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Human Capital & Conditional Convergence - YouTube
Channel: Marginal Revolution University
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- [Alex] In our previous videos,
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we showed how capital accumulation
can generate growth
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in the short run,
but in the long run,
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we always end up at a steady-state
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where all of investment is used
to make up for depreciation.
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What about human capital? --
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represented here
by the labor force, "L",
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times their education level, "e."
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Well, there's no doubt that
higher levels of education correlate
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with higher levels of economic output.
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But just like physical capital,
human capital is subject
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to diminishing returns.
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The United States has
a well-educated workforce,
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and that's good,
but it's possible for a country
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to invest too much in education.
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It helps an economy
to have some PhDs --
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at least I hope it does --
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but how much extra growth
would we get
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if we required everyone
to have a PhD?
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Probably not that much.
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It's a good investment
to teach people to read and write
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and do some math,
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but would it pay to train everyone
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to understand
the general theory of relativity?
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I don't think so.
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So education is subject
to diminishing returns.
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And what about depreciation?
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Yeah. Unfortunately, human capital --
it wears out too.
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Think about all of the current
human capital in the world.
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Where is it going to be in 100 years?
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Unfortunately I know.
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First we go into retirement,
and after that,
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it's just depreciation,
depreciation, depreciation.
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Moreover, it takes a lot of investment
in schools and universities
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and time and effort
to build human capital.
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At some point, we're going to need
all of that investment
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just to keep the population
as educated as it is now.
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So the accumulation of capital,
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whether it's physical capital
or human capital,
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it can only get us so far.
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Now let's turn to an important
prediction of the Solow Model.
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Poor countries should
grow faster than rich countries.
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Now, that's a pretty bold prediction.
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If it were completely true,
then all poor countries --
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they'd be catching up
to the rich countries.
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And all countries
would be approaching
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similar levels
of steady-state output --
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perhaps with some differences
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due to differences
in savings rates.
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Now as we saw before,
there are growth miracles.
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Some countries
like China and Korea --
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they're clearly catching up.
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But there's also growth disasters.
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Countries like Nigeria
and Argentina,
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which are falling further
and further behind,
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or at least not catching up.
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Indeed, broadly speaking,
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over the last
several hundred years,
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what we've seen isn't convergence,
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but divergence -- big time.
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But let's step back
and remember
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that the factors of production
in the Solow Model --
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they're just
one piece of the puzzle.
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When it comes
to explaining prosperity,
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we also need to remember
the importance of institutions,
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the institutions
that create the incentives
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to accumulate and to use
the factors of production
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in socially beneficial ways.
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Two countries
with really different institutions --
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they're not going to converge.
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But, if we focus in on countries
with similar institutions,
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then the Solow Model predicts
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that the poorer countries
should grow faster,
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and all countries
with similar institutions --
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they should converge
to similar levels of output.
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We call this
"conditional convergence."
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Conditional on institutions
and other factors being similar,
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we'd expect poor countries
to grow faster.
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Is it true?
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Let's take a look
at the 20 founding members
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of the OECD,
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basically the Western
developed economies.
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It seems reasonable to say that
they've got similar institutions,
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so according to the Solow Model,
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they should have similar
steady-state levels of output.
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Here we're going to plot
the growth rate of these countries
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over 40 years on the vertical axis,
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and real GDP per capita in 1960
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on the horizontal axis.
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Remember, the Solow Model predicts
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that the countries
which were poorer in 1960 --
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they should have grown faster
over the next 40 years
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than the countries
which were wealthier in 1960.
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And that's exactly what we see.
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The countries which
were relatively poor in 1960 --
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they grew faster than the countries
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which were
relatively wealthy in 1960.
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So among countries
with similar institutions,
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there is convergence --
conditional convergence.
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The Super Simple Solow Model,
however, makes another prediction:
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zero growth in the steady-state.
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But clearly that's not what we see.
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The growth rates
for the wealthier countries,
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they're lower than
for the poorer countries,
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but they're not zero.
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The United States --
it's been growing consistently
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for 200 years,
and we're still growing.
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That doesn't sound
like zero growth at all.
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It's useful, however, to bring back
the two types of growth
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that we discussed earlier:
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catching up;
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and cutting edge growth.
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When you're catching up,
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when you're poor
relative to your steady-state,
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that's when the Solow Model predicts
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that you grow quickly
as capital accumulates.
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But then you slow down
as you approach the steady-state.
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However, for the wealthiest
countries in the world --
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those are the cutting edge --
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this model of capital accumulation,
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it fails to explain
how you keep growing,
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albeit at a slower pace.
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So how do we explain growth
at the cutting edge?
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Well, let's not forget
about our last variable: Ideas.
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Ideas is going to be
the focus of our next video,
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and we'll see how new ideas
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can keep us growing
on the cutting edge.
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- [Narrator] If you want
to test yourself,
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click "Practice Questions."
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Or, if you're ready to move on,
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you can click
"Go to the Next Video."
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You can also visit MRUniversity.com
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to see our entire library
of videos and resources.
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