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Krugman on Gordon: Both Need to Re-Read Dixit and Stiglitz
Paul Krugman has written an excellent book review of Robert Gordon's new pessimistic book about the future of economic growth. Ed Glaeser also wrote an excellent review for the WSJ last week.
Krugman provides a great life sketch as he compares progress in daily quality of life from 1870 to 1940 versus from 1940 to today.
The key missing piece in both Krugman, Glaeser and Gordon is any discussion of variety. Modern capitalism is constantly accelerating product differentiation. Since none of these scholars study industrial organization (I realize that Krugman won the Nobel Prize in part for his IO work), they downplay that products such as cars, entertainment, newspapers — are continuously becoming more differentiated. Given the enormous variety of consumers in the population, there are huge efficiency gains from matching such diverse consumers to diverse products. Amazon's core huge scale and Big Data is solely focused on this task.
YouTube with its enormous collection of material allows me to watch a Jim Heckman Video one minute and then watch a Led Zeppelin 1977 concert in the next hour.
Our time is our scarcest resource. Our ability to combine our time with Internet services allows us to have a leisure flow of utility that non-structural researchers can't quantify because they can't introduce an expenditure function approach. Recall what an expenditure function is: it represents the minimum income you would need to achieve a fixed utility level facing market prices p. But, over time the dimensionality of this p vector just keeps rising so the amount of income you need to reach this utility level declines. This is the Boskin point of the declining real CPI index.
Krugman, Gordon and Glaeser focus on “economic growth” rather than growth in our “standard of living”. Pollution and crime is falling across the U.S and leisure opportunities are soaring. Has our standard of living accelerated?
My point is that the divergence between GNP per-capita and one's standard of living is increasing over time. Why? Re-read this blog post. GNP per-capita is becoming a worse indicator of our standard of living as we take more leisure time and now enjoy higher quality leisure and better health while we enjoy it.
Source: http://greeneconomics.blogspot.com/2016/01/krugman-on-gordon-both-need-to-re-read.html
