Eighty are men and eighty are women. Eighty toil on farms and the remaining eighty are split equally between doing manufacturing work and performing various services. Everyone is productive: the unemployment rate is zero. The standard work week is thirty-five hours.
One day they come together as a community and agree that everyone will work longer. They extend the work week to forty hours.
QUESTION 8
Everything else being equal, do you think that the decision to increase the work week will increase economic output?
☐ Yes.
☐ No.
I don’t know how you answered, but Cobb-Douglas believers would have marked “Yes.”
Next question. The work week has increased. Then everyone begins buying machinery to help them do their jobs better. The farmers replace their horses with tractors. The tradesmen trade in their hand tools and buy power tools. The service sector throws out its pens and gets typewriters.
QUESTION 9
Everything else being equal, do you agree that as more machinery is used economic output will also rise?
☐ Yes.
☐ No.
I don’t know how you answered, but Cobb-Douglas believers …
The work week is longer. More capital equipment is being used. And not only is the capital equipment improving as technology advances, the townspeople are figuring out how to organize themselves better. Technicians are specializing rather than being jacks of all trades. Time-motion studies help manufacturers work more efficiently.
QUESTION 10
Everything else being equal, would you agree that the greater the total factor productivity the greater the economic output?
☐ Yes.
☐ No.
I don’t know …
There are just a couple of more things to say before leaving the Cobb-Douglas production function and neo-classical growth theory.
First, increasing hours worked can only get you so far. Yes, this year the village can move from thirty-five to forty hours and maybe next year from forty to forty-five hours. But there is only so much time in a day. You can’t grow the economy forever by continuing to increase the work week.
The next important implication is that, in the vernacular of Cobb-Douglas, capital deepening can also only get you so far. Let’s keep it simple with this example: There are three carpenters working together, framing houses. Right now, they are all using hand tools. Carpenter One buys power tools and his productivity goes up. Then Carpenter Two follows suit and ditto with his productivity. Carpenter Three is last to the party — but he joins in. It stands to reason that after capital is fully employed, they will be working more efficiently. With hand tools, each framed five houses a month. That has increased to ten … but as they upgrade their equipment with new and somewhat improved tools, their productivity will exhibit diminishing marginal returns.
Diminishing marginal returns is an important economic concept and one that every recreational runner is familiar with. It’s a nice day, so you go out for a thirty-minute run. You cover six kilometres, which means one every five minutes. If you decide to stretch your run out to an hour, it’s highly unlikely that you’ll cover twelve klicks. Rather, in that time you might run ten. That’s an example of diminishing marginal returns. As you add increments (in this case thirty-minute blocks of time), your output (distance) increases, but at a diminishing rate. In that second half-hour, it’s taking you seven and a half minutes to cover a kilometre while it took you only five minutes previously.
This teaching from neo-classical growth theory has important implications for a developed country like Canada that is already “deep” in capital. Neo-classical growth theory would predict that we can’t rely on capital accumulation alone to drive progress. It will have to be other things: either number of hours worked, total factor productivity, or some combination of both.
One final point: let’s say there are two villages that are virtually identical, except Village Two has a better climate. Its growing season is longer, which means that there is more agricultural output per hour worked and per unit of capital. Moreover, Village Two has denser forest around it, providing fuel that is both abundant and cheap. Under those circumstances, wouldn’t we expect that Village Two’s citizens would enjoy a higher standard of living than Village One’s? Absolutely. Yet, at the same time, those natural advantages wouldn’t translate into a higher growth rate. Village Two’s people would be better off, yes, but the gulf between the standard of living of the two villages would not widen over the years.
Neo-classical growth theory allows for the fact that even if hours worked, capital employed, and total factor productivity are equal, certain jurisdictions — if they’re endowed with resources — can and in fact should be better off than another locale not similarly blessed.
To summarize: according to growth accounting and the Cobb-Douglas production function, there may be a different base of wealth between two villages or counties or countries or you-name-it, depending on resource endowment. However, once that is put aside, it’s only about hours worked, amount of capital, and total factor productivity. Right?
Not exactly.
It seems to me that neo-classical growth theory misses the single most important factor that has led mankind onward and upward and that is … but before I get to it, let me ask another question, one that I routinely pose to my George Brown College students early each semester.
QUESTION 11
Which country has the higher GDP per capita?
☐ Israel.
☐ Saudi Arabia.
As soon as the words are out of my mouth, I can read the reactions of my students on their faces. “Sir, come on! What do you think we are? Stupid?!” (Some of those comments on ratemyprofessor.com were spot on!) “Saudi Arabia has oil … lots and lots of it.”
This is an indisputable point. Saudi Arabia extracts 10 million barrels a day2 … 417,000 barrels an hour … 7,000 each minute … in excess of 100 barrels of black gold every single second of every single day. Yes, the answer is clear-cut and obvious.
The country with the higher GDP per capita is, by a wide margin, Israel. According to the CIA’s World Factbook, Saudi Arabia has a GDP per capita of $31,300 while the corresponding figure for Israel is $36,200.3
When I let this out of the bag most of the students sit in stunned silence.
How can this possibly be?
They know that Saudi Arabia has oil.
But they don’t know what special resource Israel has. Until I tell them.
Israel has … Israelis.
People, properly organized and motivated, are the key drivers of both prosperity and progress.
Uh-oh. My suspicion is that I’ve already stepped on some politically sensitive toes. But I’ve got some good news. When I worked for one of Canada’s largest publicly traded financial institutions, I attended “sensitivity” training, or as they termed it, a “Respect in the Workplace” seminar.
One of the session’s key objectives was to teach me and my colleagues what was and what was not offensive. In Stalled, you will not encounter phrases like: “Another kick at the cat” (cruelty to animals is an inappropriate subject for metaphor); “Blind as a bat” (the visually impaired and/or crepuscular flying mammals might take umbrage); “It ain’t over ’til the fat lady sings” (female endomorphs have feelings, too!); or “Too many chiefs, not enough Indians” (wasn’t taking their land enough?!).
Consider yourself warned. Hands up, chin