4. The fallacy of
composition
• What is true of the parts is true of the whole
• Examples:
• Farmer with bumper crop
• Keynes’ paradox of thrift
5. The neoclassical
production function
• Sure individual firms have a production
function
• Does this imply that the economy has a
production function?
• Non-trivial because of the fallacy of
composition -- Cambridge critique
6. Total Factor
Productivity
• Suppose we own a farm
• 10 workers in year 1 and we produce 100
units of a crop
• In year 2, we still have 10 workers, but how
much do we produce?
12. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible
13. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible
Okay
Debatable
14. Why is efficiency key?
• Can’t produce more with the same inputs
unless you’re more efficient
• This is a given
18. Ronald Coase (Nobel 1991)
• “In my youth it was said
that what was too silly
to be said may be sung.
In modern economics it
may be put into
mathematics.”
