If you teach economics, this may be the most important book published in 2014

I once taught economic policy in France to civil servants for several years in a row. Of course, I always considered that the most important part of the course was the one about the Solow model and productivity growth. As Paul Krugman once pithily and famously put it: "Productivity isn’t everything, but in the long-run it’s almost everything." (*) If I had been restricted to giving only one lecture in the course, this would be the one I would have given.

What was surprising is that, a couple of times, I stood in for colleagues towards year end, professional civil servants who taught the same course than I did but had unexpectedly had to quit teaching, having been called to a higher job, and then I discovered that they had skipped this all-important bit, and that I did have in fact to give their students that lecture.

That set me thinking and I made a quick survey of soft economics textbooks, which showed me that growth theory was not always, even seldom, taught to non-economics majors. So not only was productivity growth all-important, it was also under-taught.   

In the medium term, the main driver of productivity growth, of course, is technological progress, something which happens in a very unruly and haphazard manner - and cannot be centrally planned, contrary a misconception quite common among politicians and mandarins. To make that very fundamental point clear, I used to give out to students a short but quite illuminating text, Innovation, Components and Complements [PDF] written in 2003 by the great Hal Varian, who authored in the 1980s what is still the standard graduate Microeconomics textbook and then went on to become Google's chief economist.

So I was delighted to stumble this month on another text, How we got to now, [WSJ review, NYT review] book-sized this time but extremely entertaining, which raises nearly all the important questions about innovation while being very accessible, a compulsive,  beach-compatible and exhilarating read.  

Its author, Steven Johnson, a polymath with a literary degree, has already written several popular books about the history of technological innovation, but this one, companion to a PBS series, is the most thought-out and pedagogical. If I was still teaching, it would be on the top of the required holiday readings list for students, probably together with Tim Harford's Adapt. 

Highly recommended.

(*) The Age of Diminished Expectations, 1994

Misunderstanding China, an ongoing topic

China is very large by most geographical standards. It is the most populous country on the planet. It now has arguably the largest single national economy - besides having an extremely ancient and distinct culture. So, well, it sort of does matter.

So, you would think that basic facts about China would be rather well known.

Think again. Misunderstanding it seems to be one of the most commonplace things on earth. Everyday journalists, politicians of all hues, academics of every possible kind of tenure, plus a huge number of self-declared pundits sprouting every kind of improbable brain colour or texture, brandish unchecked facts and gratuitous theories about China without having even bothered to check the country's all-important demographics and having tried to understand what they actually mean.

I was especially reminded of this yesterday when, looking for something that would fit into my new treadmill's narrow pulpit, I took out from a dark corner at the bottom of my shelves a book from 2005, which I had once unwisely bought on the strength of its enticing title (What Does China Think?) and of its flip-jacket recommendations (notably Chris Patten's - may he be cursed for an appropriate number of generations) then soon banished to down there.

It perfectly exemplified that what most "experts" fail to understand is that China will be old before it actually gets rich. Because they have not even heard of basic economic growth theory and, most of the time, do not even know what a partial derivative is (which makes them unable to understand the concept of productivity), nor have looked at what spectacularly happened to Japan post-1990 (blue line), or is now happening to Europe (green) though less to the more adaptable US (brown),

 

they cannot conceive that China's technocratic leadership, in front of all that well-grounded evidence, decided long ago that what really mattered was maximising per capita GDP in 2022 or whereabouts, when what is usually known as the 'Lewis turning point' is scheduled to occur: 

(This last graph is from one of Bei Xu's numerous papers for Natixis on the Chinese economy, all of them greatly recommended).    

So, yes, China is in a hurry to get rich and powerful - before declining, as a country's total factor productivity is unambiguously negatively linked to population ageing. 

This being a heavily managed economy, where local authorities play the role venture capitalists and institutional  investors play in genuine market economies, there are thus probably no worries to be had about Chinese economic growth in the next few years - though the obvious danger is that they try to artificially beef up growth in the run-up to 2022, a bit like what Japan spontaneously did in the run-up to 1990, to disastrous later effects.

As to why today's China - in spite of its huge frustraded hordes of angry nationalist young males created by the single child policies - is so unagressive compared to what Wilhelmine Germany used to be at a comparable economic development stage a hundred years ago, look no further: China could sure enjoy the sound of marching boots today and bask in an orgy of nationalism, but in 20 years' time, it will have to rely mostly on slipper-wearing pensioners for its defense. No enticement to go out, conquer and make enemies there.    

Having at last renounced Twitter and all his works and pomps, I will now endeavour to start posting seriously again on selected financial and economic misconceptions, a bottomless treasure trove of topics. I do apologize for the 18 month hiatus to the surprisingly high number of you that, according to Google, seem to have bothered to check this soon abandoned blog. I had no idea.