Human Capital & Conditional Convergence


♪ [music] ♪ – [Alex] In our previous videos, we showed how capital accumulation
can generate growth in the short run,
but in the long run, we always end up at a steady-state where all of investment is used
to make up for depreciation. What about human capital? — represented here
by the labor force, “L”, times their education level, “e.” Well, there’s no doubt that
higher levels of education correlate with higher levels of economic output. But just like physical capital,
human capital is subject to diminishing returns. The United States has
a well-educated workforce, and that’s good,
but it’s possible for a country to invest too much in education. It helps an economy
to have some PhDs — at least I hope it does — but how much extra growth
would we get if we required everyone
to have a PhD? Probably not that much. It’s a good investment
to teach people to read and write and do some math, but would it pay to train everyone to understand
the general theory of relativity? I don’t think so. So education is subject
to diminishing returns. And what about depreciation? Yeah. Unfortunately, human capital —
it wears out too. Think about all of the current
human capital in the world. Where is it going to be in 100 years? Unfortunately I know. First we go into retirement,
and after that, it’s just depreciation,
depreciation, depreciation. Moreover, it takes a lot of investment
in schools and universities and time and effort
to build human capital. At some point, we’re going to need
all of that investment just to keep the population
as educated as it is now. So the accumulation of capital, whether it’s physical capital
or human capital, it can only get us so far. Now let’s turn to an important
prediction of the Solow Model. Poor countries should
grow faster than rich countries. Now, that’s a pretty bold prediction. If it were completely true,
then all poor countries — they’d be catching up
to the rich countries. And all countries
would be approaching similar levels
of steady-state output — perhaps with some differences due to differences
in savings rates. Now as we saw before,
there are growth miracles. Some countries
like China and Korea — they’re clearly catching up. But there’s also growth disasters. Countries like Nigeria
and Argentina, which are falling further
and further behind, or at least not catching up. Indeed, broadly speaking, over the last
several hundred years, what we’ve seen isn’t convergence, but divergence — big time. But let’s step back
and remember that the factors of production
in the Solow Model — they’re just
one piece of the puzzle. When it comes
to explaining prosperity, we also need to remember
the importance of institutions, the institutions
that create the incentives to accumulate and to use
the factors of production in socially beneficial ways. Two countries
with really different institutions — they’re not going to converge. But, if we focus in on countries
with similar institutions, then the Solow Model predicts that the poorer countries
should grow faster, and all countries
with similar institutions — they should converge
to similar levels of output. We call this
“conditional convergence.” Conditional on institutions
and other factors being similar, we’d expect poor countries
to grow faster. Is it true? Let’s take a look
at the 20 founding members of the OECD, basically the Western
developed economies. It seems reasonable to say that
they’ve got similar institutions, so according to the Solow Model, they should have similar
steady-state levels of output. Here we’re going to plot
the growth rate of these countries over 40 years on the vertical axis, and real GDP per capita in 1960 on the horizontal axis. Remember, the Solow Model predicts that the countries
which were poorer in 1960 — they should have grown faster
over the next 40 years than the countries
which were wealthier in 1960. And that’s exactly what we see. The countries which
were relatively poor in 1960 — they grew faster than the countries which were
relatively wealthy in 1960. So among countries
with similar institutions, there is convergence —
conditional convergence. The Super Simple Solow Model,
however, makes another prediction: zero growth in the steady-state. But clearly that’s not what we see. The growth rates
for the wealthier countries, they’re lower than
for the poorer countries, but they’re not zero. The United States —
it’s been growing consistently for 200 years,
and we’re still growing. That doesn’t sound
like zero growth at all. It’s useful, however, to bring back
the two types of growth that we discussed earlier: catching up; and cutting edge growth. When you’re catching up, when you’re poor
relative to your steady-state, that’s when the Solow Model predicts that you grow quickly
as capital accumulates. But then you slow down
as you approach the steady-state. However, for the wealthiest
countries in the world — those are the cutting edge — this model of capital accumulation, it fails to explain
how you keep growing, albeit at a slower pace. So how do we explain growth
at the cutting edge? Well, let’s not forget
about our last variable: Ideas. Ideas is going to be
the focus of our next video, and we’ll see how new ideas can keep us growing
on the cutting edge. – [Narrator] If you want
to test yourself, click “Practice Questions.” Or, if you’re ready to move on, you can click
“Go to the Next Video.” You can also visit MRUniversity.com to see our entire library
of videos and resources. ♪ [music] ♪

32 Comments

  1. balkanac pajo said:

    first

    April 26, 2016
    Reply
  2. balkanac pajo said:

    thnx for the video btw keep it up

    April 26, 2016
    Reply
  3. Dr. Hasan Ghura said:

    u guys rock! looking forward to the next video. I guess after neglecting entrepreneurship by many economists except Schumpeter. it is time to pay more attention to entrepreneurship as a key driver to sustainable economic growth by providing an ecosystem environment which allows entrepreneurs to be more innovative.

