Sunday, April 27, 2014

Week 6: Diminishing Returns Here, There and Everywhere

Is it bad economics if we do not save all premature babies despite the fact that we have the technology to do so?

This was one of the activity questions presented to us in class during week 6 and while some found it difficult to discuss initially, it actually did spark quite an intriguing but complicated debate.  Despite the fact that topics like choosing not to try and save the lives of babies can be unpleasant to talk about, they are issues that do need discussing.

My initial reaction was to start thinking about the actual survival of premature babies born at different stages of development and why health practitioners would choose to save some and not others.  Babies are considered to be premature if they are born at anytime prior to 37 weeks of gestation, with full-term being 40 weeks.  The earlier a baby is born, the less likely it is to survive and the more likely it is to suffer from various complications.  The point at which neonates have a decent chance of surviving or being "viable" assuming that there is access to advanced technology is generally considered to be 24 weeks (although some believe 25 or even 26 weeks may be more appropriate) (Lavin et al. 2006; Powell et al. 2012).  There definitely seems to be a physiological limit at 22 weeks of development, prior to which survival is impossible regardless of technology, while between 22 weeks and 23 weeks and 6 days, there is tremendous uncertainty (Lavin et al. 2006; Powell et al. 2012).  Weight can play a role (Powell et al. 2012), but having worked in a maternity ward, I also noticed that health practitioners will often have a feeling about whether a baby will make it or not, outside of statistics and readings.  Perhaps that foresight is an unconscious recognition of signs and patterns that are common among those that survive.  Either way, not all premature babies start off with an equal chance at survival.  Some only need to spend a week or two in hospital while others need months of constant intensive treatment.

Okay, so we've established that there is a point at which it is biologically impossible to save premature babies, a period during which survival is highly improbable, but possible and a stage past which the chances of living are very good, especially with medical intervention.  Next, we started thinking about those who do survive and how well they do.  Unfortunately, saving the life of a premature neonate does not ensure that he or she will go on to lead a long and productive life.  The truth is that premature babies are at higher risk of suffering from significant health problems (such as stroke or infection after birth), disabilities as well as developmental delays, especially if they are born very early and/or with complications.  That means that some premature babies could initially be saved only to die shortly thereafter while others may be kept alive but in a vegetative or profoundly disabled state.  This is certainly the reason why studies have shown that the majority of health practitioners (physicians and nurses) discourage resuscitation in most cases when the baby is born at or under 23 weeks of gestation (Lavin et al. 2006).  In fact in Holland, the policy is to allow babies born at or before 23 weeks to die peacefully without intervention (Wishart 2011).

Lastly I thought of the considerable amount of resources that it takes to keep a premature baby alive.  It costs roughly $5000 a day just to keep an incubator running, not to mention the man hours invested by medical staff who could be using that time to look after other patients.  A number of my classmates pointed out that the neonates who die later on or who go on to be severely disabled will generally be unable to repay the costs of keeping them alive to society and/or their families.  Therefore, keeping those babies alive will have no financial benefit later on but will rather create a deficit and perhaps that is why it is not bad economics to not save them.

If we combine all of these factors and create a graph, we see that the returns on saving all premature babies begin to flatten out over time.  

Let's imagine that we first save all of the babies born after 26 weeks of gestation with no complications.  The vast majority of those neonates will survive, thereby making the returns on investing in their care rather large.  Many of them won't have to spend much time in incubators and the work required to keep them alive will be less than if their cases were more complicated.  Next we start to save the less developed neonates with more complicated cases, say those born from 24 to 26 weeks.  Fewer of those will survive and they will likely have to spend more time in the incubators, thereby making the returns on investing in saving them smaller.  An even smaller margin of those born sooner (before 24 weeks) will live and so the returns on saving them will shrink even more.  Therefore, it does not make economic sense to save all premature babies because of diminishing returns.

