Sunday, August 24, 2008

Fallacies within Fallacies

My former student (he took classes with me, I wasn't his adviser or anything) Steve Horowitz has a post over at The Austrian Economists that says in part:

"What is the fallacy of fact and fallacy of theory that the reasonably well-informed layperson believes about economics that are most in need of correction? That is, which ones do the most damage? Here's are my nominees: For "Fallacy of Fact": that the economic well-being of the average American is on the decline. For "Fallacy of Theory": that consumption (rather than savings/investment) is the source of economic growth. Both of these are utterly wrong"

Well I am basically sympathetic Steve, but I have to say that there is a fallacy in your second fallacy, viz. the fallacy that investment is the key to growth.

The whole point of the neoclassical growth model (NGM) is/was that investment is NOT the key to growth, but rather that technological progress is the key to growth. That's what got Bobby S. his prize. You have to be an AK guy (or gal) to think investment drives growth, and after Chad Jones showed for a number of countries that investment rates have risen a lot while growth rates have not, there aren't many AK folks still around.

Now, Mrs. Angus and I are on record as being extremely skeptical over the overall efficacy of the NGM, but the insight that investment does not drive growth is one thing that I think it does get right.


ei said...

I don't have ScienceDirect at home :-( I'm curious to see what implications your argument has for growth acconting/the decomposition...

Anyway, I think you need to give at least partial credit because in the Solow model TFP enhances existing machines and laborers, which is sort of crazy.

New technology must be embedded in machines, via investment, and in people via education.

br said...

The well-being of the average American may not be on the decline, but it does seem that the capacity of the average American to improve his well-being is on the decline. Any suggested reading?

ei, I may be mis-reading you, but doesn't TFP contribute to process, operational, organizational, etc efficiencies in existing machines/laborers?


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Anonymous said...

Even if it is tech rather than machines per se, that still leaves the second fallacy only half wrong, as the part wherein people believe that consumption is the source of growth remains a fallacy. The fact that Horowitz may be wrong about what is in fact the source of growth is a second-order concern.