Human Capital & Conditional Convergence Marginal Revolution University English English (auto-generated)

Human Capital & Conditional ConvergenceYouTube↗ IA↗(long shot)
Education 144.1K views 916 likes 25 dislikes 26 Apr 2016

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- [Alex] In our previous videos,

in our previous videos we showed how

we showed how capital accumulation can generate growth

capital accumulation can generate growth

in the short run, but in the long run,

in the short run but in the long run we

we always end up at a steady-state

always end up at a steady state where

where all of investment is used to make up for depreciation.

all of investment is used to make up for depreciation what about human capital

What about human capital? -- represented here by the labor force, "L",

represented here by the labor force L

times their education level, "e."

times their education level e well

Well, there's no doubt that higher levels of education correlate

there's no doubt that higher levels of education correlate with higher levels

with higher levels of economic output.

of economic output but just like

But just like physical capital, human capital is subject

physical capital human capital is

to diminishing returns.

subject to diminishing returns the

The United States has a well-educated workforce,

United States it has a well-educated

and that's good, but it's possible for a country

workforce and that's good what is

to invest too much in education.

possible for a country to invest too much in education it helps an economy to

It helps an economy to have some PhDs --

have some PhDs at least I hope it does

at least I hope it does -- but how much extra growth would we get

but how much extra growth would we get

if we required everyone to have a PhD?

if we required everyone to have a PhD

Probably not that much.

probably not that much it's a good

It's a good investment to teach people to read and write

investment to teach people to read and

and do some math,

write and do some math but would it pay

but would it pay to train everyone

to train everyone to understand the

to understand the general theory of relativity?

general theory of relativity I don't

I don't think so. So education is subject to diminishing returns.

think so so education is subject to diminishing returns and what about

And what about depreciation? Yeah. Unfortunately, human capital -- it wears out too.

depreciation yeah unfortunately human capital it wears out too

Think about all of the current human capital in the world.

think about all of the current human capital in the world where's it going to

Where is it going to be in 100 years?

be in a hundred years unfortunately I

Unfortunately I know. First we go into retirement, and after that,

know first we go into retirement and

it's just depreciation, depreciation, depreciation.

after that it's just depreciation depreciation depreciation

Moreover, it takes a lot of investment in schools and universities

moreover it takes a lot of investment in

and time and effort to build human capital.

schools and universities and time and effort to build human capital at some

At some point, we're going to need all of that investment

point we're going to need all of that

just to keep the population as educated as it is now.

investment just to keep the population as educated as it is now so the

So the accumulation of capital,

accumulation of capital

whether it's physical capital or human capital,

whether its physical capital or human

it can only get us so far.

capital it can only get us so far now

Now let's turn to an important prediction of the Solow Model.

let's turn to an important prediction of

Poor countries should grow faster than rich countries.

the cellular model poor countries should grow faster than rich countries now

Now, that's a pretty bold prediction.

that's a pretty bold prediction if it

If it were completely true, then all poor countries --

were completely true than all poor

they'd be catching up to the rich countries.

countries they'd be catching up to the

And all countries would be approaching

rich countries and all countries would

similar levels of steady-state output --

be approaching similar levels of steady state output perhaps with some

perhaps with some differences

differences due to differences in

due to differences in savings rates.

savings rates now as we saw before there

Now as we saw before, there are growth miracles.

are growth miracles some countries like

Some countries like China and Korea --

China and Korea they're clearly catching

they're clearly catching up. But there's also growth disasters.

up but there's also growth disasters

Countries like Nigeria and Argentina,

countries like Nigeria and Argentina

which are falling further and further behind,

which are falling further and further

or at least not catching up.

behind or at least not catching up

Indeed, broadly speaking,

indeed broadly speaking over the last

over the last several hundred years,

several hundred years what we've seen

what we've seen isn't convergence, but divergence -- big time. But let's step back and remember

isn't convergence but divergence big time but let's step back and remember

that the factors of production in the Solow Model --

that the factors of production in the

they're just one piece of the puzzle.

solar model they're just one piece of the puzzle when it comes to explaining

When it comes to explaining prosperity, we also need to remember the importance of institutions,

prosperity we also need to remember the importance of institutions the

the institutions that create the incentives

institutions that create the incentives

to accumulate and to use the factors of production

to accumulate and to use the factors of

in socially beneficial ways.