The topic then turned to why economists dislike there being fewer women in the workforce than men.  It did take some rooting around for the answer, but we did get there eventually.  Assuming that men and women are equally educated and skilled, a greater proportion of men in the workforce may mean that women who are more educated or skilled and would be more productive are without a job.  Therefore, the productivity of the society is not all that it could be because its citizens are not being utilized to their full potential in the workforce.

Let's look at two societies with equally educated and skilled populations, but one has a male-dominated workforce and the other equal parts men and women working:

Now let's compare the productivity of those two societies:

Of course many of the women in a society where men are dominating the workforce may be choosing to be at home with their children, etc and we cannot say outright that they are not contributing to society in any way by doing that.  But, those contributions are harder to quantify in terms of numbers and dollars, particularly with the availability of inexpensive child care.  Obviously there are jobs that attract a higher percentage of workers of one gender over the other (for example nurses are predominantly female), but this scenario would assume that everything would even out in the end.  It would also assume that contributions include providing different perspectives and making a working group more dynamic.  The best example that we arrived in my opinion was sales.  In a sales team, having different perspectives on how to market your product or service to different people means that your team is more dynamic and having the best salespeople will make it more productive.  So if your team is made up of equally successful salesmen and women as opposed to a group of successful salesmen with some less successful salesmen, your team will not only be more well-rounded but have a higher number of more productive workers.  Again, it is best for the productivity of a society to have equal parts men and women in the workforce to minimize diminishing returns.

The further that we get into this course and the more that I learn about economics, the more that I am beginning to see that we truly live in a world of diminishing returns.  From misogyny in the workforce to saving premature neonates, they are everywhere.  Even on the weekend, I noticed an example of diminishing returns while walking through a market and looking at stalls selling jewellery.  I noticed that I spent a lot less time looking at shops with displays of large clusters of bracelets and earrings piled on top of each other and more time at stores showcasing only a few pieces in a more elegant, solitary fashion. 

Despite the fact that the price tags were fairly similar between stores, the jewellery at stores with only a few on display seemed to me to have a greater value, they just seemed to be worth more.  In contrast, the jewellery at stalls with lots of pieces seemed cheaper, less precious because they were only one of many and I found the displays too overwhelming to spend any serious time looking at individual pairs.  In the end I bought three pairs of earrings from a shop that only had around 15 on display instead of buying any from the stalls with hundreds of pairs to choose from.  I also noticed that I was not the only one shopping in this fashion, in fact from the number of people walking away empty-handed from the shops with busy displays, it did not seem like they were having a very successful weekend.

This experience has taught me that if I ever wanted to run a successful enterprise I should not dilute the products and/or services that I offer with excess, but instead concentrate my efforts on a few specific things to have the biggest possible impact.


Lavin JP, Kantak A, Ohlinger J, Kaempf JW, Tomlinson M, Campbell B, Fofah O, Edwards W, Allbright K, Hagen E, Suresh G & Schriefer J 2006, 'Attitudes of Obstetric and Pediatric Health Care Providers Toward Resuscitation of Infants Who Are Born at the Margins of Viability', Pediatrics, vol. 118, no. 2, p. S169-S176, viewed 19 April 2014, <>.

Powell TL, Parker L, Dedrick CF, Barrera CM, Di Salvo D,  Erdman F, Huff SP & Saunders M 2012, 'Decisions and Dilemmas Related to Resuscitation of Infants Born on the Verge of Viability', NAINR. vol. 12, no. 1, p. 27-32, viewed 19 April 2014, <>.

Wishart A 2011, 'Premature babies battle for survival at 'edge of life'', BBC, viewed 19 April 2014, <>.

Thursday, April 17, 2014

Week 6: Macroeconomics, Growth and the Value of Investing in Human Capital

Macroeconomics is the overall study of entire economies and how they behave including the cycles of peaks and troughs as well as what causes them in both the long and short term.  It also involves the examination of employment rates, inflation, growth and trade.

