Growth

Econ Buff Podcast #34 with Ryan Mattson and Rex Pjesky

Dr. Ryan Mattson and Dr. Rex Pjesky talk with me about economic growth and its causes. Dr. Pjesky walks us through what growth is and how it is related to the standard of living. We discuss the nature of the standard of living, what it means, and how coordination plays a role in economic history. Dr. Mattson argues growth in the standard of living matters more than the level of standard of living. Dr. Pjesky explains how growth translates into future wellbeing. Dr. Mattson and Dr. Pjesky address the inclusion of things other than material wellbeing our measures of economic growth. Dr. Pjesky lays out the history of economic growth throughout history and I push back on his description as partially a product of how we measure economic wellbeing. We discuss the potential for economic growth to permit people to more reliably provide for lower-order needs and thus have more resources available to focus on higher-order needs such as the intellectual and spiritual. Dr. Mattson explains his view on how stagnation in economic growth hampers how opportunities are available to individuals in that stagnant economy. Dr. Pjesky explains that technology changes cannot explain the major economic growth that occurred during the industrial revolution and following, arguing instead that coordination and access to the resources, knowledge, and skills of others are what makes us wealthy. Finally, we explore what makes some nations rich and others poor and discuss how some nations, during the most connected time in history can actually regress in terms of economic growth.

Photo by David Köhler on Unsplash

Transcript

Stitzel: Hello and welcome to the EconBuff Podcast. I’m your host, Lee Stitzel. We have a very special episode as we are recording this in front of a live studio audience. Special thanks to Dr. Pjesky's class. With me today are our two staples of the podcast --- Dr. Ryan Mattson of The Center for Financial Stability, and professor here at West Texas A&M, and Dr. Rex Pjesky, Professor of Economics here at WT. Ryan, thanks for joining us.

Mattson: Thanks. Great to be here.

Stitzel: Rex, also glad to have you.

Pjesky: Good to be here again.

Stitzel: So, our topic today is growth, specifically growth in the way that the field of economics conceptualizes it. Rex, just what is growth?

Pjesky: Economic growth, I think broadly defined, would be a measurable increase in our standard of living. And what standard of living would be is, you know, what command do we have over consumption of goods, that [would] basically make us happy. So, economic growth is an expansion in our production and consumption capabilities.

Stitzel: So, we're touching on a bunch of big topics. I want to, sort of, drill down into a couple of these. First, and most obvious, is just standard of living --- what does that mean and why is it important? Let me direct this to Ryan, and then you can cut back in Rex.

Mattson: Sure. Sure. So, I think, when a lot of economists talk about growth though --- and I guess I’m going to take a more specific point that macroeconomics when we talk about growth --- we talk about gross domestic product. So, when Dr. Pjesky refers to production, he's talking about the value of what we create within the economy within a year or a given quarter. And that is also going to be (at least from a traditional macroeconomic perspective) the same thing as our expenditure in a given growth or any given quarter or year. So, the spending of all households, the spending of all firms, the spending of governments, and then correcting for the net exports and import value that we have. So, economists are going to approach this from a really specific standpoint of this number [and] this aggregate. And Dr. Pjesky has expanded this a bit (as we all do) to standard of living to saying: O.K. well, if we are producing more and spending more, [then] we're doing better. If we're making more goods, [and] if we're making washing machines and more books and computers, then people are coming out of poverty, and people are able to get these goods and services. But that can also be maybe a bit of back and forth there, because increases in GDP growth (which is usually when what macroeconomists refer to) may not necessarily be increases in standard of living. But then that could also be potentially controversial as well.

Pjesky: Right. We as economists we generally measure these things as what we are spending, O.K., which is what the GDP is that Dr. Mattson said. So, we'll add up all of the money that we spend on everything that we buy, whether we're consumers, investors, or the government. And so, that is, sort of, a metric that we use for an overall measurement of how exactly we are doing from month to month or year to year (whatever the time period is). But the goal of economic growth is to have more command over the goods and services that we consume in order to make us happy. So, we don't want to produce more washing machines because we want to produce more washing machines. We want to produce more washing machines because we want to be able to recycle our clothes and have clean things to wear. The same thing is true with our computers, with our cars, with the food that we eat, etc. So, economists measure economic growth by looking at changes in what Dr. Mattson's identified as gross domestic product. The goal of this endeavor is to try to make a first pass, or be able to gauge exactly how much consumption and production is possible, and it's going on within an economy in a given year.

Stitzel: So, how's that tie into standard of living, right? We're commanding more resources. You're having certain things that you want to consume or want services available to you. How does that tie into standard of living?

Mattson: So, in terms of GDP growth, we can think of the U.S. in the 20th century started out at (I want to say somewhere) around about $15K GDP per person. If we divide up GDP, divide up the whole pie $15k worth of expenditure in a year, [it] has gone up to about $50K or $60K. My numbers may not be right, but you guys can look up. Look that up and see. But it was a exponential growth. It was a very fast increase in growth that made people better off, because we had these products that we could spend money on to improve our lives, and improve our standard of well-being. But that growth began to slow as we became more and more of a developed economy. So, when we look at GDP and standard of living --- for example, saying that China has the largest GDP in the world, seems to say: O.K. well, they're the best economy. But that's not necessarily true. While the growth in China has been spectacular and fantastic, we're bringing a billion people out of poverty. That's great. There is stagnation as well. Japan's

GDP size, for example, is very large in dollar terms [and] in level terms. But their growth has been stagnant for 20 years, which has led to what some would argue is a lesser standard of living, because they're not improving as quickly. So, with the standard living, I’d say [then] the growth of that is more important than the levels. If we have high growth, the standard of living is probably going up. If we have low growth, the standard of living may be stagnating or not improving.

