Please hand in your final exam at the Economics Department main office at Evans Hall Room 508-1 to Joe by noon on Thursday Aug 13th. If you have any concerns, please don’t hesitate to email me.

Jane Jacobs is one of the most influential figures in the context of urbanization and cities. Here’s a bit from the entry on Jane Jacobs in Wikipedia.

The Economy of Cities

The thesis of this book is that cities are the primary drivers of economic development.

Jacobs’ main argument is that explosive economic growth derives from urban import replacement. Import replacement is when a city begins to locally produce goods which it formerly imported, e.g., Tokyo bicycle factories replacing Tokyo bicycle importers in the 1800s. Jacobs claims that import replacement builds up local infrastructure, skills, and production. Jacobs also claims that the increased produce is exported to other cities, giving those other cities a new opportunity to engage in import replacement, thus producing a positive cycle of growth.

In a blog post about Jane Jacobs, John Hagel writes:

Jane Jacobs loved cities, . . . Much of her writing – especially the triad of her books, The Death and Life of Great American Cities (1961), The Economy of Cities (1969) and Cities and the Wealth of Nations (1984) – compellingly describes why cities are so important. Her first book explores the dynamics that shape city life and make it so rich, as well as providing a devastating critique of urban planners that seek to impose conceptions of order and, in the process, smother the very elements that make cities so vibrant. In the words of Sandy Ikeda, she seeks to explain “how cities full of strangers manage to achieve the high level of social cooperation needed to consistently generate their own economic growth.”

Her second book challenged the conventional view that the development of cities depended on agriculture and instead argued that the development of agriculture depended upon cities. In Cities and the Wealth of Nations, Jacobs argued that macroeconomics had focused on the wrong unit of analysis – the source of wealth was not nations, but cities. In fact, as the New York Times in their obituary of Jacobs summarized the theme of her book: “She contended that national governments undermine the economy of cities, which she sees as the natural engines of economic growth.”

I had mentioned the World Development Report 2009: Reshaping Economic Geography in class the last time. Instead of downloading the entire 410 page World Bank document, you could just download the Overview (32 pages) — which is part of the assigned readings.

Paul Romer is a brilliant economist who has been stressing the importance of cities and urbanization. Here’s a TED talk of his which is a must-see.

In the talk he touches upon a number of issues. For instance, he talks about the importance of rules and how good rules lead to good outcomes and bad rules lead to bad outcomes. He says that we have to figure out rules on how to make rules. This is what we briefly discussed in class — that the constitution of a state is very important.

I never tire of telling people that the US is so successful partly due to the great constitution it has. That is the rule book for rules. I argue that the American economy is so successful because Americans are very good at making good rules.

About 2 years ago I briefly wrote about my conjecture about why the American system is so good compared to, say, India’s. I think Americans make, and follow, good rules.

. . . in a sense it is not sufficient to just say that Indians and Americans are inherently equally capable, and that the Americans are more successful than Indians because they have better systems. You have to also explain why Americans could build better systems.

Abhi Rulz

I have a tentative answer. Let me tell you a story. One evening I was visiting with my friends Sudha and Vijay, and their two kids Anu and Ahbi, in Rancho Palos Verdes in southern California some years ago. We were watching a video when Abhi, then three years old, had to take a bathroom break. He was promised that we would pause the video while he went and did his business. When he got back, he realized that we had not “paused” the video but had instead stopped it. He was furious. “Paused! Paused!” he yelled. He was hopping mad. He said that the rule was you have to “paused” the video, not stop it. It took a while for us but we all accepted that we had messed up and it won’t happen again. He was placated.

He was in a phase where you could resolve any dispute between him and his older sister, or get him to do something, by merely invoking the appropriate rule. You had to tell him, “Abhi, the rule says such and such . . .” and he was willing to go along with it because that was what the rule said. He was not sufficiently sophisticated to challenge the source of the rule or why it was a reasonable rule. To him, a rule was a rule and it had the force of law and everyone had to abide by it.

I still cannot think of how important rules are without recalling with a great deal of sweet nostalgia that incident of Abhi absolutely insistent that we had broken the rule that we had agreed to. I think rules are important and if you agree to a reasonable set of rules, you can actually build wonderful systems. Let me get to that the next time.

Back to Romer’s talk. He then talks about the importance of giving people choice. The importance of freedom and choice in building good economies cannot be overestimated. Economic freedom is absolutely essential. Economic freedom creates wealth — and wealth is the foundation of all other freedoms. The idea of political freedom, for instance, is an empty concept without economic freedom.

We will discuss this in class on Monday.

