standard model. The data suggests that rich nations/individuals continue to grow and become richer while the poor continue to struggle. The flaw with Solow's model is that the model is dependent on technology to justify the changes in growth making the model suitable to explain growth in developed nations, but is not accurate in the study of poorer nations. Lucas plans to adjust for the flaws in Solow's model by accounting for human capital, like skill level and the spillovers of that capital. The research of human capital has proven to be quite enlightening of over the last couple of decades. Knowing the skills a person possesses can explain that person's expected salary, how they make decisions about work and leisure time, and also their household duties.
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B for Kim - read (critically) what you write.
ReplyDeleteOy vey ... time for big, fat, (social science), urban myth busting. This isn't Kim's fault though - everyone thinks this. That's why it is a problem.
The issue is human capital. Human capital is one of those "Eureka" ideas. Once it dawns on you that there's all this stuff — education, experience, know-how — that may be important, you recognize that it is all around you, and jump to the conclusion that it must be important. Your (internal, mental) theory says so, and so do the theories of the people who actually write out and solve the math. Except that the data doesn't support this. The most important determinants of economic growth are still unknown. But, we have a list of things we've established are of secondary importance, and human capital is on that list — but it isn't even at the top. Here's the takeaway from this. When you leave this class and think about how to make the world a better place, everyone thinks that inputs to human capital creation have got to be increased. No one talks about the fact that the output obtained from all those inputs isn't that important.
Lastly, a couple points of clarification. First, Lucas is arguing not so much for human capital, but for spillovers of human capital. Second, Lucas point isn't really about "accuracy" of the Solow model, so much as it doesn't seem to work at all for some undeveloped countries.