Development of the

Global Economy

The Importance of Productivity in an Age of Dilemmas

Lecture #1

A dilemma is a problem with two putative solutions, neither of which is unambiguously better than the other .

Short Run vs. Long RunRules-based Policy vs. Discretion-based Policy

Stimulus vs. AusterityLow Interest Rates Driving Demand vs. Low Interest Causing Bubbles

Greater Productivity vs. Loss of Jobs in ManufacturingLow Priced Energy vs. CO2 Induced Climate Change

Extractive Institutions vs. Inclusive InstitutionsCompetitive Markets vs. Judicious Regulation

Inequality vs. IncentivesRich vs. Poor

etc...

All Economic Activity is Ultimately Devoted

to Two Things --

Of course, we must also be concerned with...

--- The distribution of income and wealth, and...

Of course, we must also be concerned with...

--- The distribution of income and wealth, and...

--- Equal opportunities for future generations, and...

Of course, we must also be concerned with...

--- The distribution of income and wealth, and...

--- Equal opportunities for future generations, and...

--- The judicious control of market externalities

Government Can Sometimes be Useful in Helping Us Accomplish

These Goals

Government Can Sometimes be Useful in Helping Us Accomplish

These Goals

That is,

Government Can Sometimes be Useful in Helping Us Accomplish

These Goals

Helping to Control Externalities, Provide a System of Justice and Enforcement of Contracts, Supply Goods and Services that the Private Market Fails to Provide, Ensure a Reasonable Distribution of Income and Wealth, and Moderate the Business Cycle

U = utility C = consumption L = leisure

Both C and L ultimately are related to y = output per population

U(C( ),L(x))T

ttU x dx

We Must Increase

y =

Steadily Over the Long Run

OutputPopulation

How Can We Increase (r1) (r2) and (r3) ?

Suppose we just want to increase (r1) which is

Child Labor – Not Really

Elderly Workers – Limited at Best

Foreign Workers – Maybe, but Problems, Problems

Robot Workers – Not for Many Years

< 1

No Matter What, (r1) has an Upper Limit

Okay …..suppose we try instead to increase (r2) which is

No Sleeping ----

No Eating ---

Just Work, Work, Work ---

< 24 Hours/Day

No Matter What, (r2) has an Upper Limit

In Fact…the Trend is for Less Hours Not More Hours of Work !

How Can We Increase y?

The Only Reliable, Long Run Way is to Increase

(r3) = Average Labor Productivity

How Do We Get High Growth in Labor Productivity?

How Do We Get High Growth in Labor Productivity?

Short Run – Moderate the Business Cycle, Get the Economy Growing Again

How Do We Get High Growth in Labor Productivity?

Short Run – Moderate the Business Cycle, Get the Economy Growing Again

Long Run – Encourage Saving and Investment

How Do We Get High Growth in Labor Productivity?

Short Run – Moderate the Business Cycle, Get the Economy Growing Again

Long Run – Encourage Saving and Investment

Dilemma -- Are These Two Goals Compatible?

Besides More and Better Labor and Capital,

We can also Increase Output per Person with More Land and

Raw Materials

Terracing Can Give Us More Land – But Ultimately Limited

Parts of the Zuider Zee in

the Netherlands as Reclaimed Land from the

Ocean – Really Difficult and

Costly

Noordoostpolder, Netherlands

Hong Kong Airport – Land Reclaimed from the Ocean

Not Land, but Space, Coupled with Physical Capital

Recycling Can Help Us Reduce Some Resource Problems

Renewable Energy Can Help a Little in Our Search for Energy

Naturally invention and innovation are important, but these are all just another way of saying that we need greater investment in research, development, motivation, education, marketing, production flows...investment will be best when government does not create large distortions, but encourages free trade, competition, and business becomes focused on providing a better product rather than getting a better deal from the government.

Ultimately, all our efforts will require saving as a temporary sacrifice -- in order to grow the economy. This is what we must prepare for and why the challenges we face are so daunting to a world that wants results NOW.

Basic Questions to be Discussed in Afternoon

1. Are Equity Markets around the World in a Bubble ?

2. What are the Global Demographic Trends and Why are they Important ?

3. Is Secular Stagnation the Cause of Low Growth and Low Inflation ?

4. Is Fiscal Austerity or More Stimulus the Best Policy for Governments Today ?

5. Why is Income Inequality Worsening throughout the World and is this Bad?

6. What is Globalization and How To Make It for Everyone ?

Thank You for Listening

Now, you have precious little time to prepare...so do your best for

today...about 8 minutes for each group’s talk today...That’s about 4

slides and average of 2 minutes per slide...email me your PPT atdavidkleykamp@gmail.com