1 Macroeconomics BGSE/UPF LECTURE SLIDES SET 6 Professor Antonio Ciccone

2 Ideas and Economic Growth

3 Producing output versus ideas Ideas: non-rival, accumulable input Ideas: may be excludable (patents, secrecy) or not Ideas: producing them lowers current, but increases future output

4 Producing output versus ideas Question: what is the growth process for a given allocation of inputs between producing output and producing ideas?  Characterize the join evolution of ideas and output in the “spirit” of Solow

5 1. A FRAMEWORK FOR ANALYZING GROWTH WITH RESEARCH AND DEVELOPMENT Quantity of output produced Production of new ideas Population growth (exogenous):

6 Growth of ideas ( )

7 CASE 1: Balanced (constant) growth path

8 Is the BGP stable? Graph on the vertical axis against on the horizontal axis Check that is increasing when below and decreasing when above

9 0 STABILITY OF BGP

10 Note that implies that a faster population growth n translates into faster growth of ideas in the balanced growth path. Is there empirical support for the positive relationship between n and the long run growth rate?  Hard to test as we need long time series for that; but Michael Kremer 1993, QJE used population growth data going back to 1 Million B.C.

11 R&D and endogenous growth Hence, there can be long run growth even without exogenous technological progress BUT the growth rate is linked to population growth, which we don’t usually think of as a “policy parameter”

12 CASE 2: NOW, there is long run growth even if n=0!!!

13 Population Growth and Technological Change One Million B.C. to 1990

14 How can we “detect” the long-run impact of ideas? 1)Presumably, over most of human history, new ideas where simply the by-product of human activity. So let us imagine that the number of new ideas is proportional to the number of people alive at some point in time. 2)If we had a measure of TFP for a very, very long time, we could check on the link between TFP growth an population. But we do not. 3)The only data that we have for a very, very long time is population size. The question is therefore how can we use population data to find out about the link between population and the number of new ideas?

15 How can we “detect” the long-run impact of ideas? 4) Malthusian hypothesis: over much of human history, TFP growth was offset by population growth. 5) As a result, we can “observe” TFP growth by looking at population growth.

16 TFP Growth and Decreasing Returns to Labor Assume the following production function: where: indicates the level of technological progress is population is land At least for a pre-industrial society, it may make sense to have only labour and land as production inputs. Note that the production function has constant returns to scale: the replication argument is valid! (ie, double the amounts of input, and you double output)

17 The Malthusian Hypothesis Now express the production function in per-capita terms: and assume that population increases when is above some subsistence level. This will reduce output per capita, so that it is reasonable to assume - if population growth reacts fast enough - that population will constantly adjust such that always holds.

18 Malthusian Population Level We can solve for the population level that corresponds to What does it mean? In the absence of changes in, population will be constant Ceteris paribus, population will be proportional to land area If separate regions have different levels of technology, population or population density will be increasing in

19 CONSTANT Technological Progress and Population Growth Now: enter technological progress. Assume What does this imply for population growth? implies  Population will grow at a constant rate. True?

20 NOTE: Population of 3 billions was reached around 1900.

21 New Ideas and Population If every individual has the same probability of inventing something new, and HENCE  Population growth is itself proportional to population, which appears true over much of human history.

22 A Natural Experiment Consider a "natural experiment": the end of the last ice age around B.C., when previously connected land masses (Eurasia+Africa, the Americas, Australia, Tasmania) were separated and technological diffusion wasn't possible any more. Assumptions: These 4 regions had shared the same basic technology up to that point. Hence, their populations must have been proportional to the land areas (larger areas more population).

23 4 Separated Regions

24 The natural experiment: results