production in socially beneficial ways

Two countries with really different institutions --

to countries with really different

they're not going to converge. But, if we focus in on countries with similar institutions,

institutions they're not going to converge but if we focus in on countries with similar institutions then the solo

then the Solow Model predicts

model predicts that the poorer countries

that the poorer countries should grow faster,

should grow faster in all countries with

and all countries with similar institutions --

similar institutions they should

they should converge to similar levels of output.

converge to similar levels of output we

We call this "conditional convergence."

call this conditional convergence

Conditional on institutions and other factors being similar,

conditional on institutions and other

we'd expect poor countries to grow faster.

factors being similar we'd expect poor countries to grow faster is it true

Is it true? Let's take a look at the 20 founding members

let's take a look at the 20 funding

members of the OECD basically the

basically the Western developed economies.

Western developed economies it seems

It seems reasonable to say that they've got similar institutions,

reasonable to say that they've got similar institutions so according to the

so according to the Solow Model,

solo model they should have similar

they should have similar steady-state levels of output.

steady-state levels of output here we're

Here we're going to plot the growth rate of these countries

over 40 years on the vertical axis,

growth rate of these countries over 40 years on the vertical axis and real GDP

and real GDP per capita in 1960

per capita in 1960 on the horizontal

on the horizontal axis. Remember, the Solow Model predicts

axis remember the solo model predicts

that the countries which were poorer in 1960 --

that the countries which were poor in

they should have grown faster over the next 40 years

1960 they should have grown faster over

than the countries which were wealthier in 1960.

the next 40 years than the countries which were wealthier in 1960 and that's

And that's exactly what we see.

exactly what we see the countries which

The countries which were relatively poor in 1960 --

were relatively poor in 1960 they grew

they grew faster than the countries

faster than the countries which were

which were relatively wealthy in 1960.

relatively wealthy in 1960 so among

So among countries with similar institutions,

countries with similar institutions

there is convergence -- conditional convergence.

there is convergence conditional convergence the super simple solo model

The Super Simple Solow Model, however, makes another prediction:

however makes another prediction zero

zero growth in the steady-state.

growth in the steady-state but clearly

But clearly that's not what we see.

that's not what we see the growth rates

The growth rates for the wealthier countries,

for the wealthier countries we're lower

they're lower than for the poorer countries,

than for the poorer countries but

but they're not zero. The United States -- it's been growing consistently

they're not zero the United States it's

for 200 years, and we're still growing.

been growing consistently for 200 years and we're still growing that doesn't

That doesn't sound like zero growth at all.

sound like zero growth at all it's

It's useful, however, to bring back the two types of growth

useful however to bring back the two

that we discussed earlier:

types of growth that we discussed

earlier catching up and cutting edge

and cutting edge growth. When you're catching up,

growth when you're catching up when

when you're poor relative to your steady-state,

you're poor relative to your

that's when the Solow Model predicts

steady-state that's when the solo model

that you grow quickly as capital accumulates.

predicts that you grow quickly as capital accumulates but then you slow

But then you slow down as you approach the steady-state.

down as you approach the steady-state

However, for the wealthiest countries in the world --

however for the wealthiest countries in

those are the cutting edge --

the world those are the cutting edge

this model of capital accumulation,

this model of capital accumulation it

it fails to explain how you keep growing,

fails to explain how you keep growing

albeit at a slower pace.

albeit at a slower pace so how do we

So how do we explain growth at the cutting edge?

explain growth at the cutting edge well

Well, let's not forget about our last variable: Ideas. Ideas is going to be the focus of our next video,

let's not forget about our last variable ideas ideas is going to be the focus of

and we'll see how new ideas

our next video and we'll see new ideas

can keep us growing on the cutting edge.

can keep us throwing on the cutting edge

- [Narrator] If you want to test yourself,

if you want to test yourself click

click "Practice Questions."

practice questions or if you're ready to

Or, if you're ready to move on,

move on you can click go to the next

you can click "Go to the Next Video."

video you can also visit

You can also visit MRUniversity.com

mruniversity.com to see our entire

to see our entire library of videos and resources. ♪ [music] ♪

library of videos and resources

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