Valentine’s Day Is Over: Getting Out Of The Steady State

Now that the Valentine’s Day chocolates have been consumed and flowers have withered and died, many of us go back to the same old routines in our relationships. That is, we go to work, be nice to each other (hopefully), and continue to use our comparative advantages at home. We go back to our “steady-state”. Which is not terrible, but not all that good.

Hold on to your seats, we’re going for a ride down week 4 of introductory macroeconomics.

What’s cool about Valentine’s Day and similar holidays is that it keeps our relationships from going completely stale. But, I would imagine, that after 5, 10, or 30 years, even the holidays won’t keep your relationships from getting old.

In economics, we can attribute this staleness to a couple of concepts: depreciation and the law of diminishing returns.

Depreciation is simply the wearing and tearing of capital. Cars break down, your home’s pipes get rusty, your potato chips get bleh. On top of that, the law of diminishing returns states that the first slice of pizza is not as great as the 20th slice of pizza. (Don’t look up the actual definition, this one is better.)

With both of these concepts working together, the future of your relationship looks grim.

The Solow Model

Robert Solow’s Model of Economic Growth, taught in introductory macroeconomic classes all across the United States, has a Nobel-Prize-winning prediction. It says that at some point, both poor and rich nations will stop experiencing economic growth. They will reach a “steady-state” in which all the savings of the country go toward fixing the crap that breaks down. This can easily describe many of our relationships. We invest enough love to get us out of the dog house when the time comes to go to the dog house but, oftentimes, not enough to foster growth.

Check out Figure 1. Say, your spouse leaves for a month on a work trip. This can be seen as a negative shock to the current stock of love capital. So, this means there’s not much love around to invest (your spouse is gone, remember?) thus, you are not as content as you were. When your spouse comes back, you go out to dinner, “cuddle” a whole lot, and you get back to your steady state. (You know I’m right.) The depreciation rate after your spouse gets back is much lower than the rate at which you invest love. So you see rapid growth (contentment) in the relationship. Once you reach your steady state, things are back to kind of normal. You know, the same ‘ole relationship.

Valentine’s Day can be seen as a bump up the stock of “love capital”, right? Society tells you to purchase chocolates and roses and to be extra nice to your spouse. So you bump up the love stock for the day. However, if you notice, on V-Day, the depreciation rate is higher than the investment rate (green line is above the red line). Because the depreciation rate is higher than your usual investment of love to the relationship, you simply go back to the steady-state (the blue heart). This graph literally describes the chocolates being consumed and roses whithering away.

Obviously, this model is a bit limiting, right? Not only do we see countries continuing to experience economic growth even after seemingly reaching a steady-state, but we also see old folks displaying a fresh love for each other that is almost sickening. How is this possible?

Solow, attributes long-term economic growth to “technological change” and drops the mic. But, what does that mean? And, how and why does technological change even happen?

Romer’s Model of Growth

Paul Romer—Nobel laureate in 2018—challenged Solow’s model by omitting this “technological change” and accrediting long-term economic growth to indefinite investments in human capital. If we look at the Solow graph, growth can only occur if we increase the investment rate, but at some point, it’ll meet up with depreciation and you’ll be at a steady-state again. And, let’s get real…there are only 24 hours in a day. We can only invest so much into our relationships.

Romer, on the other hand, claims it’s not about how much you invest, but about discovering new ways for your capital to work better and more efficiently for you. This requires just simply changing it up. “Human history teaches us…that economic growth springs from better recipes, not just from more cooking.” He’s right! “Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable.”

Changing The Recipe

With fresh new ideas, you can escape the trap of the steady-state and become a sickening old couple constantly growing in their relationship.