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.

Conjectures and Refutations p.323-327

The beginning of this sections talks about Romer cleaning up his paper and publishing "New Goods, Old Theory, and the Welfare Costs of Trade Restrictions."  This leads into the main argument of the section on whether or not "new goods" is possible.  The debate is whether or not we have an finite number of goods available or whether we can continue to improve and make new ones.  Odd as it may seem, this isn't obvious "The insistence of economists like Schumpeter and Young that the creation of new goods was of fundamental importance had been disregarded."(p. 325)  For some reason economists were holding fast to the idea that new goods in the marketplace was not that important to growth theory.  My understanding of this is that economics is a changing field and assumptions cannot be defined as "right" because there is always the possibility of things changing and messing up the model/theory/idea, etc. 

Chapter 23 - Pages 321 - 323

Is growth of knowledge subject to diminishing returns? Are tomorrow’s opportunities more or less than those of the past? Have the important discoveries already been made? When new ideas come about, do they spurn out newer and greater ideas? Wouldn’t new ideas and an increase in knowledge lead to a greater speed of growth? Or do ideas and knowledge sort of get in the way, like patent-races and people stepping on each other toes to get ahead.

These were the question of Romer and a challenger, Charles I. Jones. A Harvard graduate who argued that while R&D added to many things, it did not speed up growth rates. Growth rates, despite a growth of knowledge, have remained relatively constant for 100 years.

While Romer’s assumptions were contrary to the Solow model – Jones focused on the implications of R&D and how to measure if there was too little or too much of it. Jones went on to create tons of research and articles and with Robert Hall he created a new growth accounting framework and took over the NBER program on growth fluctuations with Peter Klenow.

Pg 316-318

Warsh talks about Krugman who had been left out of the field until he took up economic geography. Economic geography was a left out sub-field of economics until the early 90's. Chicago is used as an example, because of it's prestige location it became the central for water travel, and then moved on to be a railroad hub followed by air travel. All of these developments lead to what is now Chicago and all of it's industries. This helped explain growth in certain areas, Krugman had done something important for the field after all.

Pg. 312-316

Paul David's paper "The Computer and the Dynamo" analyzes the gains in productivity that came from the availability of electricity and compared them to increases in productivity due to the invention of the computer. Electricty led to two unique periods of technological advancement. The primary phase occurred when "electric dynamos" took over the roll of steam engines to provide power. The second stage was the creation of "miniaturized electric motors" that would power household appliances, like: refrigerators and radios. David comments that a similar reaction could be expected from the computer industry. The productivity issues of the 1980's were labeled as "technological presbyopia", which meant that people were acutely aware of what computer technology could lead to in the future, but were quite uncertain of the next step to reach these future goals/ideas. Timothy Bresnahan and Manuel Trajtenberg created a model that simplified comparisons like David's as "general purpose technologies". GPTs are basically inventions that initiated other technological advances. The model also addressed the innovations that were inspired by the GPTs. Kenneth Sokoloff, used these models to show that "inventive activity originates around transportation centers", and why the low fee patent system in the US spread to a much greater number of people than the "class-conscious European system". The success of new technology in markets typically depended on the "bandwagon" effect (as stated in Thorstein Veblen's book Imperial Germany and the Industrial Revolution) . These markets were also considered monopolies because of increasing returns. A new generation of economists directed their attention to the key components of "network externalities", such as; interoperability (compatibility) of standards, complementarity of system components, switching costs around to pay for the education for a new system, and lock-in. What economists discovered was the same "hardware/ software/ wetware paradigm" (wetware being the human brain) that Katz and Shapiro had already detected. In the 1990's, economics had greatly developed and had begun a great transformation. For decades, growth theory explained the gap between savings and investment as foreign aid/ education/ population control. William Easterly explained that the reason none of these solutions are working is because not everyone has the same incentives for economic growth. The new growth theory brought attention to different issues, such as; the importance of institutions, multinational firms capability to spread knowledge, foreign investements to improve developing countries, and the significance of location, climate, and disease. Many economists focused their studies on different aspects of the new growth theory, and each economist was able to look at the issue from a different perspective.

Conjectures and Refutations p.311-312

This a continuation of the earlier post on Michael Kremer.  The main point of this section is population growth; it starts out with saying Malthus was essentially right that technological progress led to an increased population which would then decline because of starvation and environmental collapse; however, the model Kremer came up with showed that population would decline because of lower birth rates and lack of specialization.  The other key point is that Kremer showed that the division of labor was limited by population, however ideas will transcend those limits and allow for continued specialization and growth.  A note is that "small numbers meant no specialization." 

pg. 308-311

Another contributor to the new growth model was Michael Kremer. After graduating from Harvard, Kremer began teaching in Kenya, which got him thinking about economic development. When he returned to the states, he began studying the relationship between technology and population growth. The common belief during that time was that population drove technology and innovation. Kremer decided to further explore this by studying it over a long period of time.