Stitzel: Rex, you can't possibly agree with that right?

Pjesky: Sure. I mean…

Stitzel: The level of standard of living isn't what matters ---- it's the trend? Do you agree with that?

Pjesky: Well, I mean, that's, I mean, that's an interesting question. You know, when you compare levels, you know, levels to trend, I think what might be important in that discussion is what kind of time period that you're looking at. So, if you're comparing today to, say, you know, 100 years ago or 200 years ago, the differences in the way that we live in the United States today (versus the way that most of the world lived 200 years ago) is rather remarkable in the level of the standard of living. So, if you go back 200 years ago, an overwhelming majority of people alive then found it a genuine struggle to keep themselves clothed and sheltered and fed. Transportation, you know, getting around doing what you wanted to do was extremely dangerous and virtually basically non-existent for most people. When you fast forward [to] today --- it's a completely different situation, O.K. Now a very, very small minority in the United States has a real struggle at getting sheltered, clothed, and fed. Now, things like transportation --- I’m using transportation because, you know, traveling around seeing the things you want to see, [and] seeing the people that you want to see is something that makes most people remarkably happy. You know, transportation now is safe, incredibly easy, [and] incredibly convenient. So, just using those two things as very tiny examples, you have seen remarkable changes in the level of the standard of living that we have now versus any time in, sort of, the (in what you could consider) distant past. I think where growth is important is when you are looking at year to year changes. So, if we grow or shrink 2% from this year to next year, [then] our standard of living (for most the people in the United States) isn't going to have a noticeable difference one way or another. But the reason that growth would be important from year to year is that would guide what kind of policies that our government might need to make in order to make sure that our standard of living, sort of, keeps up this trend in going up. And, you know, a growth rate of -2% from this year to next year might be a signal to society that maybe we better do something so that we don't have a recognizable decrease in the level of the standard of living that most of us have. Later in the course -- I won’t mess up the podcast too much, [but] later in the course --- we'll talk about what some of these policies are. So, very, very quickly that will become the main and only focus of the class looking at, you know, short-term policies that adjust the course of economic growth through time from --- not over long periods of time, but through time --- year to year.

Stitzel: So, if I can encapsulate, I think, what you two have said and as succinct as possible, right, is economic growth is that change in the standard of living. And, I think, the argument that you were laying out there is this idea that the standard of living is what matters. And Ryan, tell me if I've got this wrong. You're saying, right, but what matters is the change in that, i.e. growth is what matters. So, Ryan let me give you a chance to defend yourself here. Do you think economic growth is what matters? Because I think what Rex has said is: here's this level of command of resources, access to consumption, services, [and] the way that we order our lives; and that's what's really different in the modern era versus time periods where we were struggling just to feed ourselves. First, are those contradictory? And second,

how do you see growth as being relatively more important than standard of living then?

Mattson: I’m not sure they're hugely contradictory; but I do think that growth takes the most important aspect of it as the number one point on that list. If we would compare certain societies that have been growing faster versus ones have been growing slower --- Argentina, for example, had a much higher level of GDP and standard of living than South Korea in 1950, for example. But the growth in Argentina stagnated for decades, for more than half a century; whereas the growth in South Korea continued and increased. Yes, they had some very obvious volatility in the 1990s, but that allowed them a much higher standard of living. We need --- I don't want to equate growth and standard of living, but we need --- growth for the standard of living. And when we don't get that growth, people begin to feel that standard of living is dropping off and beginning to stagnate. And then, people get upset and the policymakers tend to lose elections after that.

Pjesky: Let me let me reinforce that point. The growth become changes in levels very, very quickly, especially over generational time. If you compare two societies, and one of them grows at 1% and the other one grows at 3% a year, then after 70 years (which would be like maybe three generations) the society that grew at 1% a year on average is just twice as well off than they were when they started. But a society that can achieve 3% growth over that same 70 years will actually be eight times better off. Did I get the math right there?

Mattson: Yeah, that’s about right. Yeah.

Pjesky: So, at 3% growth the standard of living doubles about every generation or so, all right? You double every 25 years. At 1% growth, it takes three generations. Three generations to grow. So, small changes in the growth rate, if they're sustained will translate into massive changes in the standard of living over the medium and long term. And we see this play out in several countries. The Argentina example is one of them, which is, you know, sort of, maybe a middle case. And then, you have cases like, maybe, North Korea compared to South Korea, which has been an absolute growth disaster, where their GDP has actually shrunk, you know, for generations. And so, because of that shrinking economic growth, the people that live in those societies are actually struggling to feed themselves, to shelter themselves, [and] to, you know, to clothe themselves. So, a reversal or a stagnation in economic growth will find us really, really unhappy over the, you know, maybe even short or medium term. So, there's an economist named Robert Lucas who won the Nobel prize several years ago. And the story is that he started, you know, studying physics or something like that. But when he started to think about economic growth, he very, very quickly came to the conclusion that there was absolutely no other concern of humanity that was more important to think about than economic growth; because our command [and] our ability to shape our lives in a macro-sense depends almost on nothing else. So, whatever goal that you have for society --- doesn't make any difference what it is, all right --- those goals will be easier achieved if you are in an environment with high economic growth, all right? It doesn't equate perfectly to standard of living. It doesn't equate to the happiness or spiritual condition of individual in a perfect way. But what it does give us as a society is the ability to achieve those things easier, all right? Bottom line is this --- and you can translate the macro into your own life, all right --- if you have more money, all right, that doesn't mean that you have no problems. But if you have more money, then any problem that you face is a lot easier to deal with.

