Distribution & Rent

In session 5 we tackle the thorny issue of distribution. We already know about growth under-performance in recent decades. Now we learn that what extra scraps there are may have been pocketed by the rich, leaving the vast bulk of society no better off, maybe even worse off in real terms. This is hardly a sustainable base from which to build better productivity and living standards all round.

In examining the erosion of labour’s GDP share, contrary to the steady state predictions of the Solow model, we shall review recent research on links between imperfect competition, higher mark-ups and rising supernormal profits (rent).

Useful, easy reads on this topic are available from Bob Solow himself, writing for Pacific Standard in Aug 2015, as well as a summary of Simcha Barkai’s work on a Chicago Booth blog (Nov 2016). Following is another picture to whet your appetite as well as a link to a CORE (open access) Economics textbook you might find interesting.

Markup graph above is from The Rise of Market Power and the Macroeconomic Implications, De Loecker & Eeckhout, Aug 2017.

As for further reading on rents, imperfect competition and market power, this section of the CORE Economics textbook is worth a look.

21 Feb 2018

Flying Cars

Stagnation is our theme in session 4. Are we really doomed to slow growth or is it a figment of statisticians’ imagination? There may be something in that but, personally, I think there are bigger stories: we may well be getting less productive in generating ideas and, even if not, we surely seem less able to get them embedded in our global production process (“diffused”) in an acceptably efficient way.

We shall also talk about r-star and its slow motion “crash” in recent decades. The story is undoubtedly linked to the (apparent) slowdown in trend GDP growth – we saw it in our steady state equation. But we can also put forward a richer narrative that introduces risk and its impact on savings.

We’ll be coming back to that risk topic in future sessions, especially in trying to understand business cycles, the nature of finance and the challenges posed for monetary policy. So hold that thought!

In discussing tech pessimism we shall note the ironic quote from venture capitalist, Peter Thiel “We wanted flying cars, instead we got 140 characters“. Proof, perhaps, that new- machine-age scepticism is not just the preserve of “grumpy old men”. How ironic, therefore, that not so long ago Twitter announced its experiment with 280 characters…a massive productivity gain that gives us yet another hockey stick to look at!

15 Feb 2018

Growth Modelling

In session 3 we use the Solow growth model to help collect thoughts about the long-run dynamics of a competitive market economy. The implicit assumption is one of efficient firms operating at the production frontier. The model tells us that net investment adds to the capital stock which, in turn, adds to GDP.

But evidence frequently challenges our theories. For example, there are widespread doubts about the benefits of China’s investment boom. These concerns are partly based on a 2016 study from Saïd Oxford which argues that over half of the infrastructure investments in China have destroyed, not generated economic value.
China Infrastructure Investments Threaten Economic Growth, Sep 2016

Moreover, in anticipation of our upcoming analysis of Western “stagnation”, we shall highlight the need for better ideas and improved total factor productivity if better living standards are to be enjoyed (hopefully by the many and not just the few, a topic we explore in session 5).

Unfortunately, a recent study suggests that good ideas are becoming increasingly difficult to come by. One of the authors is Chad Jones, your Macroeconomics textbook hero!? For example, it is claimed that the number of researchers required today to achieve the famous doubling every two years of the density of computer chips (Moore’s Law) is more than 18 times larger than the number required in the early 1970s. Yikes!
Are Ideas Getting Harder to Find? Stanford/MIT/NBER Working Paper, Sep 2017

7 Feb 2018

Exploring GDP

It was good to meet up with you all in our first session. Hopefully you did not find our “marathon” too onerous. Remember, if you have any problems or questions, please feel free to contact me. And many thanks to our volunteer speakers on Savings and the Cobb-Douglas production function who will be guiding us next Tuesday.

For session 2 there will be three big themes:

Theme 1 – More Accounting

We shall examine the output, expenditure and income methods for calculating and cross-checking GDP. This will help you get to grips with the concept of value-added, the importance of distinguishing transfers from productive activities, offer deeper insights into production boundaries as well as recognise the implications of globalisation for measuring income flows.

Theme 2 – From Flows to Stocks

We shall add depth to our GDP understanding by taking a look at flows of funds (financial accounts). For every buyer there is a seller. And when business takes place we should ask questions about how such transactions were financed; the “no free lunch” principle.

In addition to cross-checking GDP calculations, flow of funds analysis offers a vital bridge towards stocks and balance sheets. As we discussed, GDP growth and inflation can only be partial (and often flawed) measures of economic health. Equally important, if not more so, is examining the stresses and strains that might be occurring because of growing debt burdens and sector imbalances. If we learnt anything from the Great Financial Crisis of 2007-09, it is that we should never take finance for granted.

By looking at the difference between assets and debt we arrive at a concept called “net worth” which, in national income accounting speak, is called national wealth. Effectively, it is a $ measure of a country’s total non-financial assets plus net claims on (or by in the US’s case) the rest of the world. At a macro level, financial assets always have a counterpart liability (debt or equity) so these all cancel out. At the sector level you can either focus on direct holdings of non-financial assets (as with the diagram below) or, in addition, you can record that sector’s holdings of, say, government debt and corporate equity.

In the Federal Reserve’s Z1 Financial Accounts series, data to support both approaches are available (notably tables B.1 and S.2.a). For a guide on interpretation you are strongly recommended to read US Net Wealth in the Financial Accounts of the United States, FEDS Notes, 8 Oct 2015.

As you can see from the Fed’s chart (and the update below), US net wealth has recovered sharply from recession levels and has reached new highs. This largely reflects the rebound in property and share prices. Whether that rally continues remains to be seen. The maths deliver an inconvenient truth: if asset values sink, so does your wealth!

Theme 3 – From Accounting to Economics

We shall then prepare ourselves for economic analysis by reviewing simple theories of production, productivity and distribution (wages and profits). This means some revision of basic micro stuff – production functions, diminishing returns, economies of scale, marginal productivity & competitive factor markets. It would help move things along more smoothly if you could dust off your notes on these, if necessary.

This might be a good place to mention a fantastic, free, online resource. It is the CORE economy textbook, supported by the Institute for New Economic Thinking. Any time you need to review introductory economic material you could dip into it. A search for “production function” gives you this, for example.

Looking forward to seeing you all again next week and have a great weekend.

30 Jan 2018


Welcome to London and I look forward to meeting you later this month (13:00-16:00hrs on Tuesday 30 January in room 303) .

We start our first session with administrative issues which should take about 30-40 minutes:

  • course overview and syllabus
  • textbook and online resources
  • attendance, registers & class etiquette
  • office hours
  • session formats & student presentations
  • assessment and grading

The remainder of Session 1 will introduce Gross Domestic Product – the key “go-to” number for summarising a country’s economic performance. GDP data are rarely out of the news, real and “fake“. GDP data can win or lose elections, are central to key policy decisions and have enormous influence on private sector behaviour, not least global capital investment decisions. Little surprise then that statisticians have been threatened with jail, even executed, if their numbers are deemed unpalatable by political masters.

The main conceptual learning objectives are to understand the so-called circular flow, the distinction between withdrawals and injections, the derivation of key accounting identities and, especially, the practical and conceptual problems with GDP measurement (exacerbated in recent decades by digital technology and intangible, sometimes “free”, services).

As for technical skills we shall explore the use of FRED data visualisations,  exponential growth calculations and the joys of index numbers.

For class prep I recommend the BEA’s primer on national economic accounts – it contains a nice (and thankfully brief) overview of some key concepts you will need to master. Also have a look at this video featuring Diane Coyle’s excellent book on GDP.

Stephen Hannah
17 Jan 2018