In “Population Growth and Technological Change: One Million B.C. to 1990,” Kremer reported that before the 19th century technology had led to population growth but not necessarily a higher standard of living. At some point, however, increased population led to broader markets, which in turn led to specialization and wealth. His model predicted that the population would ultimately decline because an increase in wealth would lead to “lower fertility around the world.”

Pages 306-308

One of the first extensions of new theory was to the growth of cities. What makes a city grow. A graduate student at the University of Chicago, Edward Glaeser, took a fresh look at what makes cities grow and work. There were three ideas that Glaeser looked at. The first was concentration. Cities that fall into this category are places where there is one or two dominant firms in the city. Such as Detroit or Pittsburgh. The Second idea was one of competition within industries. This suggested that cities where many firms in the same industry would compete and would be more likely to foster growth. The third idea was that diversity was the main cause of growth and strength to a cities economy. This was shown through the example of Manchester and Birmingham in the nineteen century Manchester was a city that had a large industrial economy but it wasn't very diversified. Birmingham however, was very diversified and had many small industries. Late in the twentieth century only two cities remained vibrant in England, Birmingham and the even more diversified London.

Glaeser used the Standard Industrial Classification (SIC) system to see whether or not any of these theories was true. He found that instead of growing faster, cities where big companies were overrepresented grew at a somewhat slower pace than the rest. He also found that diversification seemed to be a key in growth in a city.

Chapter 22 - Pages 303-305

Romer’s Buffalo paper finally went out in October of 1990. He had changed his terminology and his mathematics, using some common shorthand techniques. The author paraphrases Romer looking back at this thesis. Instead of paraphrasing a paraphrased paragraph, I’ll just give it to you, because I find in interesting:

Remember my thesis, and how it was articulated, I had these general equilibrium ambitions, I was hoping people would pay attention to that, but they didn’t. On the other hand it was a little too abstract for the Solow types, the MIT types, who said, just give me the equation, don’t worry about the logic and assumptions. I don’t think either of those paths ultimately would have led to the clarification of what do we mean by an externality, as opposed to what do we mean why a non-rival good. That’s where the rigor and logic of GE math really paid off.

The paper was upstage by world events of that time, the fall of the Berlin Wall and the collapsing of the Soviet Union.

In 1989, Romer left the University of Chicago for the much warmer and sunnier hills of California. While he left without any job in hand, he was offered a tenured professorship a year later at the University of California at Berkeley. As the author states, he left Chicago where “there was confusion and resentment.”

Chapter 23: 305-306

By 1989 there was a race to discover more about the evolution of increasing returns. Among those searching for answers were Krugman, Romer,Helpman, Grossman, Xiaokai Yang and countless graduate students. Many sensed the opportunity to increase their reputations so nearly all macro economists were involved in the battle to be the first to discover the connection between “scale and specialization.”

Pg. 299-301

Romer's Buffalo model of aggregate growth showed sufficient job creation, but neever showed what would happen when jobs become obsolete. The idea of out-dated jobs was referred to as "creative destruction" by Joseph Schumpeter in 1942, and teams of researchers had been formed to address the problem. In a capitalist society, economic progress and competition are always in need of new investments because production is continuous. Models built to demonstrate "creative destruction" are menat to reveal what happened in an industry durind and between periods of technological advancement. Many economists became uninterested in learning more about economic growth around around 1970, and it wasn't until the 1980's that a race amongst economists spurred to construct models that reflected the mechanisms that result in "creative destruction". Oneeconomist that is renown for his work in explaining economic growth is Gene Grossman,who wrote Economic Growth: Theory and Evidence. Grossman claimed that "the neoclassical model 'could not deliver all of the answers'", therefore growth measures were becoming more and more unproductive. In the mid-1980's, economists interest in the mechanisms of aggregate growth when Paul Romer finished a dissertation at the University of Chicago, and after Robert Summers and Alan Heston gave the public access to their data of 100+ countries comparing GDP and its components. It was after these two events that Grossman compiled what, in his opinion, were 37 of the most significant papers to the new world of economics.

Chapter 22: 301-303

In 1988, Robert Solow was honored with a Nobel Peace Prize for his work with growth models. While many people were excited for him, others were not. Joe Stiglitz, whose model Solow used, complained heavily that he and others had done work similar to Solow, yet their research was ignored. Stiglitz, and other economists like Sheshinski, Akerlof, and Nordhaus came to be known as the “lost patrol” because the top economists at that time ignored their work concerning the growth of knowledge in formal models. And while the “lost patrol” was resentful of Solow at times, George Akerlof often reminded them of Solow’s keen vision regarding models and economics in general. Solow may have had his critics, but no one could deny his brilliance and his far reaching influence.

