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."