Causes of Long-Run Growth

Question 1

Describe the Spread of food package?

Answer 1

-shape of continents favours spread of food packages in some directions but not others
-East-west axis across Euroasia, same latitude
-Africa has giant natural barrier of the sahara desert (unfavorable)
-Superiority of farming over hunter-gathering–> productive agriculture feeds many people, dont have to work in the fields anymore, leads to diversification of labor–>creation of armies, bureaucrats, inventors, writing

Question 2

What is the Solow Model?

Answer 2

The Solow Growth Model provides insights into the determinants of economic growth, emphasizing the roles of capital (K), labor (L), and technology.

Question 3

What are the 3 ultimate causes of growth?

Answer 3

1. Geography
2. Culture
3. Institutions

Question 4

What are the 3 variations of Geography?

Answer 4

climate, “Guns, germs and steel” and disease

Question 5

Explain why climate is a factor in the geographical causes of growth and why its unfounded.

Answer 5

(Montesquieu’s theory): Warm climate makes people unfit to be governed by democracy (the greater the distance from the equator = the greater the GDP)

Falsehood: Correlation is not causation (reverse causality + omitted variable bias)

Question 6

Explain why “Guns, germs and steel” is a factor in the geographical causes of growth.

Answer 6

Differences in geography, climate,and natural resources (i.e., domesticable plants and animals) lead to different rates of societal development. (Jared Diamond’s ultimate causes of inequality).

Peace’s of luck explain why certain people and areas in the world were better off then others.

-Peace of luck #1: Geography ie. The mediterranean climate (better for agriculture, which permitted shorter winters and longer summers)

-Peace of luck #2: The amount of grass species ie. the fertile crescent had many from wheat, barley, pea, lentil, chickpea and flax

-Peace of luck #3: Domesticable animals, which helped with agriculture ie. the Big 5 (sheep, goat, cow, pig, horse)

(Close contact with animals + high densities (thanks to productive agriculture): crowd diseases = ends up being an advantage as immune systems developed to fight these crowd diseases).

-Peace of luck #4: The spread of food package ie. in Eurasis the surface is much more flat = easier to travel on.

*because they were so productive in other things, people had time to do other things like build the army, bureaucrats, invent and write.

Question 7

What’s Jared Diamond’s explanation on why Europe colonized the rest of the world. What are the problems with his theory?

Answer 7

• the fertile crescent didn’t dominate due to overexploitation, China didn’t dominate because they only had themselves and couldn’t rely on others, but Europe couldex: Christopher Columbus got rejected for his explorations by Italy, France and Portugal until Spain said Yes→ Problems with this theory: it’s all about luck, there’s no further analysis past 1492, which is when colonization official commenced and it’s difficult to test this theory. + the only cause of growth = A unique package of climate + domesticable animals + plants

Question 8

Explain why disease is a factor in the geographical causes of growth.

Answer 8

close contact with animal+ high densities (thanks to productive agriculture) led to crowd diseases in Eurasia, where people then over time developed immunity to these diseases

Question 9

China (guns, germs, steel)

Answer 9

-Very geographically homogeneous, no natural barriers
-favored a unified, centralized empire subject to arbitrary decisions by leaders
-in 15th century, largest naval fleet on earth, ships were much superior to european ships
-but, there was power struggle stopped oceangoing shipping; emperors banned oceangoing voyages because they were worried about threats to their power from travelling merchants

Question 10

European (guns, germs, steel)

Answer 10

-very heterogeneous in terms geography, languages, societies

Question 11

Summary of guns, germs, and steel hypothesis

Answer 11

-availability of domesticable plants and animals explains why europe colonized the rest of the world, and not the opposite
-implication of this theory–> the world is explained by geography and history in a deterministic way–> impossible of change the course of history

Question 12

Problems with the “guns germs and steel” theory

Answer 12

-no place for incentives
-in other words, give people the appropriate amount of domesticable plants and animals, and they will work hard and prosper: is this true?
-what about incentives to work hard?
-in other words, maybe domesticable plants and animals are necessary, but no sufficient, conditions for growth
-but are these things really necessary untestable

