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.
A for Basil.
ReplyDeleteThis argument is kind of obtuse. So here goes.
The Arrow model of contingent goods — the infinite spreadsheet of Warsh — assumes that we can describe the world with all possible goods in the columns, and all possible things that might happen in the rows.
This model is obviously not very realistic, but it allows you to talk easily (in a mathematical sense) about what has happened, and what might happen but hasn't.
In some sense, when you do a supply and demand model, and break it up into the variable that is shifting one of those curves, versus the variables that might shift them, you are doing this sort of analysis too.
What Romer wondered is if the field is limiting itself with this model. Think about it: you can always add one to infinity, right? So, why can't we always add new goods to Arrow's infinite spreadsheet? And if we can, how does the model change?