    April 29, 2016
    Reply
  4. bovtroy said:

    I really appreciate these videos; I had a terrible professor for Macro Theory.

    May 14, 2016
    Reply
  5. Abigail Zhang said:

    soooo nice!

    October 1, 2016
    Reply
  6. knowitsome nobile said:

    Can you explain keynesian ideas and friedman's too!!?

    October 14, 2016
    Reply
  7. tim lui said:

    who else is here the night before thier exam

    October 23, 2017
    Reply
  8. Gold Photo said:

    These videos are amazing! thank you for your service these are super easy to watch

    December 5, 2017
    Reply
  9. Bobur Madirimov said:

    Thanks Doctor!

    February 22, 2018
    Reply
  10. Дмитрий Панкратов said:

    hey, wait a minute) what's wrong with Luxembourg? These guys rock

    March 12, 2018
    Reply
  11. Niharika Saini said:

    simply amazing 🙂 thank you so much 🤓

    March 18, 2018
    Reply
  12. zacharycat said:

    To grow quickly requires capital for expansion, which means borrowing and paying interest on debt. All that debt eventually brings growth to a standstill

    April 14, 2018
    Reply
  13. Markus Tralla said:

    Omg my PhD is due in 10 minutes and you just saved me!

    April 18, 2018
    Reply
  14. Tolu Akin said:

    I appreciate you so much!

    May 14, 2018
    Reply
  15. honest diplomat said:

    Poor Countries grow faster than Devoloped countries due to Law Of Diminishing Marginal Returns….. Right????

    May 20, 2018
    Reply
  16. honest diplomat said:

    Can you explain Consumption Function please!!!!

    May 20, 2018
    Reply
  17. raymond mukeka said:

    How can too much education not be good for a country? Those neoclassic theories only perpetuate inequality and keep poor people to stay at there place.. Shame.

    July 24, 2018
    Reply
  18. Diksha Jain said:

    You guys are saving lives! Thanks a ton 🙂

    July 29, 2018
    Reply
  19. TheShutteredRoom said:

    Ideas and culture may be the same, not to get confounded with technological progress.

    October 4, 2018
    Reply
  20. Samyak Jain said:

    You guys are doing great work. I want to know what is your source of information/article/ journal for saying that human capital also faces diminishing returns and is related to the idea of conditional convergence.

    December 2, 2018
    Reply
  21. Rainmakr 95 said:

    thank you for all these videos. god bless.

    January 28, 2019
    Reply
  22. Alper Coşkun said:

    Burdan tek ders sınavına gireceğim Aykut hocama selamlar 😄

    February 4, 2019
    Reply
  23. Phoenix said:

    All of your videos are awesome! Thanks 😀

    February 6, 2019
    Reply
  24. Ava Yang said:

    👏👏👏

    February 26, 2019
    Reply
  25. MultiSaffran said:

    Similar institutions, yeah, not so much.

    March 29, 2019
    Reply
  26. SparkStop said:

    I love how there are 22 dislikes. Like 22 people came in here and said "Hhhmmm, this educational video is wrong" and then disliked and left. I imagine they're the same kinds of people to call me a democRAT or republiCANT in the comments of a news article

    April 2, 2019
    Reply
  27. Emin Yetkin Ertürk said:

    Why did you subtract Turkey from plot graph of the OECD ?

    May 17, 2019
    Reply
  28. kiran gupta said:

    Can we say the BRICS countries converge as they have structural similarities

    May 28, 2019
    Reply
  29. Sergio said:

    23 marxists disliked this video.

    July 14, 2019
    Reply
  30. P.P. Mahapatra said:

    Beautiful videos. Thanks a lot. God bless.

    September 4, 2019
    Reply
  31. Christina Wu said:

    5000 AUD a course for an international student. but i m here listening to the free 6 min youtube video and get everything

    September 24, 2019
    Reply
  32. Mohit Shetty said:

    Education is not subject to diminishing returns.

    September 24, 2019
    Reply

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