Mattson: Yeah.

Pjesky: All right? So, even something simple as a hot water heater going out, all right --- anybody's hot water heater can go out --- but if your hot water heater goes out and you have a $1,000 that is a problem that you could probably have solved by tonight, all right? If your hot water heater goes out and you do not have a $1,000, well then you have an incredibly stressful period of time --- maybe a week, maybe a month, [or] maybe even longer than that in order to deal with that. So, economic growth makes it easier for society to tackle whatever problems come their way.

Stitzel: So, how does it do that? How does it do that, right? Because there's several mechanisms at play actually in what you just said, right? Because as individuals we're prone to thinking about this in the context of: well, I have more money in the bank, ergo I just go replace my water heater. But there's actually a lot of rich dynamics there in terms of my productivity, the way that I fit within the economy, [and] the opportunities that have been given to me. And on the other side --- the availability and the quality of the water heater, right? There's a lot that economic growth is driving on, sort of, both sides of that problem. So, either one of you….

Mattson: Sure.

Stitzel:…get into the dynamics of that.

Mattson: And let me kind of also use something to piggyback off of what Dr. Pjesky is saying about growth being important. If we think of --- so when I say --- standard of living, you know, not very few of you are going to be thinking GDP. Some of you may be thinking [about] access to medical care, crime prevention, [and] things like that. And if you look at the GDP numbers, GDP has no relationship to crime at least not in the United States. People don't commit more crimes during recessions. People don't commit less crimes during recessions. It's just unrelated. Health on the other hand, if you look at the emerging economies in the world in Latin America and Africa and Asia, what you find is a very strong correlation between this growth rate of GDP (this imaginary number that we've made up of expenditures over an economy) and the under five mortality rate (which if you're not familiar with that number --- that's the amount of children who die before reaching their fifth birthday). So, if we have high growth in these economies, [then] we have fewer children dying before their fifth birthday, which goes to, I would say, that kind of happiness and spiritual fulfillment. Now once we get into the middle income economies or higher income economies, [then] that correlation begins to go away. We don't get a whole lot of boosts in health and medical expenditures from, say, GDP growth. But we get a lot of it at the beginning. And that's where Bob Lucas says that may become important. So, where growth ties into this standard of living is very dynamic. I can't grow out of a criminal economy. I can grow out of a lot of health care issues. I can grow out of a lot of transportation issues and infrastructure issues. But there are certain things that GDP cannot cover within the, say, a standard of living.

Stitzel: Yeah the criticism of something like Lucas's observation --- notice I avoided the bad pun of Lucas’ critiques there --- is that's focused on the material and that we lose things. So, I’m really glad both of you have brought up you know this this spiritual this non-material aspect of it; because we've talked a lot about the standard of living and, like, what is it that's changing most dramatically over time. And it's these things that GDP probably can measure. And I'd be eager to hear if either of you two wanted to dissent from that opinion. But talk to us a little bit about how you see that playing out, because I think you can't disentangle the story of history, you know, over the last for sure 200 or 300 years and economic growth. I mean, that probably is the story of the world [and] is the story of humanity. And one of the things that I would always do when I teach about growth in my economics classes is just show what growth looks like, what GDP looks like over time; because GDP growth is essentially zero for most of history, right? And then, I want to get into, you know, where and why and how some of that happened. But the argument that Rex made earlier talking about: well, you know, look however far back you look and you're having trouble feeding and clothing yourself. And now, when we give an example to an audience we say: oh, your water heater goes out or you have a flat tire. This says you're just on a different level of issue [or] different kinds of issues. So, talk about the interchange a little bit between non-material and cultural things and that the things that GDP can measure.

Pjesky: I think, you know, different economists are going to come up with different answers to that. And different disciplines within academics [are] going to approach that question in different ways. But this, you know, this an economics class. So, we're going to give that perspective. But, you know, as the society becomes more wealthy, the nature of the problems that they face changes remarkably. You know, 500 years ago nobody had to worry about their hot water heater going out or having a flat tire because they didn't have those things really at all. Maybe their wagon wheel may have fallen off or something like that. But, you know, the way that we're able to live our lives, and the connections that we are able to seek with other, you know, human beings, and the nature of those connections is radically changed through, you know, economic growth. So, what this process has given us is the ability to connect with other human beings in ways that people 500 years ago probably did not and were not able to connect. So, you know, again in developed nations such as the United States, you know, it's incredibly freeing for people to not have any significant concerns about like starving to death this winter. So, you know, food insecurity is a thing across the world. It exists in the United States. But it is not, sort of, the norm like it would have been several hundred years ago. So, you can proceed with your lives. Every individual can proceed with their lives, you know, through this winter without really not having that much concern about having enough to eat. And, you know, ponder for a moment how that would affect the way that you lived your life, if you were legitimately concerned about not having enough food over the next couple of years. And again, I’m not saying that doesn't exist ever, but it's not the systematic problem that it would have would have been in humanity several hundred years ago. So, that frees us as human beings to pursue higher needs [and] higher spiritual needs. Higher intellectual needs might be a better, you know, word to, you know, use there. I’m able to interact with my family. And I’m able to interact with the people that I work with. And I’m able to interact with, you know, my neighbors and my community in ways that are different than I would if I were completely consumed

with the need to gather enough food for myself over the winter. So, you know, again focusing on just food here, I think in a nutshell --- that is what, and if you multiply that times, you know, many, many examples that we could use instead of food --- that's been the consequences of economic growth for you know, for humanity.

