Human Capital & Conditional Convergence

In our previous macroeconomics video, we said that the accumulation of physical capital only provides a temporary boost to economic growth. Does the same apply to human capital?
To answer that, consider this: what happens to all new graduates, in the end?
For a while, they’re productive members of the economy. Then age takes its toll, retirement rolls around, and eventually, the old workforce is replaced with a new infusion of people. But then, the cycle restarts. You get a new workforce, everyone’s productive for a while, and then they too retire.
Does this ring a bell?
It should, because this is similar to the depreciation faced by physical capital.
Similarly, are there diminishing returns to education? It likely wouldn’t pay off for everyone to have a PhD, or for everyone to master Einstein’s great theories.
That means the logic of diminishing returns, and the idea of a steady state, also applies to human capital.
So, now we can revise our earlier statement.
Now we can say that the accumulation of any kind of capital, only provides a temporary boost in economic growth. This is because all kinds of capital rust. So, one way or another, we’ll reach a point where new investments can only offset depreciation.
It’s the steady state, all over again.
However, what does the journey to steady state look like?
The Solow model predicts that poor countries should eventually catch up to rich countries, especially since they’re growing from a lower base. And given their quicker accumulation of capital, poorer nations should also grow faster, than their more developed neighbors.
And eventually, every country should reach similar steady states.
In other words, we would see growth tracks that all eventually converge.
So, why isn’t this always the case? Why, in some cases, are we seeing “Divergence, Big time,” as coined by economist Lant Pritchett?
The answer to these questions, lies in the institutions of different countries and the incentives they create.
Assuming that a certain set of countries do have similar institutions, that’s where we see the convergence predicted by the Solow model. We see that poorer countries do grow faster than their richer counterparts. And conditional on having similar institutions, eventually, even poorer countries will reach a similar steady state of output as more developed nations. We call this phenomenon conditional convergence.
You can think of it as a national game of catch-up, with catch-up only happening if institutions don’t differ.
What happens though, once all this catching up is done?
Let’s not forget that there’s still another variable in the Solow model. This is variable A: ideas -- the subject of our next video.
There, we’ll show you how ideas can keep a country moving along the cutting edge of growth.
Catch up on the Solow model:
Introduction to the Solow model: bit.ly/1SMud3G
Physical Capital and Diminishing Returns: bit.ly/1SpLT31
The Solow Model and the Steady State: bit.ly/233vDGw
Office Hours video on the Solow model: bit.ly/1VQ8XLe
Subscribe for new videos every Tuesday! bit.ly/1Rib5V8
Macroeconomics Course: bit.ly/1R1PL5x
Next video: bit.ly/1SHvrdp
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Thank you! -Roman

[@samyakjain4338]

You guys are doing great work. I want to know what is your source of information/article/ journal for saying that human capital also faces diminishing returns and is related to the idea of conditional convergence.

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[@PunmasterSTP]

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[@alparslankorkmaz2964]

Nicely explained

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[@NoName-h1q6k]

hey, wait a minute) what's wrong with Luxembourg? These guys rock

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[@mun011raj]

How do u know that the largest economies are currently at the steady state point (on the 1960s graph switzerland usa etc) and not just before the equilibrium, which would explain how their still growing cuz theyre yet to reach the steady state point

[@kaolonly]

Can you explain keynesian ideas and friedman's too!!?

[@tinygoof]

I appreciate you so much!

[@mylitcorner]

honestly

[@PunmasterSTP]

Conditional convergence? More like "Quite amazing knowledge for us!" Thanks for giving us a lot of *ideas*! 😎

[@emmanuelameyaw6806]

what if additional capital is better and hence its depreciation is lower...

[@beboysub]

Thank You Sir

[@yetkinertrk]

Why did you subtract Turkey from plot graph of the OECD ?

[@bestebiltekin9755]

Thought the same thing probably it was against the general correlation :D

[@yetkinertrk]

@@bestebiltekin9755 Actually they have already indicated why Turkey is excluded under the graph, I just did not realize. Because of the different historical background and institutions... By the way, your idea is also true and it sounds more like an economist's perspective 👍😀

[@35INHUMAN]

Great vids

[@aghgha]

In case anyone is curious, this organization has ties to the Koch brothers via the Mercatus Center and George Mason University. They promote the "Austrian School" of economics, which advocates against trust laws, social safety nets, and welfare. They are against your class interests. I'm only here because wealthy donors funded UNC's ECON department, these videos are attached to our ECON 101 textbook.

[@moonpie8273]

sry, I don't really grasp the idea of human capital also subjecting to diminishing effects. can someone explain a little bit?...

[@thetaomega7816]

Imagine you have no idea how to do marketing - Reading into some literature for one hour will increase your productivity A LOT, lets say you get 100% more views. So when you read for another hour you change a few things again on your website, you get 50% more views. The first human capital was more efficient, we have diminishing returns

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[@lkjdude]

who else is here the night before thier exam

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me haha trying to save the semester somehow

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[@TheGoldenFluzzleBuff]

@@gadeab1999 You have to tell me. Did you make it? I'm prob in the same boat as you

[@TheeBaptiste]

*morning of....

[@ExcelTutorials1]

this was helpful, thanks!

[@KARE19269]

Can we say the BRICS countries converge as they have structural similarities

[@AmatriceBand]

I don’t get how Turkey is part of OECD.

[@longnewton1]

There is an issue. The US and other richer countries provide aid but in exchange for access to local natural resources (for example). They then extract the value from developing these resources restricting the growth that would have been achieved in the resource rich poor country.

[@mun011raj]

That sorta stuff isn't included/considered to exist in the model at all so u can only really use that point as evaluation. One of the assumptions of the model is no trading between countries

[@thetaomega7816]

damn paying for resources is now extracting values

[@boburmadirimov829]

Thanks Doctor!

[@sonder2075]

Thanks!!

[@PrinceKumar-hh6yn]

Ideas 💡 and intelligence prove a theory wrong

[@chanyuanabigailparker9809]

soooo nice！

[@TheShutteredRoom]

Ideas and culture may be the same, not to get confounded with technological progress.

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[@MultiSaffran]

Similar institutions, yeah, not so much.

[@benjwipfler4750]

Similarity is relative

[@zacharycat]

To grow quickly requires capital for expansion, which means borrowing and paying interest on debt. All that debt eventually brings growth to a standstill

[@euanaustin807]

zacharycat This is typically the case. Yet, debt can be used to finance investments that deliver returns greater than the debt and added interest, making the debt worthwhile :)

[@ava4088]

👏👏👏

[@Themessageislam1234]

4:52 where is turkey on this graph?

[@furkanatak4668]

Read the note right bottom of the screen. Back then we have approximately 400$ per capita. We now have 10000$ roughly. But that's just an example of growth of catch up economies.

[@mos5139]

Education is not subject to diminishing returns.

[@zachstack3133]

Actually it is. Every extra year of education is going to increase your productivity by less and less. The difference in productivity between a high school education person and a PhD person isn't as dramatic as between a absolutely illiterate person who never went to school and a high school person.

[@justinlamofficial]

@@zachstack3133 Agreed

[@davidblumenshine2410]

some of those arguments in the beginning are pretty nonsensical

[@TheGoldenFluzzleBuff]

I love how there are 22 dislikes. Like 22 people came in here and said "Hhhmmm, this educational video is wrong" and then disliked and left. I imagine they're the same kinds of people to call me a democRAT or republiCANT in the comments of a news article

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[@balkanacpajo1835]

first