If you were to ask Robinson Crusoe why he sacrificed units of consumption goods production to build a fishing net, he would tell you unequivocally that with the aid of a net, the units of consumption goods he would be able to produce in the future would be mul- tiplied many fold. Robinson understood capital’s con- tribution to his labor productivity. And he’s not alone.
Producers in modern economies like the United States appreciate that connection no less. Americans don’t just invest in the production of physical capital–fishing nets, tractors, construction cranes, oil-refineries–but in the production of human capital as well. This we learned well: Investing our population with greater knowledge makes our population more productive.
You may not be able to“see”a worker’s BA or PhD while she’s at her workplace as you might see a worker operating a cement mixer to pave a driveway, but that BA or PhD is perhaps our most productive form of capital. And we produce a lot of it. Table 1 records the growth of our investments in public and private insti- tutions of higher education.
Degree-Granting Institutions of Higher Education, Selected Years 1979-2009
ALL INSTITUTIONS PUBLIC PRIVATE YEAR TOTAL 4-YR 2-YR TOTAL 4-YR 2-YR TOTAL 4-YR 2-YR 1979 3,152 1,957 1,195 1,475 549 926 1,677 1,408 269 1989 3,535 2,127 1,408 1,563 595 968 1,972 1,532 440 1999 4,048 2,335 1,713 1,681 612 1,069 2,367 1,723 644 2009 4,409 2,719 1,690 1,676 652 1,024 2,733 2,067 666 Digest of Education Statistics, http://nces.ed.gov/programs/digest/
d09/tables/dt09_265.asp
Between 1998 and 2008, the number of full-time college students increased by 37 percent and part-time by 24 percent. The increase in women’s enrollment outpaced men 34 percent to 29 percent. The faculty employed in 2007 to produce this vast supply of human capital was 1.4 million, 0.7 full-time, 0.7 part-time. As well, 0.3 million graduate assistants supplemented the faculty input.
Result: During the 2007-2008 academic year, degree output numbered 750,000 associates, 1,563,000 BAs, 625,000 MAs, 91,300first-professional, and 63,700 PhDs.
These numbers reflect a remarkable increase over a decade. For example, the number of BA’s increased, 1997–1998 to 2007–2008, 32 percent, the number of White students earning BAs increased by 25 percent, Black students increased by 55 percent, Hispanic stu- dent increased by 86 percent, and Native American students by 46 percent. That’s a lot of human capital in the making.
Innovations creating even more advanced technology are possible. The exciting conclusion we reach, for the simple Robinson Crusoe economy and for our own, is that there are no impassable limits to the growth potential of our economy. Resource limitations may impose a short-run constraint on what we are able to produce in any period of time, but given enough time and enough minds, new technology reduces the severity of scarcity. Our grandchildren will no doubt regard our technology as rather primitive, but their grandchildren will consider their technology as hardly more advanced.
The Indestructible Nature of Ideas
Capital goods can be destroyed, but ideas are far more durable. Wars can bring havoc to any economy’s resource base. People’s lives are disrupted. Many do not survive the war. Whole factories, complete with machinery, and roads, bridges, railway networks, electric grids, energy facilities, and any other form of the nation’s capital stock can be reduced to rubble. But capital goods can also be replaced quickly. Look at Exhibit 5.
AD represents the economy’s prewar production possibilities curve. The destructive effects of war, particularly on its people and capital stock, is shown as an inward shift to the left of the curve, toA0D0. Recovery, however, can be whole and swift because people, even with minimal capital stock, don’t have to reinvent the wheel. Human capital once acquired, is virtually indestructible. In time, applying more advanced technologically-focused knowledge, the economy can shift its production possibilities curve back again to AD and even beyond to A00D00.
The physical devastation of Japan and Europe caused by World War II had some rather paradoxical consequences for these war-torn economies. Because so much of their capital stock in the form of factories and machinery was destroyed, these economies were forced to start over again. But they started over with the most advanced machinery and the most up-to-date factories. The result was an incredible increase in their economies’ productivity. Ironically, economies that were spared the devastation of the war had their prewar technology still intact
EXHIBIT 5 Inward and Outward Shifts of the Production Possibilities Curve
With resources destroyed, the economy’s production possibilities decrease. The decrease is depicted by the shift to the left of the pro- duction possibilities curve, fromADtoA0D0. In time, with the rebuilding of resources and the use of more advanced technology, the economy can recoup and even surpass the levels of production previously attained. This is shown in the shift to the right of the pro- duction possibilities curve, fromA0D0 toA00D00.
CAPITAL GOODS
CONSUMPTION GOODS
PRODUCTION POSSIBILITIES CURVE A''
D' D D'' A
A' How are technological
change and economic growth related?
38 PART 1 Find more at http://www.downloadslide.comTHE BASICS OF ECONOMIC ANALYSIS
and grew less rapidly than those whose capital stocks were destroyed and replaced with the more modern technology.
National Security, Conventional War, and Terrorism in the 21st Century
It seems reasonable to suppose that by shifting resources away from the pro- duction of other goods to the production of national security goods, a national security–minded nation acquires more national security. This is indeed what we see depicted in the move from a to b along the production possibilities curve of Panela in Exhibit A.
But that may not be the entire story. The production possibilities analysis involving national security is much more complicated than that shown in Panela.
Why more complicated? Because a nation’s security depends not only on the resources it allocates to the production of security goods but also on the quantity of security goods other nations produce. That is, a nation’s security is as much contingent upon what other nations commit to security goods production as it is upon its own military preparedness.