Stitzel: Yeah. It's an elegant answer, and I think one that probably appeals intuitively to the audience. But I think in the back of their heads they're probably like me. They're thinking: right, but am I closer to the people around me? Am I building, you know, spiritual and intellectual connections? I mean, it's probably almost undoubtedly that intellectual growth and stimulation has got to be higher just based on our access to things. You know, but say I were born 200 years ago. Is my development [and] my satiation of those higher order needs --- is it actually higher? Is it is actually better?

Mattson: I think this goes into the question of the perception that level and that growth rate. I mean, as Rex was talking about earlier, where we're at a level where we don't worry about food, but we worry about other stuff. We're always worrying about things. And whether that's some kind of, you know, evolutionary tick of ours going back to, you know, you've got to scan the horizon constantly for any threats that come out. This where I would still argue that growth is much more important than level, because it could be that we get into a stagnant economy. It could be that we hit a recession. We go through lockdowns. We go through low growth rates. And finally, when we open up and there are a lot of jobs available, [then] suddenly people are not really wanting to engage again with the economy. We have this issue of --- what are they calling it now? The Great Resignation, or The Great Quit, or something like that? That is, I think, more related to the fact that we have not seen this growth in recovery, not just post-Covid but pre-Covid, in the wake of The Great Recession where we had such low growth rates in what's called the recovery, that has led to people perceiving things as being worse than they are. We tend to look at negative news. We tend to look at this and this and all the bad news. I mean, if you look at emerging economies, for example, people should just be screaming for excitement. Just every day we get up in airplanes and we think nothing of flying from one side of the country to the other. In fact now people get angry about it. We have people, you know, attacking people in the middle of an airplane. I think, that greater spiritual or intellectual satisfaction seems to come in times where we get that higher growth; where we get that higher --- not just this ability of I don't have to worry about food --- but then thinking my child's going to have a better life than I did. And, you know, things that

are things are going to be better in five to ten years. If we don't see that in this growth rate, it seems

to be anyway [and] maybe I should back up a second here. If that's not reflected in this growth rate [and] if that kind of optimism isn't reflected, then we could potentially be looking at a stagnation that doesn't really account for the level. We could be very wealthy and still very unfulfilled spiritually and intellectually.

Stitzel: So, let's say starting today over the next 10 years economic growth stagnates dramatically. Would you rather be born in that time period? You're born today? Or would you rather be born 100 years prior today when economic growth would have just obviously been dramatically much higher? You know, obvious in the next 10 years from 100 years ago that we'd have The [Great] Depression. But your growth during that time period is really high.

Mattson: Hmm mmm.

Stitzel: So, is it level or is it growth in that context?

Mattson: Well, it's growth. So, I personally I like having been born in the 1980s, because people got my Simpsons references at least up until a few years ago.

Stitzel: But there will be cultural moments in the next 10 years.

Mattson: But there will be cultural moments. Yeah. No, I would actually rather be born today because of the potential that we have in in how technology is growing. The various things that we see --- yes, we are in a, I would say, a low growth period since The Great Recession. But I would still rather be born today than say at the, you know, beginning of the climb of the Roman Empire, or the beginning of the Industrial Revolution, because our standard of living is still much higher. And going up from there I think, we, I think, will see higher growth rates as we go on 10, 15, [or] 20 years down the line.

Stitzel: So, I've been attacking your argument. Let me steelman the argument for a minute, right?

Mattson: O.K. Yeah.

Stitzel: Looking forward in time, right, growth is more important than standard of living; because I would rather probably be born 100 years from now into a more prosperous [time], right? And also this would be an excellent application of the veil of ignorance, right, is if you, sort of, baked into the question is if you would like to be born in the next 10 years as if you'd be born in America. But what if you're born elsewhere in the world? Well if I don't know which part of the world I’m born into, [then] give me 100 years from now. Because there's, like Rex was saying, right, hundreds of years ago everybody in the world is subsistence. Now we have highly developed and we have developing nations. Maybe two, three, [or] four hundred years from now we're essentially all developed. It's all relative. But maybe, there's almost no subsistence living, right? People maybe 400 years from now [think] maybe subsistence living is only done by people who choose that as a lifestyle; because they disagree with us about the nature of subsistence living's relationship to actually fulfilling your higher order needs, right, like monks (or something like this) that we'd see in history. But that's why growth's important, I think, if I can still man your argument a little bit. If we say: oh look, we've achieved the standard of living now. That's very backward looking. If we think of the importance of economic growth, and for what it does for the future, [it just] makes your argument stronger I think. So, thoughts on that?

Pjesky: Well, I think that I’m a humanist and I’m an optimist very much, you know, very much so. And I think that it's --- there's almost no question that the best time to be alive is right now, all right? But if human beings were given the choice between living out their lives from this point today into the future with stagnation ---- and, you know, given that choice or the choice to going back 100 years ago and live through all of the fantastic innovation and growth that we know has happened in the past --- I think that's a really difficult question to answer because, you know, [as] human beings we want to be happy. We want to be comfortable. And if our lives stayed stagnant for the rest of our lives, just the way that they that they are, you know, we'd probably do pretty well, right? There's no reason to think that I wouldn't be happy if everything that I have right now just sort of locked in and stopped. O.K. And, you know, some would even argue that if we did that, then we could share out everything that we know and that we have right now. And that we could bring everybody up to the level that, say, you know, somebody in the upper middle class, you know, would be. And that would be, you know, almost like a utopia. But on the other hand, you know, human beings need to march, right? We’re on the march. We need to absolutely push forward. So there’s this desire in human beings for change. There's this desire for human beings to use what we're talking about for, you know, growth --- whether or not it's societal growth or personal growth. So, even if we are, you know, rich and comfortable right now it would be somewhat I think disappointing, and would be somewhat of a loss for humanity not to continue to push forward, and just to see what we can do next. You know, the things that I have in my life that, you know, based on how I behave make me really, really happy. You know, I like my iPad. I like, you know, just stuff like that, just as almost a trivial example of technology. You know, 20 years ago I wouldn't have even imagined liking one of those things or even needing one at all. But yet, once I got my hand on it I was thinking: good grief, this this just like the most awesome thing in the world, right? So, to push forward with economic growth with new innovations to see what comes out next, I think, is innate humanity. And without that, we’re definitely missing something. And it doesn't have to be trivial entertainment things. It can be, you know, things that really matter like medical advances. So, you know, we have pills and treatments today that we can't imagine living without. But if you go back at some point in the history, those things didn't exist and people really actually did fine without them. So, you know, even the short-term growth like Dr. Mattson saying is incredibly important for our growth. It's right there in the explanation for our growth as a species, and our growth as individual human beings.

