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.
A for Will. This is actually 2 sections of the book — sorry for assigning you extra work Will.
ReplyDeleteIn this section, Romer confronts the problem that has bugged Shaulauna (that I remember) and others of your (that I don't). How do we measure ideas?
Romer didn't have this data, so he decided to use data on capital instead: a fudge, justified because most new capital also contains peoples' new ideas of how to put old capital to new uses.
At the time, the Penn-World Tables came out for the first time. These are the basis for all the data comparisons made in the first 5 chapters of the Barro text.
Interestingly, in 1986, they gave the data set away. In 2011, we're used to the idea of cheap data being available on the internet, but back then this was a radical move. It's probably the first documented case of the IT adage that "information wants to be free".
Extra credit for the first person to comment with a definition of sangfroid, and an explanation of what it means in context.