Arnold Kling  

Elastic Economy

More Tax Day Thoughts... Fishy Economics...

In this essay, I suggest that the economy has grown more diverse over the past fifty years, making it more elastic.

One way to describe the elastic economy is that it has become more complex. Human wants continue to be relatively simple and basic. The fundamental resources, such as land and labor, are the same. However, there has been an explosion in the variety of ways of converting the fundamental resources into products and services that satisfy basic human wants. There are a large number of paths leading from resources to satisfaction, and just as with the Internet, a variety of paths diminishes the dependence on any one path, making the system as a whole more robust.

For Discussion. How has the elastic economy changed the relative value of two forms of human capital: generic human capital (skills that can be used in many different jobs); and specific human capital (skills that can be used in only a single job or industry)?

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CATEGORIES: Growth: Consequences

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Eric writes:

I don't even understand the question!

I have my own question: complexity may make the economy more robust, but does it also make the economy grow more slowly?

I'm of course thinking of economies of scale here. Yes, complexity means more choices, but it also means more work to supply those choices, and no one choice can achive the economies of scale that we previously had for our fewer choices.

In the 1950's, Ford and Chevy each produced one basic car. They each produced over a million of this one model per year, and could really optimize the production of that one model to achieve enormous economies of scale.

These days, the number of car models, and car manufacturers for that matter, has exploded. The choice is dizzying. Some of those models are lucky to break into 5 figures for production. What impact does this have over the overall economy if economies of scale are lost?

This is probably an even bigger issue in services, where it is very difficult to build any economies of scale, and therefore it is difficult to build productivity. If productivity is the engine of economic growth, what does this complexity do to our economic growth rate?

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