Stitzel: Right. This, sort of, the --- you said you're a humanist. I don't think you meant that in, like, the literal sense, because literally what you've described is that is the anti-humanist position, right? And so

earlier I said: oh look, growth. It's nothing. And then all of a sudden, we get to the 1600s and it just takes off. Well, that's only true if our myopic view of GDP is right. Right? Isn't the story of humanity and culture --- it is growth and it is expansion. And if we zoom in, I think, like any one individual person may say: oh look, what are the odds this person's subsistence living very high? And yet we mentioned the Roman Empire. What's the Roman Empire about, right? If we measure the GDP growth of that period --- it's nothing, right?

Mattson: But we can measure it today, nothing compared to back then.

Stitzel: Especially as a growth rate. Especially as a comparison of standard of living. And yet, maybe some in the crowd here, when I said which part of time would you like to be born in, maybe when you said Roman Empire, [then] I'd love to be. Would this be an opportunity for me to be part of one of the greatest stories in history, part of the greatest growth and expansion of human history, you know, setting aside various moral complications of it, right?

Pjesky: But, I think, it'd be a great place to visit. But I don't think you'd want to live there.

Stitzel: Well it's --- and that's --- because, I think we conceptualize this as a tough, a brutal, a risky, [and] a dangerous era to be in, right? And but some of us in the crowd might like that, right? I might have some young men in particular in here that think, you know, if I’m very willing to live a dangerous, risky life in exchange for glory, right? And, we know, this is true historically, right? Maybe it's foreign to us as modern, especially Americans, right? But there's a sense in which GDP hasn't captured growth, right…

Mattson: Yes.

Stitzel:….whatever your conceptualization of the expansion and development of society is; especially in ways, right, what are the legacies of something like the Roman Empire, or, you know, like we have Library of Alexandria. This not captured very well by GDP. These are among the greatest achievements in human history. That's immense economic growth. And now, and some of this probably a measurement bias, right, where we just have more tools to be able to measure things. And who knows how we would measure things in the past. There's a lot of growth in human history because of exactly that type of desire for advancement. That's what we want individually. That's what we want as a culture. That’s what we want as a species if you will.

Pjesky: Well, when you, I mean, look at the long history of humanity, what we're talking about is growth follows like almost a hockey stick pattern. You know, we get to, you know, 1700-1800 or so and what we measure as standard of living is growth just explodes. And before that it's been flat. So, what that really means in practical terms is that --- you know, human beings living in, like, the year 500 and human beings living in, like, the 1500 year [is] those two groups of --- people would at least recognize the lives that the other ones lived. You couldn't bring back groups of people from either one of those time periods to this time period and then have them recognize anything, O.K.? So, humanity --- despite the Library of Alexandria, despite the Roman Empire, despite the, you know, the empires and the advancements that humanity made in Europe and China and all just, you know --- all across the globe [and] anywhere humans lived, there's been this characteristic of, you know, building things and creating communities and stuff like that. But that didn't translate into what we consider to be increases in standard of living until the Industrial Revolution. Basically in 1700-1800 --- that's when things really started to take off. And well, what's the difference is the question, despite all of the advancements in knowledge and technology that human beings have always come up with, all right? So, we learn new things. We don't forget old things. So, our knowledge accumulates over time. What happened with the Industrial Revolution that sparked the modern world --- the world in which we live today? Well, that's a question that, you know, there's a million different answers to that. None of them are completely satisfying. But whatever the true answer is boils down to something incredibly simplistic. During the Industrial Revolution, for whatever reason and beyond the Industrial Revolution for whatever reason, the true innovation that happened there was humanity’s ability to cooperate with one another [as] to achieve these kinds of goals in commercial society. So, there was always trade. Human beings are trading species. This, you know, is what we do, right? If there's two people alive, [then] they're going to trade. It's innate in us for some reason to interact [and] to trade with one another.

Stitzel: Because we want to better ourselves. That’s the division of labor, right?

Pjesky: Yes. That would be the driving force. But I think that we'd have interaction in community even without that; because we had trade [and] we had community without any measurable increases in the standard of living for thousands of years of humanity. What happened with the Industrial Revolution is we found a way to coordinate our activities in ways that we did not know how to do before. So, the innovations with steam power and stuff like that --- that's typically taught in, like, maybe a high school history class or something like that that sparked all of this. It's not really a very satisfying answer to me, because we had massive links in human organization and human technology before that. So, what was it that 1750 or whatever it was --- what was it at that point that was different? And that's the question I don't have an answer for you, all right? Because there's, like I said, a million answers to that question. But that's the key question in the history of humanity in this context that we should be thinking about.

