Productivity, Structural Unemployment & Creative Destruction

As we know, cyclical unemployment can become structural if prolonged. And as labor costs rise, there is an incentive for firms to increase the capital/labor ratio rather than hire workers. This can be part of the process of creative destruction. It's all explained rather well in this blog post at The Wall Street Journal.

What I like about the post is that it is short yet very clear. I would think you might want to use with your students as a discussion starter at the beginning of the period or to summarize a day's activity.

Team or Trade

There is a thought-provoking article in today's issue of The Wall Street Journal (subscriber content at this writing). Matt Ridley discusses the work of evolutionary biologist David Sloan Wilson. Wilson has done some work on cooperative behavior and, according to Ridley, sees cooperation evolving from generosity or altruism. Ridley notes that others in the field see ideas like reciprocity and see groups of people agreeing to punish non-social behavior.

Ridley notes Adam Smith pointed out that this works among small groups of friends and family.  But for larger groups of strangers, another mechanism is needed. Smith's idea of division of labor and the corresponding idea of specialization promotes cooperation because of interdependence.  We need each other and we benefit from cooperating with each other. As Ridley states "trade dissolves hostility between groups."

This article caught my attention because it connects with insights from Adam Smith: An Enlightened Life by Nicholas Phillipson.  In that book, the author recounts that Smith felt the origin of language resides in our need to convince one another of mutual benefit from cooperative behavior.

If you can find an un-gated version of the Ridley article, I strongly recommend it. If you can't, see if you can access it through a library or other legitimate source. Barring that, I again recommend Phillipson's book.

Out of Poverty: Financial Institutions and Economic Development

Here's a news release (HT to Marginal Revolution) that could be useful a number of ways.  It's about some research that came from data collected by Dr. Robert Townsend of MIT. It the article speaks to the role of saving in helping people out of poverty. But I think it would be useful when discussing financial systems, institutions (the importance of saving), and the formation of capital. There are links to various articles, working papers and a book on Dr. Townsend's page. I'm also adding the book in my carousel at left. I hope to pick up a copy soon. Then I will share my review.

The Value of Cutting Costs

Recently, I took an online course that focused on economic development and poverty. One of the discussions we had questioned whether technological innovation benefited the rich, the poor or both.  One of the conclusions was that, because of the cost of innovation, initial benefits tended to gravitate to the rich because they could pay a price that would compensate the producer.  But over time, as the cost structure changed, the benefits were realized by those at lower income levels, as well. One of our classmates even noted that, because of the passage of time, the technology was actually better quality as well as cheaper by the time it became available at lower prices.

Yesterday, there was an opinion piece in The Wall Street Journal that dealt with that topic. It reinforces the point that the real value in innovation may not come in the initial stages - many innovations don't last very long.  But for new products and technology that does last, the real benefit comes as producers find ways to reduce the cost. And I will add, improve the quality and reliability in the process.

This relates to my post from one week ago which linked to a discussion of poverty and choice.  It also reminds me of a quote from Joseph Schumpeter who once said "The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls."

I welcome your thoughts.

Choice in Poverty?

There is a very thought-provoking article in the new issue of Foreign Policy. (HT to EconomicsandEthics) The article examines recent research on food and poverty in much of the developing world and comes to some conclusions that are sure to stir up debate in development circles.

But there are some fundamental applications that you may want to consider. The article offers numerous examples of choices people make that many would consider questionable, especially when faced with poor diet. But the discussion of opportunity cost that can result from these examples may broaden your students' perspective of the concept.

There are also examples of inferior goods that can readily be used. Please share your thoughts.

Human Capital and Growth

If you're looking for an example of the role of human capital on growth and the production function, look no farther than this article from today's edition of The Wall Street Journal. (Subscriber content at this writing but put the story title in your browser and you should be able to find an ungated version.) The story is about Portugal and the low level of education in that country. As you would expect, it has a significant impact on growth and standard of living.

The video below is from the story and explains some of the institutional aspects of the problem. And as we understand, you can change the law but changing culture and tradition can take a while.



I think this would make a great example for that production function discussion. Please share your thoughts.

Which Weighs More

It's always interesting to hear the "but we don't make anything anymore" argument when it comes to economic activity. But this article from the BBC (HT to Cafe Hayek) makes a case that can be summed up as “a dollar is a dollar is a dollar.” (Or a pound is a pound is a pound if you prefer.) Maybe the biggest concern is change. (See next post on "creative destruction." I was reminded of the great children's riddle, "which weighs more, a ton of bricks or a ton of feathers?"

More Creative Destruction

What are some good, current examples of "creative destruction" to use when discussing economic growth?  This report has 10 answers. (HT to Carpe Diem) Do you need to call your broker?

The Triumph of the City

I've run across some interesting reviews, so today's posts are taking a largely bookish turn. The first review I want draw your attention is this one from The Literary Review (HT to Arts & Letters Daily). The book is Triumph of the City: How Our Greatest Invention Makes us Richer, Smarter, Greener, Healthier and Happier by Edward L. Glaeser.

If the review is accurate reflection, Glaeser's book is reminiscent of some of the work by Jane Jacobs. She was also an advocate of the city - as an economic engine for ideas along with many other reasons.

Many of us choose to denigrate urban living and flee to the countryside. Yet it is often the city that provides us the means for what we envision as a more pastoral life that is sought but frequently not found. Despite the poverty that often arises in the megalopolis, people still head to it to find a chance at a better life. This book may have to go on my list of books to be read - I will have to dig deeper to decide whether it should be borrowed or needs to be acquired to gain a place in my library.