10 Oct 2017

MRUniversity: The Solow Model and the Steady State

Capital & Interest 1 Comment

I am linking to this as a supplement in my Liberty Classroom course on the History of Economic Thought. This is simply amazing how well they get across the concept in such a short time. The animations / sound effects are perfect for such an esoteric topic.

One Response to “MRUniversity: The Solow Model and the Steady State”

  1. Tel says:

    Firstly, I’d like to say that it’s great to see how many excellent resources are out there, and they do explain the model very well. The diagrams and animation really works. Given how our mainstream educational system is grinding into the obstruction of teacher’s unions, central government control, SJW colleges, insanely high fees for minimal education content, and cry-bully students… looks like the Internet is saving us just in the nick of time with this kind of educational resource, available at an attractive price too.

    Now I want to push back a little bit… you have an economic model and into that model is built a bunch of assumptions. It’s a fine thing to teach that… buuuuuut those assumption are indeed assumptions. Describing “Iron Law of Diminishing Returns” as if it was a tangible thing is not helpful. If capital really has universally diminishing returns then why do most parameters in human history show hyper-exponential growth? We are taller than our ancestors, we eat better, we live longer, get sick less often, and our athletes also run faster, jump higher, and if you took just about any modern team in just about any sport and sent them back in time to play against an equivalent team of the day… I think the modern team would reliably win. We don’t appear to be hitting any steady state point.

    I don’t doubt that there are many cases where capital will “rust” or wear out, or run into diminishing returns, but it’s fair to the students that we describe other cases as well. Let’s look at something like Pythagoras Theorem, has it worn down over the years? Is it looking rusted now and out of date, needing to be replaced with a new theorem? I don’t think so. If anything we are getting bigger returns out of the same Pythagoras Theorem because we use it for more things (like least squares optimization) than Pythagoras himself would have thought of.

    Also, their isolation of human capital from what they call physical capital is one way of doing it, but that’s just an arbitrary perspective on it… humans are physical after all. Is there a good reason for economists to treat electrochemical machines differently to machines made from either iron or silicon? What about a farmer’s stock, is that capital? Is it physical capital? Maybe I’m sounding very nit-picky here, but the point about a model is that it is deliberately a simplified version of reality so it’s helpful for students to see it that way, not as a substitute for going and looking at reality.

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