Mattson: Let me take that back a step and again go back to these measures where we talked about 1600-1700, you know, what was the difference in measuring say GDP between, I don't know, 1600 and 1776? The difference is Wealth of Nations. The difference is Adam Smith pointing out that there is a price to these things. And the price signal gave us a value for these things that we did not have previously, or that we did not see previously. We start to see it then spread out 17th-18th-19th century, and we can measure that value. So now, we're Galileo with the telescope looking up at the stars and seeing things just a little bit more clearly. And we bring up the issue of, you know, whether or not we want to live in the Roman Empire or live today. And the people in the Roman Empire couldn't conceptualize how we are living today. Well let's extrapolate that too. Can you guys conceptualize how we're going to be living 500 years from now, or even 20 years from now? I grew up in the 90s. No iPads, right? You know, I would come home and watch TV with advertisements, right? You guys can skip through that. This is something you guys probably never lived through, [and] probably wouldn't fully understand how that would be. But let's push that out even further. I can go on YouTube, and if I’m curious about the history of the Bubonic Plague in Europe, [then] I can go and do that for free. No one is measuring the value of my time spent in studying 14th century history. Or let's be even more practical now. No one is studying my time, or no one is valuing my time, giving a value to my time, learning how to program on (I don't know) Google. What's the Google school thing they have now? I was going to plug that, but I guess not. You can go online and learn programming without hiring a professor [or] without hiring a teacher to do that. Is that measured in GDP? Not at all, because there is no price signal on that. So, with the changes in the Roman Empire as saw there, you know, the prices would have been unobservable in that sense. We begin to observe them in the 18th, 19th and 20th century. And even then, we're not observing all of this value, because we had half the world's population not being paid for their labor for a very long time. Even now, any household labor done by the spouse that stays home --- that is not measured in GDP. The value I get from using a dishwasher is kind of priced into my --- what I pay for it, right? But my dishwasher is now what? 10 years old? Gonna break down fairly soon. But the value I got --- I would probably price much higher than the $300 I paid for that thing. But I can spend more time with my kids. I can spend more time learning things, and getting that academic or spiritual fulfillment that I didn't get before. That's not measured by GDP. So, let me, I guess, put a flaw in my own argument with the growth rates. Some of the things you guys are getting are not measured. We don't know how much value you're getting from YouTube. We don't know how much value you're getting from Facebook. How much do people pay to use Facebook?

Pjesky: Zero.

Mattson: What's the fee?

Pjesky: Zero.

Mattson: How much benefit are you getting from using it? We don't know.

Stitzel: Maybe it's negative.

Mattson: It might be negative. It could very well be negative, then we'd be worse off. But I’m trying to be optimistic.

Stitzel: So, when Rex brought up this idea of coordination, and how that is one of the primary drivers in what actually caused the modern growth period, you know, that's rooted in the industrialization. And I don't want to conflate, right? Because when we talk about coordination as economists, we're talking about the way that we coordinate principally through markets, right? So, Rex tell me if I’m misrepresenting your argument here. But part of what's happened is in that time period markets developed in a way that people were free to trade [and] free to coordinate. I mean, everybody's trading over time periods, but they're coordinating, and that's much bigger than markets. I don't want to limit that, because that is the big story here. How does that fit with what Ryan was just saying. There are things that are not being valued, which it that's not strictly true, right, because those things do have value even if we can't measure them in observable prices. But I would say markets have always existed, right? Because even if we don't have markets in the way that we think about them today… there is still markets happening in the Roman Empire and empires even previous to that or non-empires previous to that as well.

Pjesky: Well, yeah. There’s always been cases where human beings have met for the purposes of trade. So, to just say that wow we have markets now and we didn't have them then, that's not, that didn't quite get you all the way there. So, the nature of the coordination that we have now is much more extensive and much more reliable than what they've ever had in the past. And so, that's why we're able to connect with people in the world in ways that we couldn't connect before. The reason we're so rich now is because we are commercially connected with more people than we've ever been before. Now, if that's facilitated through markets, then markets are the answer. But it wouldn't have to be markets. It could be any mechanism that allowed us to be commercially connected with more people, that is gonna that's basically going to make us rich. Because if you're connected with more people, then whatever it is that you're doing with your life is more valuable to others. And you are also able to tap in to the value that other people are creating for you, and absolutely for everybody else. So, the fact that we have all of these things that we enjoy that aren't included in our official measurements of gross domestic product or standard of living --- or whatever, you know, whatever you may call it --- is actually a testament to how well those mechanisms are working. So if you have a dishwasher that you paid, you know, a certain amount of money for, and you value that well beyond that, well that's just a surplus that you get to enjoy. That's very, very difficult to measure because it's subjective. It's different for other people if you're able to use free services like, you know, like, Facebook or, like, Google or stuff like that. It's free. You don't have to pay for it. Well, that, I mean, that's just a, you know, that's just an offshoot of all of the activity (of all of the activities) that we're able to do.

Stitzel: Notice that answers the water heater breakdown questions I was asking earlier, right? And that coordination amongst larger more varied groups of people is a huge part of what actually provides the ability to solve those kind of basic issues that we have now. But, I want to turn here just a little bit, because you tapped into something that I think is an excellent transition here. So, we've talked about this idea of, like, what has caused growth in human society. Like, what's what are the drivers of economic growth? But you also mentioned, sort of, in passing as a part of what you just said. Why are we rich? And I think that raises this question now of why are some nations today rich and why are some poor? Why are some developed and some developing? You said you've got, O.K., maybe there's millions of potential answers, and there's a lot of interaction between what caused growth on, sort, of a global scale if you will. But if we look at different nations --- do we have some answers to what could be causing growth at that level?

