The Economics of Ideas Introduction

Population  Human population growth has been exponential

Population  Animal population growth fluctuates  Time-series data on Pandora moth populations inferred from the number of trees infected during population fluctuations

Population  Human populations also fluctuate with disease outbreaks, but these fluctuations haven’t been persistent the way they have for animal populations

Population  So, we have a puzzle: why hasn’t human population growth been subject to the same kinds of checks that operate in animal populations?  Early thinkers on this subject – such as Thomas Malthus – were persuaded that finite economic resources together with diminishing returns must eventually drive wages down to subsistence levels, leading to checks in further population growth  But exactly the opposite has happened. Why?

Population  The answer to the puzzle is IDEAS  Ideas evolve memetically  Good ideas lead to increased economic productivity or general human betterment  These ideas get copied and become the basis for new ideas  Ideas lead to technology

Technology  The first good idea: agriculture  Observation of plant reseeding patterns and understanding of the role of seeds led to plant cultivation  Random capture of buffalo calves led to the realization that animals could be domesticated  Subsequent innovation was largely devoted to the development of tools for farming

Technology  The productivity improvements made possible first by simple agricultural technologies, then by technologies for transportation by land or sea which opened up trade, and finally with the onset of industrialization in the 19 th century, have not only allowed the human population to continue growing, but have also allowed for economic growth in excess of that of population growth, leading to a parallel growth in living standards over time as well.  So, in the first part of the course, we examine economic growth, its determinants, sustainability, and the role of technical innovation as a driver of growth  In the second part of the course, we will focus on how society manages the process of innovation, and the economic trade-offs implicit in this.

Growth Basics  Experiment: Tearing a sheet of paper  Take a sheet of paper and fold it in half, then tear it in half along the fold. Then take the resulting two pieces of paper, put them together, fold in half, and tear along the fold. Continue this process as long as you can (you can stop folding once the pile is small enough in area). Answer the following questions before you start tearing  Question 1: How many times do you think can you tear the resulting pile before it becomes too thick to tear?  Question 2: How many times would you have to tear the pile before it becomes a mile high? (Hint: a pile of 15,840,000 sheets of paper would reach a mile high.)

Growth Basics  Experiment: Suppose you find yourself reincarnated as a frog living in a pond with water lilies that double in number every day. At the beginning of the month, there is one water lily, and the pond is covered by water lilies in 30 days.  Question 1: On which day is the pond half covered?  Question 2: On which day is the pond a quarter covered?  Question 3: Suppose you and your fellow frogs start moving dirt on the day the pond is only a quarter covered and manage to enlarge the pond to twice its original size. How much time have you bought yourselves in terms of having access to open water?

Growth Basics  Exponential growth  Arises when the increase in quantity over a period of time is proportional to the quantity at that point in time :  If we let the time interval go to zero, we end up with the differential equation

Growth Basics  Exponential growth

Growth Basics  Exponential growth  Relationship to growth in discrete time

Growth Basics  Exponential growth  Now, subdivide the interval (say the year) into n subintervals and compound n times instead of just once. This gives  Note that we divide the annual rate by the number of subintervals to convert it into a rate over the subinterval.  In the limit, as the number of subintervals goes to infinity, we get

Growth Basics  Exponential growth  Rule of 70  When growth is exponential, there is an interesting relationship between the rate of growth and the time it takes for an initial amount to double: i.e. the doubling time can be obtained by dividing 70 by the growth rate expressed in percent

Growth Basics  Exponential growth  Rule of 70  The rule is derived from the fact that given some initial quantity N 0 growing at rate (in fractional terms) r, the doubling time satisfies

Growth Basics  Exponential growth  Rule of 70  Taking logs and solving for t yields  Multiply top and bottom by 100 to convert the growth rate to a percent and rounding up to 70 gives us the rule

Growth Basics  Exponential growth  Rule of 70  Examples >“Asian tigers” – Hong Kong, S. Korea, Singapore and Taiwan – experienced growth rates in the ’80’s and ’90’s in excess of 9% per year. Via the rule of 70, this means these economies were doubling in size every 8 years or so >World population is growing at an average rate of 1.14% per year. Population doubling time is thus around 60 years

Growth Basics  Exponential growth  Rule of 70  Examples >Gasoline prices in perspective: The U.S. inflation rate from 1980 to 2005 has averaged roughly 3.5% per year >At this growth rate, prices double every 20 years >The current price of gasoline is about $2.50/gal., which would have been $1.25 in 1985 >In fact, in 1985, gasoline was slightly more expensive, running just under $1.50

Growth Basics  Exponential growth  Conclusions  Exponential growth is relentless  Human population growth has been exponential  So how have we managed to stay ahead of our own relentless needs?  BRAINS