Pg. 290-293

Romer argues that the accrual of knowledge is of greater significance than the supply of physical factors. Romer supports his theory by discussing that the raw materials used to manufacture products were virtually the same, but recently the process in which these materials are combined into consumer products has become exceptionally more efficient. The book uses the example of how many different ways iron oxide is used today compared to a century ago when its only use was as a pigment. Now it is used to make products like televisions and video tape recorders. During his studies of rival and nonrival goods, Romer realized how Kenneth Arrow's negativity towards new ideas was the wrong way of approaching the issue. Arrow rejected new ideas because of the "irreducible 'lumpiness'" which Romer discovered to be the fixed cost of a "new set of instructions". Romer argued that new ideas are worth the initial fixed cost because an unlimited number of people can use an idea at the same time, an typically, the usefulness of the idea will not diminish. These fixed costs explain the relationship of specialization to market size, but bigger markets usually sell more of the same design. Romer's Buffalo model was a revised and improved version of his telegraphic model in 1987. The original model was constructed around the idea that population was the key. If that were true then populous countries would have surpassed smaller country's economies long ago. The Buffalo model proved that it was new ideas by highly skilled professionals that was the key factor in growth. Its also important to know that new ideas affect the economy in a different way than the manufacturing of products because ideas are able to be copied and used by an unlimited number of people at once without cost.

Chapter 22: 293-299

Over time, economists realized that monopoly rights given to knowledge would diminish over time. Knowledge that couldn’t be kept hidden created a spillover. Romer believed that patents might limit unauthorized use of an idea, but that intellectual property was much easier to steal and copy than human capital. Romer also concluded that monopolistic competition must be present if we are to give rights to intellectual property. And while everyone agreed intellectual property rights should be given, hard question arose. Which ideas are subject to property rights, how long should property rights last? No one could answer these questions so they thought it best to leave it up to social policy.

Romer’s new model was very different from previous growth models; his model took monopolistic competition for granted and included an R&D sector. Information, especially information based on facts and connected with a rival good, was very valuable to Romer. He felt that once we got enough information, we could turn information into knowledge by structuring it. Once we’ve obtained knowledge, the final step is generalizing it so the world can make use of it. After realizing the missing piece of the economic puzzle was the idea that “the fundamental source of increasing returns was the non rivalry of knowledge”, he set out to do just that. Romer’s goal was to help everyone else understand what he has just discovered. And, after many years, he accomplished his goal and his ideas became a “conviction shared by the world.”

Pg 289-290 Endogenous Technological Change

A conference was held in 1988 in Buffalo where many of the up and coming economist were in attendance. Romer presented his paper called "Micro Foundation for Aggregate Technological Change" that was later renamed "Endogenous Technological Change". This paper helped explain growth and Romer's theory.

Chapter 21 Pages 287 & 288

The ski lift paper presented Paul Romer with opportunity. Because of this paper and it's "take-home message," Romer was invited to present at a workshop at the University of Chicago. Founded in sound price theory and complex math, Romer's workshop and paper were appealing to those at Chicago. Just weeks after the seminar, Romer was contacted by former professor Jose Scheikman and offered a position as a full professor. This presented the boost Romer needed to go back to work on his model of growth.

At the Ski Lift p. 278-284

This section deals with Barro and Romer working on price theory and public finance. This is an interesting aside to Romer's work on Growth Theory. A lot of space is used to describe the theory of rival and nonrival, or, public goods. While taught in Principles of Micro-economics classes now, these concepts were little understood just a few decades ago. While Romer was working on a paper about Ski Lifts and club theory, he came across the idea of rival/nonrival goods while reading a textbook by Richard Cornes and Todd Sandler. Finding the content useful, Romer applied it to his paper on Ski Lifts and eventually made the connection that the rival/nonrival concept could be applied to economic growth. "For the very meaning of a nonrival good was that it was an item which is not 'used up'..." While looking at Growth Theory in class, we found that we haven't reached that "steady state," which can be applied to technological growth, but also that we haven't "used up" our ideas yet which is keeping growth possible.

Another interesting point in this section is on page 279-280 about James Buchanan. I'll just quote one section, but it's worth thinking about: "Economists should cease proffering policy advice as if they were employed by a benevolent despot and instead turn their attention to the way in which political decisions were made." This part also mentions including "political failure" along with market failure. It should also be noted that Mr. Buchanan also received a Nobel Prize for his work in political decision making.

