I’m curious to hear your thoughts a bit more about if we can salvage SWE by introducing non-standard preferences.
Minor quibble: “There is then no straightforward sense in which economic growth has historically been exponential, the central stylized fact which SWE and semi-endogenous models both seek to explain”
I agree that there is no consumption aggregate under non-homothetic preferences, but we can still say economic growth has been exponential in the sense that GDP growth is exponential. Perhaps it is not a very meaningful number under non-homothetic preferences, as you have argued elsewhere, but it still exists. Do you have thoughts on why GDP growth has been exponential in a model without a consumption aggregate?
And yeah, that’s fair. One possible SWE-style story I sort of hint at there is that we have preferences like the ones I use in the horses paper; process efficiency for any given product grows exponentially with a fixed population; and there are fixed labor costs to producing any given product. In this case, it’s clear that measured GDP/capita growth will be exponential (but all “vertical”) with a fixed population. But if you set things up in just the right way, so that measured GDP always increases by the same proportion when the range of products increases by some marginal proportion, it will also be exponential with a growing population (“vertical”+”horizontal”).
But I think it’s hard to not have this all be a bit ad-hoc / knife-edge. E.g. you’ll typically have to start out ever less productive at making the new products, or else the contribution to real GDP of successive % increases in the product range will blow up: as you satiate in existing products, you’re willing to trade ever more of them for a proportional increase in variety. Alternatively, you can say that the range of products grows subexponentially when the population grows exponentially, because the fixed costs of the later products are higher.
Great paper, as always Phil.
I’m curious to hear your thoughts a bit more about if we can salvage SWE by introducing non-standard preferences.
Minor quibble: “There is then no straightforward sense in which economic growth has historically been exponential, the central stylized fact which SWE and semi-endogenous models both seek to explain”
I agree that there is no consumption aggregate under non-homothetic preferences, but we can still say economic growth has been exponential in the sense that GDP growth is exponential. Perhaps it is not a very meaningful number under non-homothetic preferences, as you have argued elsewhere, but it still exists. Do you have thoughts on why GDP growth has been exponential in a model without a consumption aggregate?
Thanks!
And yeah, that’s fair. One possible SWE-style story I sort of hint at there is that we have preferences like the ones I use in the horses paper; process efficiency for any given product grows exponentially with a fixed population; and there are fixed labor costs to producing any given product. In this case, it’s clear that measured GDP/capita growth will be exponential (but all “vertical”) with a fixed population. But if you set things up in just the right way, so that measured GDP always increases by the same proportion when the range of products increases by some marginal proportion, it will also be exponential with a growing population (“vertical”+”horizontal”).
But I think it’s hard to not have this all be a bit ad-hoc / knife-edge. E.g. you’ll typically have to start out ever less productive at making the new products, or else the contribution to real GDP of successive % increases in the product range will blow up: as you satiate in existing products, you’re willing to trade ever more of them for a proportional increase in variety. Alternatively, you can say that the range of products grows subexponentially when the population grows exponentially, because the fixed costs of the later products are higher.