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INTERVIEWS
WITH ECONOMISTS
GLENN
OTTO
Glenn Otto
received his PhD from Queen's University in Canada in 1993 and
is currently a Senior Lecturer in Economics at the University
of New South Wales. His research interests are in the area of
quantitative macroeconomics — in particular, economic growth
and business cycles.
In 1957
Robert Solow proposed the growth accounting formula, which allows
economists to estimate the contributions of capital and technology
to the growth of productivity. What is the importance of this
formula?
When people
talk about productivity what they often have in mind is labour
productivity. This is simply the ratio of real output to the labour
input. A rise in labour productivity effectively means that more
output can be produced for the same number of workers or the same
number of hours worked. However, the standard neoclassical production
function implies that labour productivity depends on two factors:
the capital to labour ratio and the level of technology. Solow
developed a simple method by which the growth rate of labour productivity
can be decomposed into the contribution from the growth in the
capital to labour ratio and the contribution from growth in technology.
If the main source of growth in labour productivity is the accumulation
of capital per worker, this implies a movement along a given production
function and points to an eventual slowdown in growth due to diminishing
returns. In contrast, growth in technology implies a continual
outward shift in the production function and the possibility of
future growth in labour productivity in the medium to long term.
One important application of growth accounting is to try to identify
whether the rapid economic growth in the East-Asian economies
during the 1980s and early 1990s is primarily due to growth in
human and physical capital or growth in technology.
In the
growth accounting formula, a coefficient of one-third is assigned
to the growth of the capital stock. Is this coefficient value
reasonable for Australia?
Provided the
capital stock is narrowly defined as private physical capital,
then a coefficient of one-third is reasonable for Australia. If
factor markets are competitive, then the coefficients on capital
and labour in the growth accounting formula are, respectively,
capital’s share and labour’s share of national income.
In addition, if aggregate production is characterised by constant
returns to scale, these two shares will sum to unity. Annual estimates
of capital’s share of national income in the market sector
published by the ABS indicate a range between 0.27 and 0.37. If
capital is defined in broad sense to include human capital and
stock of R&D, then a higher coefficient on capital, closer
to unity, is implied.
Some of
your work deals with the so-called ‘Solow residual’.
Could you tell us in a simple language what this means?
The Solow
residual is obtained from the growth accounting formula by subtracting
the (share-weighted) growth rates of labour and capital from the
growth rate of output. Thus, it captures changes in output growth
that are not accounted for by changes in measured inputs. It is
sometimes called total (or multi-) factor productivity. In principle,
the Solow residual is a measure of the growth rate of technological
progress. In practice, any factor that affects the growth rate
of output (other than via changes in the measured inputs) will
show up in the Solow residual. While technical progress is one
of these factors, others include improvements in the quality of
inputs, changes in their rate of utilisation, changes in management
practice and changes in the quality of social infrastructure.
This implies that short-run variations in the Solow residual can
be difficult to interpret and do not necessarily reflect underlying
changes in technology.
Can you
give us an idea about the contribution of technology to economic
growth in Australia over the period since World War II?
Estimates
of the contribution of technology to the growth of output are
available for Australia from the early 1960s. The average growth
rate of real output over the last 25 to 30 years is slightly above
three per cent per annum. Standard growth accounting exercises
indicate that just under half of this growth is due to technical
progress.
Do you
think that economics deserves the title the ‘dismal science’?
No, I don’t
find it dismal. It seems to me to be a very useful way of understanding
the world. However, I can understand why many people might view
economics as a dismal science. Economists are always talking about
constraints and trade-offs and opportunity costs. When it comes
to questions of economic or public policy, the economic approach
is to weigh up the costs and benefits of a particular proposal.
While advocates of a particular policy (e.g. additional spending
on education or hospitals) generally have a pretty clear idea
of the perceived benefits, it frequently falls to economists to
point out that there is an opportunity cost associated with such
policies. Economics suggests that policies should be undertaken
only where the benefits to society actually outweigh the costs
to society. Interestingly, if you look at the original quotation
by Thomas Carlyle in which he calls economics a dismal science,
it is essentially this cost-benefit approach to society to which
he objects.
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