Pg 284-287

Warsh starts out by talking about how a movie is a nonrival good because no matter how many people see the movie, it doesn't take away the enjoyment of the first person. This is also an example of the theory of "intellectual property".

He then describes Romer's opinion on Arrow's papers of the 60's which had three characteristics: 1 Uncertain, 2. inappropriable and, 3. indivisible. Knowledge happens to be part of these categories of growth. It is also said to be a nonrival good because it can't ever be "used up" and depreciated. Knowledge of yesterday is still has the same value. There is a good chart on page 286 that describes how Romer put it in to perspective.
He then poses the question, what exactly are private and public goods? What is the English language? It is something we all have privately but use publicly, how does this transfer into knowledge and advancement?

He ends with this quote "The economics of nonrival goods were very different from those of people and things"-pg 287

Chapter 20 Pages 270-274

Opposition to Romer's developments, and defense of the Solow model came from the New Keynesians. New Keynesian thought stood opposite the New Classical faction, and was founded on a focus on the imperfections of the invisible hand. Primarily a "liberal doctrine," many prominent economists adhere to the New Keynesian club. However, there were also Saltwater economists who, though drawn to Keynes, leaned more to the conservative side, economists like Martin Feldstein and Greg Mankiw.

Believing that there was "plenty of room in Keynesian tradition" for more conservative views, Mankiw (with David Romer and David Weil) replied to Romer's growth model with what became known as the Augmented Solow Model. Defending the Solow model as "consistent with the evidence," the new model added human capital in order to explain all observed differences between nation's growth rates. Key to this conclusion was the idea that one pool of knowledge exists for all, countries only differ in the mix of physical and human capital used to capitalize on this knowledge. Response from Romer and others was that the model was "indefensible" and "unsatisfying," because of all that it failed to account for and explain.

Chapter 20 - Pages 268 & 270

The author introduces the economist Robert Barro and gives a small bio on him on page 268, or one can be found here. Barro got along well with Romer and was quick to see the significance of Romer’s work on growth. After “Crazy Explanations,” Barro worked on an alternative hypothesis of convergence. He focused his efforts on explaining how some poor countries caught up to industrialized countries - by maintaining property rights, permitting markets to function and accumulating a certain amount of human capital - while other countries did not.

Romer and Barro forged ahead using the ‘Crazy Explanations’ module to mathematically test out different scenarios to explain growth rates, something that could not be done before the Solow model. They agreed to start a workshop in growth for NBER, but before the meeting Romer had been persuaded by Larry Christiano of Northwestern to drop this growth-accounting approach. Hence, Romer was back to the economic role of knowledge and later wrote, “I wish I had stuck to my guns about the importance of the [simpler] kind of evidence….”

Chapter 20 - Pages 261 & 262

Due to the Lucas lectures, Romer found himself with a new sense of popularity. He was invited to present a paper at NBER (National Bureau of Economic Research) in Cambridge in 1987. There were a lot of questions during this post Reagan revolution. Many raised questions about exchange-rate fluctuations, budget deficits and more. However, the biggest question was of the productivity slowdown in the United States.

Romer, being as intelligent as he was, saw this as an opportunity to not only say something about it, but to show how his model worked, especially in difference to the Solow model. He titled his paper “Crazy Explanations for the Productivity Slowdown.” As Romer further explored the convergence debate about differing rates of economic growth among nations, it all may have amounted to nothing, but as the author says, a “wild-goose chase.”

Pages 262-268

Romer wanted to show that all kinds of choices made in the public and private sectors were likely to have significant effect on national growth rates. For a long time the standard explanation for why the British and American productivity differed was because of capital. The USA had more land and because of that their wages increased thus creating a need for new technology to make highly paid workers more productive.

Since knowledge isn't something that we gather data on, Romer had to come up with a way to include new knowledge in his growth model. He did so by equating the growth of knowledge to the rate of capital investment. He did this because most new machines represent significant advances over old ones. New knowledge was "built in" to capital investment.

Unfortunately this seemed to leave just about everyone behind. People thought, wasn't Romer concerned about the growth of knowledge? not new capital investments. Romer's message had been misunderstood. It seemed that Romer had given up on the idea that new knowledge played a part in the growth of the economy, when in reality he hadn't done that at all.

Pages 259-260

The summer of 1986 Romer worked on a model of specialization and differentiation. Was it spillovers that drew people to the cities or was it the opportunity to specialize? Or was it both? Romer created a model in which economic growth depended only on the appearance of new goods to generate growth. In December he circulated his model first as a working paper of the Rochester economics department and secondly in a telegraphic version presented at the meetings in New Orleans.

When the paper "Growth Based on Increasing Return Due to Specialization" was published in May 1987 it was hardly noticed. It was too short. Romer later said "I don't think that paper influenced people very much."