Econ of Ed 10/7/03

Demand and supply curve is the shorthand of economics.

The elasticity of the demand curve is always negative – the elasticity of the supply curve is always positive.

Elasticity is represented as slope.

0 elasticity is vertical.

High elasticity of supply: sand

Low elasticity of supply: avocados, or other crop that takes years to fully mature a producing tree

Low elasticity of demand: luxury goods, high end technical software

High elasticity of demand: clothing, English beef

For a shift in the curve, something has to happen which makes EVERYBODY demand more at the same price. (Raise in price of substitute good, for example.

Moving along the demand curve REQUIRES a shift in the supply curve. Eg if there were more fish available the price of fish would fall (shift to the supply curve) and Q_E would go up.

The whole history of educational econ comes out of discussion around economic growth.

Long & short of it: From an accounting standpoint it's really easy to understand the mistakes economists made in the past and how to correct. From a causal standpoint, it's very hard to understand how education affects economic growth.

Economists discovered human capital in the 1950s – economists fascinated with economic growth b/c of the Cold War, raised interest in how developing countries grew. Tried to do economic growth models on how to make countries grow faster

Walt Whitman Rostow's "The Stages of Economic Growth" 1957 – interesting period piece MIT professor (economic historian) argued that econ growth went through several stages – embodied the industrial model of econ growth.

Industrial model: Like making pancakes: put in all the right ingredients, mix, and add heat and wahoo there you have it, Right inputs, right combination, BINGO - Econ growth. Capital + labor =econ growth. Dcapital +Dlabor = Dgrowth.

But it didn't come out the way they thought. Didn't account for all growth. Since 19^th century, labor had been measured by person-hours worked. But the industrial model wasn't accounting for all growth. Then they started looking at investment in schooling – and that made sense. There's a causal implication that investment in ed increases econ growth.

1970's, different model. Can't just ADD education. Looked at agriculture to see at what point education seems to cause increased output. They found that it's pretty high levels of ed that cause increased output. And it really had to do largely with people adopting new inputs, and the speed at which they adopted them (new seed, fertilizer)

Entrepreneurial model: education increases production by enhancing tech adaptation and use. You can't just add ed and stir – something has to HAPPEN (the adoption) and it tends to happen at higher levels of ed.

1980s – because of tech as source of new growth and the "knowledge economy" (good example is Japanese auto industry) Using smarts and education to increase efficiency – create more value with less inputs.

What is the big productivity increase? Thinking! Education is not just an input, it is a PRODUCER of the new technology, as people use education to create new tech & methods. (Endogenous model)

Industrial model nice for accounting approach.

Accounting means: if you list all your inputs, then you can figure out how much growth you should have – all you need to know is the share of each input and you can accurately predict. Labor accounts for 80% of US output, capital 20%.

In 1970s income distribution was seen as the distribution among factors of production – how much does labor get, how much does capital get, how much does land get – not as individual incomes. Reasonable to an extent because ownership of land, capital, and labor tend to break down along class lines. Looking at factors can tell us something about personal income distribution. If a shift in share of labor down – income distribution less equal, higher the share of labor, more equal the income distribution.

Countries with similar econ growth produce it in v. different ways – US invests heavily in Ed, Germany not so much, mostly in physical capital, Belgium high investment in ed. Accounting model didn't show causality, it just indicated (descriptively) that there were lots of different paths to similar level of econ growth. Keep this in mind when you hear about econ growth rates over all.

You've heard that Europe has slower growth rates over all than US – "Eurosclerosis" – there's been a widely held view that Europe is less dynamic, but what they aren't saying is that at least during the 90's the US had an enormous growth in the labor force through immigration – you're not just worried about the growth rate, you're worried about per-capita income. If you have growth with a static workforce, you get productivity increase (allegedly you can get this by investing in education or in capital per worker) But if workforce grows along with econ growth there's no increase in per capita productivity or income.

Main components to econ growth: more labor, more physical capital, more investment in ed.

Q: Is the more ed à more econ growth only true for self-employment model, where those with human capital are making decisions, or does it hold true for an employment model where decisions are centralized in the hands of a few?

The problem is that on a given job you don't see a lot of productivity difference between highly-educated and uneducated workers. PhD and primary school working with a shovel – except PhD isn't going to be there…. "The great train robbery" argued this – but taking a slice out of the income distribution and looking at it doesn't tell you anything about the whole world, because you are catching the low end of higher ed and high end of lower ed…

Where does human capital really contribute to productivity?

Tech isn't just hardware or software it's a new way of doing things. Progressive type of organization (Hewlett-Packard model) In the knowledge economy assuming the endogeneity model is correct, the more freedom you give your workers to make contributions and use their creativity, the more productivity increases – particularly true in industries with highly educated workforces.

Epitome of this kind of workplace? Education: self-employed, innovative, freedom to make decisions

Data suggest that a more educated labor force CAN increase growth rates – usually means that investment in education is also accompanied by investment in non-human capital. Seems to be some kind of an interaction between educated people who are more quick to understand how to do things and hence are more flexible – this is what produces econ growth.

Example of country with lots of human capital and almost no growth: English Caribbean, Cuba, China? Chinese truly believe in industrial model – said, okay, we have the human capital, all we need is the physical capital. So they bought "turnkey" factories – factories complete, ready to go – and they couldn't get exactly the same output. Like the Yugo. The workers had similar education levels but there was something missing in the organization of the way that people thought about production. Intangibles.

Interstices

Markets knock out low-quality through competition. What happens in a situation in which for example the state is corrupt and you have a market? Do you automatically get econ growth? No, the state has too many functions the market depends on in order to operate efficiently. This is one of the great ideological discussions in capitalism, between people who want to talk mainly about markets and people who want to talk mainly about regulation.

Post WWII South developed on Federal money, so it's ironic that they're the most freemarket-loving area of the country. Hidden role of state in markets through subsidies and tax breaks, incentives etc. If state is corrupt and works on bribes, fair adjudication not possible, the trust necessary in market interaction not possible. If it's who you know and not the market or the legal system, social capital is eroded.

Markets can't function effectively without efficient, reliable states that invest in public goods and regulate the economy and society. Conservative v. liberal debate centers around: How much? How much should state be free of the market and vice versa?

Brain…melting…clearly, my attention span is about 1.5 hours long.