Wednesday, April 27, 2011

Apples, Oranges, And Salmon

Felix Salmon offered a post a couple weeks back that looks critically at some of Larry Summers recent statements. Summers is broadly-speaking still more pro-financial innovation than pro-regulation.

FLG agrees with the general sentiment that Summers has made some big mistakes that in turn makes his arrogance simultaneously tragic and comical. But this passage bugged FLG:
This is astonishing, given that Summers actually conceded, during his talk, that the biggest economic successes in the world over the past couple of decades, China foremost among them, owe essentially nothing of their success to financial innovation or deregulation.

If one knows anything about macroeconomic growth models, for example the Solow Growth model or has read Krugman's "The Myth of Asia's Miracle", then one would know that China and other high growth countries have the ability to generate that growth by increasing inputs, which basically means in practice that farmers move to the cities and become factory workers and the farmers left behind begin to use machinery. Thus, economic output increases.

However, this route is unavailable to developed nations because, well, people have already moved off the farms and into the cities. Instead of just buying existing equipment and technology and giving it to workers who didn't have it, advanced economies have to wait until new technologies are developed so that economic growth can occur. Thus, saying that financial innovation had nothing to do with the economic success of counties like China is completely irrelevant. The US and China, insofar as what contributes to long-term economic growth, are apples and oranges.

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