Question 13

What does the Protestant Ethic and The Spirit of Capitalism Weber 1905

Answer 13

example of societies having different culture that determine economic performance
-Protestantism: hard work, thrift, saving, economic success
-Different from catholicism (or caste system in india): in the caste system where you are born determines what you will do for your job
-seems to be a correlation between religion and economic development: protestant countries do better, catholic and islamic do worse

Question 14

Problem with culture theory

Answer 14

-some protestant countries are not doing so well
-some catholic countries are doing well
-islamic empire was one of the most successful and innovative in 11th-12th century (science, mathematics) there is nothing in the quran against commerce or innovation

Question 15

Protestant ethic: Natural experiment

Answer 15

-Peace of Augsbur 1555: princes got the right to impose their preferred denomination upon their subjects
-some cities became protestant and some stayed catholic
-measure development by city size (argument is that only a very productive agriculture can feed big cities, therefore large cities= proxy for economic development)
-hypothesis: protestant cities should grow more
-hypothesis was incorrect–> denomination did not effect growth as all cities grew the same amount

Question 16

What is Douglas Norths definition of institutions?

Answer 16

The humanly devised constraints that shape human interaction (informal known as the rules of the game).

Question 17

What are the 2 main functions of insitutions?

Answer 17

1. Facilitating cooperation between private actors, gains from trade (horizontal fucntion)
2. Restraining powerful actors, especially predatory governments (vertical function)

Question 18

What is the difference between inclusive and exclusive institutions?

Answer 18

inclusive = Benefit everyone in society
exclusive = which only benefit small sub-section (dictatorship, crony capitalism)

Question 19

What are the 2 strategies when facilitating cooperation

Answer 19

Honesty or dishonesty

Question 20

What is the Nash equilibrium?

Answer 20

The best outcome if everyone acts in their own self-interest, because they don’t know what the other is doing (ie. being dishonest will always be the best solution)

Question 21

Institutions vs Organizations

Answer 21

McGill and World Bank are not institutions but, rather, organizations
-Analogy: Rules = Institutions, Players = Organizations, Referee = Third-Party enforcement

Question 22

Formal Institution

Answer 22

Constitution, law
-political institutions: democracy, dictatorship, presidential system, parliamentary system, multi-party system, one-party system
-economic institutions: free markets, central planning, labor regulations, private property rights, communal property rights

Question 23

Informal Institutions

Answer 23

Social norms
-rules of religions
-marriage
-family

Question 24

Solution to the Nash Equilibrium

Answer 24

a big fine if you are dishonest–> then more incentive to be honest

Question 25

What are the issues with Exchange fines

Answer 25

problems of monitoring, enforcing, delays, corruption exist, making fining/legal punishment not always an easy solution

Question 26

Another solution for Prisoner’s Dilemma is exchange repetition, describe it.

Answer 26

“always play honest. If the other plays dishonest, play dishonest forever”
-in other words: “ill never steal from you. But if you steal from me, ill never do business with you anymore”
-tit-for-tat strategy
- “Grim Trigger” strategy

Question 27

What is Third Variable prime/ omitted variable bias

Answer 27

there is a variable that is unaccounted for that is actually causing both factors

Question 28

What is Third Variable prime/ omitted variable bias

Answer 28

-for example, we could observe that ice cream sales and shark attacks both peak in the summer, can we conclude that ice cream sales cause shark attack? no, the omitted variable bias is that summer weather causes both an increase in ice cream sales as well as increase in shark attacks (because more people are at the beach)
-number of doctors and number of patient is another example

Question 29

What is the problem with the reputation solution?

Answer 29

Manages future expectations. Only works if there are other potential partners

→ It is self-enforcing as small payoff forever > one-time big payoff (only problem is what if its not infinite, on the last try there’s a one-shot game = dishonesty, whicb could lead to a backward induction of cooperation)