We have been discussing urbanization and development. There are many interesting sources of information about where the world is today with regards to cities, and how it has changed over time. Of special interest is a site simply called “19.20.21“

While some say the world is flat, supercities are rising — vast, intensely urban hubs will radically redefine the world’s future macroeconomic and cultural landscape. Most of the world’s population right now lives and works in cities. Many more will. It’s critical to gain a true understanding of what’s happening: the rise of supercities is the defining megatrend of the 21st century. . .

Cities are the heart and the art of our culture, the homes of our governments and corporations, the places where science, commerce, art and culture collide, the vital centers where healthcare and education live. The markets in the world are centered in cities.

Lecture 27 — Urbanization slides are available for download.

Lecture 25 — Education presentation is available for download.

A good starting point for the subject of human capital and development could be a brief article by Gary Becker on “Human Capital” in the in the Library of Economics and Liberty. But first, here what the biographical entry on Gary Becker (1930 – ) says:

Gary S. Becker received the 1992 Nobel Prize in economics for “having extended the domain of economic theory to aspects of human behavior which had previously been dealt with—if at all—by other social science disciplines such as sociology, demography and criminology.”

. . .

In the early 1960s Becker moved on to the fledgling area of human capital. One of the founders of the concept . . . Becker pointed out what again seems like common sense but was new at the time: education is an investment. Education adds to our human capital just as other investments add to physical capital.

Here’s Becker on Human Capita:

To most people, capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.

But such tangible forms of capital are not the only type of capital. Schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are also capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.

Education, training, and health are the most important investments in human capital. Many studies have shown that high school and college education in the United States greatly raise a person’s income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated, richer parents. Similar evidence covering many years is now available from more than a hundred countries with different cultures and economic systems. The earnings of more-educated people are almost always well above average, although the gains are generally larger in less-developed countries.

. . .
The continuing growth in per capita incomes of many countries during the nineteenth and twentieth centuries is partly due to the expansion of scientific and technical knowledge that raises the productivity of labor and other inputs in production. And the increasing reliance of industry on sophisticated knowledge greatly enhances the value of education, technical schooling, on-the-job training, and other human capital.

New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth.

The outstanding economic records of Japan, Taiwan, and other Asian economies in recent decades dramatically illustrate the importance of human capital to growth. Lacking natural resources—they import almost all their energy, for example—and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies. China, for example, is progressing rapidly by mainly relying on its abundant, hardworking, and ambitious population.

Continuing on, “Human Capital and Poverty” by Gary Becker lays out the case why investment in human capital matters.

Becker is the grand-daddy on the subject of Human Capital — he wrote a book of that name on the subject. Here’s what that’s about:

Human Capital is Becker’s classic study of how investment in an individual’s education and training is similar to business investments in equipment. Recipient of the 1992 Nobel Prize in Economic Science, Gary S. Becker is a pioneer of applying economic analysis to human behavior in such areas as discrimination, marriage, family relations, and education. Becker’s research on human capital was considered by the Nobel committee to be his most noteworthy contribution to economics.

To conclude the Gary Becker portion of this subject, take a peek at the Becker-Posner blog (which Becker co-authors with Judge Richard Posner). Here’s one post of interest from April 2003 in which he ponders the matter of rising income inequality in the US:

Should not an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than unfavorable development? Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applicable to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (just as the initial effect of higher returns on physical capital is widen income inequality), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

Moving on, Claudia Goldin’s article “The Human Capital Century: Has U.S. leadership come to an end?” is important. She is a professor of economics at Harvard University.

The 20th century became the human-capital century. No nation today—no matter how poor—can afford not to educate its youth at the secondary-school level and beyond. Yet at the start of the 20th century even the world’s richest countries—richer than many poor nations are today—had not yet begun the transition to mass secondary-school education. With one notable exception: the United States.

The United States accomplished the feat of mass education by creating a new and unique education pattern or gauge—I will call it a “template”—that broke from the templates of Europe. The U.S. template was shaped by egalitarian institutions (a commitment to equality of opportunity); by the factor endowments of the New World (lots of land relative to labor); and by republican ideology, meaning democracy and pluralism.

For much of the 20th century this template was synonymous with a set of “virtues.” That is, the template consisted of characteristics that were virtuous. Among the virtues was mass secondary education that was:

• publicly funded,

• managed by numerous small, fiscally independent districts,

• open and forgiving,

• academic yet practical in its curriculum,

• secular in control, and

• gender neutral in its admissions.

I call these characteristics virtues because they promoted and furthered mass education and thereby increased social mobility and enhanced economic growth.

What brought about the human-capital century? Why and how did the United States lead the world in mass education for much of the 20th century? And what does this history mean for the future of education in the United States?

Lecture 24 — Corruption slides are now available for download.