Producing National Security Panelb in Exhibit A depicts two nations—
Aggressive (AGG) and Defensive (DEF)—each with identical sets of resources. If AGG’s initial move along its production possibilities curve from a to b—more security goods, less other goods—compels DEF to move from x to y—more security goods, less other goods—then AGG’s real national security vis-à-vis DEF remains virtually unchanged. The 200 units of AGG’s security goods confronting DEF’s 200 units of security goods is the security equivalence of 100 units facing 100 units. In other words, DEF’s security response to AGG’s security initiative results in both AGG and DEF having less of other goods with no increase in national security.
If AGG opts to do whatever it takes to acquire a national security edge over DEF, say, moving toc, and if DEF counters in kind by moving to z, a two-nation spiral into a resource-consuming arms race results. Depressing, isn’t it? Producing more security goods to acquire more security turns out to be nothing more than an illusion. Is there a way out? Perhaps at some point in the arms race, the oppor- tunity costs associated with the two-nation spiraling becomes prohibitive to one or both nations. Conceivably, a negotiated arms treaty involving on-site inspection and reciprocal reductions in weaponry would reverse the perverse spiral.
On the other hand, if AGG is more willing than DEF to accept the increasing opportunity costs involved in acquiring more security goods, then AGG could end up, in fact, with greater national security. But what AGG gains in security, DEF loses.
Going to War “Strike while the fire’s hot!” Can you imagine some circumstance when a preemptive,first-strike war becomes a preferred option? If moving from a to b in Panel c gives AGG a clear but only temporary national security advantage, AGG may decide to use that advantage to reduce DEF’s options. AGG may have correctly calculated that the opportunity cost of going to war is less than the opportunity cost associated with a resource-draining, no-war, no-peace security strategy.
EXHIBIT A
1,000 800
0
100 200 PANEL a
OTHER GOODS
SECURITY a
b
1,000 800
0
100 200 AGG
OTHER GOODS
SECURITY a
b c
1,000 800
0
100 200 DEF PANEL b
(NATIONAL SECURITY)
OTHER GOODS
SECURITY x
y z
1,000 800
0
100 200 AGG
OTHER GOODS
SECURITY a
b
600
0 50
DEF PANEL c
(WAR)
OTHER GOODS
SECURITY x
y z w
1,000 1,000
1,500
0 100
AGG
OTHER GOODS
SECURITY
100 200 300 a
600
0
DEF PANEL d
(TERRORISM)
OTHER GOODS
SECURITY x’
w’
y’
z’
40 PART 1 Find more at http://www.downloadslide.comTHE BASICS OF ECONOMIC ANALYSIS
The aim of an AGGfirst-strike war would be to destroy DEF's resource base, rendering it incapable of mounting an effective military response. In Panel c, AGG’s first-strike assault targets DEF’s military defenses and impairs its ability to produce goods. DEF’s production possibilities curve shifts inward toward the origin. DEF now ends up at w, capable of producing only 50 units of national security and 600 units of other goods. That is, AGG’s first strike pays off:
Its national security edge increases by a factor of 4, from a 100-to-100 to a 200-to-50 ratio.
But if AGG miscalculates and DEF is capable of retaliating DEF—soldier for soldier, bomb for bomb, missile for missile—the idea of gaining security through war becomes fantasy. In reality, for both AGG and DEF, a war not only involves movements along their production possibilities curves from other goods to security goods but because their resource bases are partially destroyed, also involves inward shifts of their production possibilities curves. Both end up with considerably less of everything.
But what if the techniques and cultures of warfare change quickly and dra- matically? What if the opportunity cost to a nation of inflicting considerable human and physical damage on another nation becomes miniscule?
The Economics of Terrorism This is precisely what terrorism, either state- supported or not, can do: Create massive damage to a targeted economy at bar- gain prices. A suicide bomber, strapped with explosives, picks a terrorist site and can, if successful, destroy a café and perhaps dozens of people. The act itself is inconsequential. But its randomness and repetition aren’t. Recruiting and training suicide bombers and producing ample supplies of explosive belts might be less costly than a New Years' celebration in Times Square. But if repeated often enough, and if left essentially unchecked, terrorist acts can quickly erode a tar- geted population’s confidence in its state’s ability to provide personal and national security.
Lack of confidence in the nation’s ability to provide security translates into lack of confidence in the nation’s future. The targeted nation’s economic vitality slackens, and fewer resources are committed to production, some disappearing entirely all this is depicted in the inward shift of the targeted nation’s production possibilities curve. Less of everything is produced.
The conventional military response is no longer effective because a terrorist attack requires neither soldiers nor missiles. That is, the security provided by the targeted nation’s production of conventional security goods deteriorates, if not fully, then at least dramatically.
Look again at Paneld. If AGG chooses to become a terrorist-supporting state, it can remain ata—no notable shift of resources to terrorist-mode security goods—yet force DEF to move fromx0 toy0 orz0, or evenw0. But even terrorism’s advantage may ultimately prove to be more illusionary than real. Why illusion?
Because terrorist organizations, although relatively inexpensive as a striking force, still require safe havens, a geography that condones and aids the recruiting, training, and equipping of terrorists and that provides logistic support for the ter- rorist activity. Without a nation’s protective shield, terrorist organizations cannot function effectively, if at all. In other words, DEF cannot respond to the terrorism itself, but might to the state supporting it. If it does, AGG’s own national security becomes once again compromised.