Mattson: So, I think the textbook answer is capital. The textbook answer is you have a certain amount of physical capital that you pair with your labor, and if you get more capital and more labor, then you get more growth. Now, this was a very narrow definition going from Smith and to Marx. And one of the reasons why the Marx critique of capitalism didn't really pan out is all he measured was physical capital, for example. He didn't take into account education [and] training etc. that capitalism could be a more sustaining system based on other forms of capital that he just was not able to measure it. We have physical capital. We have labor. We could also have organizational capital of institutions -- how the politics, how the rules, [and] how the culture of a society work and bring people together. So, that'd be the change over with, say, between, I don't know, the 90s [when] we just got cell phones. And now we're on Facebook and Twitter. And you can also have technology changes, which economists argue back and forth whether or not that's something that just we have random shocks, right? Oh, we have this new technology, or if that's something that is within the system or endogenous, [then] we develop our own technology shocks. So, technology, physical capital, labor, [and] human capital. And I want to be clear on the human capital definition --- that is education and health. There seems to be some confusion in the press on what human capital means. That is your education, your training, [and] your health. So, we all hope anyway at West Texas A&M you guys are developing your human capital, right? That's what we're selling here. And well, that's a whole other podcast.

Stitzel: Are we though? And also as Daron Acemoglu at MIT would talk about the organizational capital or the institutions. And that's another kind of expanding area of research where politics matter, institutions matter, [and] how you organize your society is going to matter. You can have huge amounts of resources such as Brazil. Brazil has all kinds of resources, but the institutions within Brazil are not very good. The amount of potential corruption, the inability of people to link together, as a Acemoglu would have measured it, are not very good. So, they have the resources on the institutions. Singapore does not have any --- we well know Singapore the island nation that has no --- resources. They have fish. But what they also have is they have a vast amount of human capital of financial know-how. They also are very lucky in their geography where they --- or at least they were for the 20th century of being where they --- are in East Asia and being able to take advantage of those trade routes. Why is it that Singapore, Japan, [and] South Korea all grew much quicker than vastly larger by capital terms [and] by resource terms than richer countries like Brazil and Argentina? So, there's a lot that goes into it, a lot that goes into growth, and you can't really pin it down to one thing. But of course, for the textbook, we'll all talk about capital and labor.

Stitzel: So, if it's capital that causes economic growth. But it's not resources that are driving economic growth, right? Because Brazil's, like, just fundamental natural resources are probably very similar now to any point in history. How is it that capital causes growth?

Pjesky: Let me say exactly what Dr. Mattson said in probably an entirely and almost unrecognizable way.

Mattson: I was waiting for this one. Yeah.

Pjesky: Rich individuals and rich societies become that way for exactly the same reason, O.K.? If you want to get rich as an individual, or if you want your society to get rich as a society, [then] here's what you need to do. You need to expand your access to other people's expertise.

Mattson: Exactly.

Pjesky: O.K. You need to expand your access to other people's expertise. So, as we became rich, as we increased our standard of living in the way that we've been talking about for the last hour or so, what has happened is this. Human beings both as individuals and as entire societies have increased their ability to tap into other people's knowledge and machines. So, the clothes that you're wearing right now that were probably sewn together in China, you --- that in a very real sense that means that you --- have access to massive textile industries across the world, all right? On the other side of the world. If your hot water heater breaks down --- same thing. You can fix that with a phone call, O.K.? You can fix that with a phone call and a credit card. And the reason that you can do that is because you will have access to all of the machines that were used to make the water heater, all of the infrastructure that was used to transport the water heater, and the expertise of the individual that will come over and get in your garage and put in the water heater, all right? Something that very few could know how to do. So, it's rather remarkable to me to think about and I, you know, tried an example. I understand that. It's remarkable to me to think that I could have a new hot water heater installed in my house by five o'clock today without even being there, O.K.? And without not knowing how to do it at all [and] not knowing anything about that process. I don't know how to make, transport, or install hot water heaters. But yet, I can accomplish that for my house in a couple of hours with my telephone.

Mattson: You may not even know the guy.

Pjesky: I don't know him [and] might not see the person that will come and do that. If you expand that example times a million or times a billion, [then] you get the modern world. We're rich because we are able to tap in to the expertise of others. You show me an individual who's poor. You show me a society who’s poor. That would be my diagnosis of the problem. They are not able to tap into the expertise of the people around them for whatever reason. The flip side of this of course, is that in order to become rich you have to have expertise that other people have access to, all right? So, maybe your expertise is doing tax forms for people. Maybe you do people's taxes. Maybe you design bridges --- you're an engineer or something like that. Maybe you put ads on Facebook as somebody's multimedia manager or something like that. That expertise is going to be valuable to you and make you rich, because other people around the world [and] other people in your community have access to that expertise that you have that they don't, O.K.? Society has figured out some way to transfer those assets, those human capital [and] physical capital --- if you want to use the econ terms for those --- things. We can easily transfer those things from one person to another. So we're rich right now because we are able to get things done for ourselves that we don't have a clue how to do. We are rich because we are able to do things for other people that they do not have a clue how to do for themselves. That's how you become rich --- by serving one another. Humanity now is massively coordinated commercially, which has been a theme in this class the first month or so. You know, in economics we study the commercial coordination that you have with strangers --- that's the primary job that economics should always be seeking to explain. If you're not thinking about that, [then] you're not thinking about economics. You're thinking about something else. That's what we study. That's what we should study, all right, because that's one of the more important questions of social science today. Now my answer is almost trivial, because the next question that you should ask me is: well, how do you do that? Well, I don't know, all right? That's where we get the million different reasons, all right? That's where we get the million different reasons that people have come up for why this happened. You know, maybe it was the steam engine that set it all off or something like that. I’m not really sure about that.

Stitzel: We know it's not technological things, right? Because why the steam engine and not the aqueducts?

Pjesky: Well, I mean, I’m being...charitable.

Stitzel: Right. Right.

Pjesky: So, you know, I don't think that this a question that we can have high confidence in the answer to.

Stitzel: Yeah. It's really interesting because we've said in a previous podcast --- which the audience probably won't have had access to at this point, you know --- but it's it is not resources that make things valuable, right? Because, you know, the example we gave last time is even if I had a pool of oil in my backyard it's useless to me. It has to be combined with the capital and the technology that people have elsewhere in the world. And so, it really is that coordination that gives things value and that connection points. How is it then that some modern nations are poor? Because one of the things that's really interesting about that is not only do I have this kind of access to the other skills, and but we have access to knowledge from other points in history, right? It's not just spatial, right? It is actually over the course of history as well. Things that the Roman Empire knew, since that's the theme of the day, only got transmitted to local cultures; and often (sometimes) economies benefited when the Roman Empire came to town, even though they might have been practically (for all intensive purposes) enslaved because of the things that Romans knew. And yet, now you and I know those things, right? So, I’m part way through Marcus Aurelius’ meditations. And I’ve read The Book of Five Rings. And I’ve read John Locke. And there's just --- there's different people at different time points. And Ryan, I know you and I have talked about some of the books that you've read recently, where it's like not only there's an odd way (and I think a beautiful way) in which that coordination that we're talking about spatially also happens --- in terms of the technical expertise or any type of expertise that Rex has just mentioned --- through more and more of human history, as well as more and more of current humanity.

Mattson: So, yeah. The access is really the most important thing. And thank you Dr. Pjesky for doing that, because that really hits the nail on the head with it. Why are some of these emerging economies still so poor, then you can make the argument. Yes, Brazil may have huge amounts of oil sitting off their coast. They still need to get it out. They don't have the access at a particular cost where it may incentivize people to go get that oil and do something with it. One thing that we can argue is that through lack of infrastructure, or artificially high monopolist costs, or artificially high government costs, or things like that deprive people of this access and that keeps them in poverty. So they are --- while we have big GDP growing, we don't have a distributive effect going on. We don't have everyone getting access to that growth. We don't have everyone getting access to that standard of living. And that really, really more so than this, you know, capital labor argument that we've been making, you know, since the 1700s and 1800s. It's combining all of these things together. And that's where we get this wealth.

Pjesky: Yeah. I mean it's a delicate --- it's in some sense it's delicate. In another sense, it's very robust. But in some sense it's really, really delicate, because, you know, we can we can forget how to do these things. You know, why didn't this happen because of Rome or similar empires across history is an interesting question. Another question is to, you know, consider the case of North and South Korea. So, you know, North and South Korea share the same resources, the same history, [and] the same language. So, almost anything that you could compare in North and South Korea would basically be the same throughout thousands of years of history. You know, up until the mid-20th century if anything, North Korea was a little bit richer than South Korea. But yet, you know, at some point something happened to divide the country in half, and they diverged in how the two societies thought about or approached economics. And now, we have North Korea as very, very quickly becoming very, very desperately poor, and South Korea is among the richest, richest material nations on Earth. And so, you had that divergence that happened really, really quickly. And regardless of the cost for some reason, the people of North Korea --- they had these connections unravel. They forgot how to coordinate with one another. So, their economy and their standard of living collapsed with nations that are developing, and having struggles developing you have the same problem. There's something that is short-circuiting the people's ability to coordinate with one another to extract oil and use it for some grand purpose to, you know, to come up with basic human needs of, you know, food and health care. We know human beings can do it, all right? Because it's happened for, you know, five-six, you know, billion people on the planet this transition has happened. So, we know it's possible, and we're almost to the point right now where we might be thinking that it's actually normal for this thing to happen. But there’s still these individuals around the world --- whether they're whole societies or, you know, individuals embedded within rich societies --- that for some odd reason are not able to coordinate with the strangers around them in order to plug in to the wealth generation that we know exists.

Stitzel: So, I want to bring this episode in for a landing. So last question --- either one of you take this on. If it's the case that coordination is what's causing growth --- and we see some examples where cultures, societies, [and] economies can seemingly forget --- [then] how is it that the (given the) world is more and more connected, that we can actually see regression and access to this coordination that drives growth?

Mattson: Well, that can come from a lot of things. You know, you could talk about a huge plague in the 14th century and we have less people. We've lost certain amounts of knowledge [and] certain amounts of education and training. You can take the Library of Alexandria example. Library gets burned down. We don't have any more information on that. In the case of North Korea though, you could just generally have a fascist dictatorship that is denying that access to the majority of its population because it fears revolution. It fears what people would be able to do with that access. So, institutionally speaking, you could have a government come in and say: we're going to cut access to that. You can make the argument China is doing this with access to online services. When we talk about, yeah, yeah, China and North Korea are, I guess, the two examples we have of that. We could have ---- Dr. Pjesky gives a very charitable --- we forget this access. I’ll be a little bit less charitable in saying in that there are certain institutions and powerful organizations that don't want us to have this access.

Stitzel: Special thank you to the audience today for their time and attention. My guests today have been Rex Pjesky and Ryan Mattson. Gentlemen, thank you for joining me on the EconBuff.

Pjesky: Thank you.

Mattson: Thank you.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.