There are two schools of thought:
  • The Neoclassic (or Chicago) School, which holds the belief that governments should not interfere or play any role in financial markets because they function better without outside involvement.
  • The New Keynesian School, which believes that governments should play a role in markets, helping to stimulate and stabilize economies, minimizing the impacts of recessions and preventing/monitor monopolies to reduce negative repercussions for countries and their populations. 
 So how do markets work?  How do they continue to grow and increase their output?  That's what growth theories try to explain.

The basics of economic growth are that saving, investment and population growth influence input factors including the size of the workforce, capital stock and technology which in turn determine output or production.

There are two main growth theories: the Neoclassical Growth Model and the Endogenous Growth Model.

I've tried to sum up the two models as I understand them:

The Neoclassical (or Exogenous) Growth Model, which assumes that people will continue to saving the same amount over time.  Based on the principle of diminishing returns, both savings and production will eventually flatten out in this model while the investment required will keep growing exponentially.  Unfortunately, this model fails to take into consideration the impacts of technology.

The Endogenous Growth Model, which states that savings is always larger than the investment needed and does not in fact flat line (i.e. the people do not continue saving the same amount of money from what they make), but continues growing exponentially and so does production.  This model does factor in the influence technology on growing the economy.  But, this model violates microeconomic principles and suggests that eventually all sectors will be ruled by monopolies.

Ultimately it was important that a few things happen, among them:
  1. That other elements such as technological developments and social benefits (including human capital i.e. improvements in education and health) be factored into the equation and
  2. That private returns from capital investment and social returns be accounted for individually.  The premise being that some of the benefits don't go to the private sector, but instead leak out and are enjoyed by the rest of society (for example an innovation that sparks the development of other products).
It is important to acknowledge that we continue to see technological advancements that change the landscape of markets, providing more and more opportunities and helping to push economies forward.

There are also spill over effects from innovation and investment in human capital.  For example, investing in education might lead to someone learning something that helps them invent a product or think of a service that should be provided for people.  That new product or service might trigger the idea for another related product or service in someone else and so on and so on.

Bloom and Canning (2008) presented several arguments for health as an investment good, with which I definitely agree:

  • Investing in education and health generally results in healthier people who are more productive and conscientious (as well as capable) of saving for the future and building bigger, more sustainable enterprises because they live longer.   
  • Healthy people are sick less often and therefore take fewer days off from school and work.  When they are present, they are more effective thanks to higher energy levels and the ability to focus better.  They gain more experience over time and are usually more concerned with increasing their knowledge through education and training to improve their employment prospects and creative abilities.  As a result, they learn more, develop better products and services, have higher wages and go on to raise healthy, educated children that contribute to the economy as well as society.  
  • A healthy and well-educated society attracts more investment because it has the capability of being more productive. 

We can use this information regarding the links between health, education, income and the economy to examine why countries in sub-Saharan Africa have struggled with crippling poverty and very little growth for so long.  The region continues to be the most affected by HIV/AIDS, tuberculosis and malaria in the world.  That burden, compounded by political instability, high rates of violence and civil unrest has severely impeded the ability of people to consistently attend school and work, let alone perform well.  In fact, a review of studies performed by Russell (2004) concluded that the direct (i.e. medical costs) and indirect costs (i.e. lost wages) of TB and HIV/AIDS amounted to more than 10% of the household's income on average in profoundly disadvantaged settings like those common in sub-Saharan Africa.  Such a massive amount of lost income can be disastrous, especially for families who are already living in poverty.  In addition, the majority of the populations in the region see very little financial or social returns on the many natural resources extracted from these countries thanks to corrupt individuals, businesses and governments.

The combination of poverty and poor health can be passed from one generation to the next through a number of ways, thereby also compromising the future productivity and economic growth of a country.  Parents who have limited knowledge and earn less (either because of poor health and/or a lack of education/experience), have fewer resources with which to provide their families access to proper healthcare, nutritious food, clean water, a safe living environment and hygiene and sanitation.  Consequently, their children are also more likely to suffer from poor health, which has been shown to be related to increased absenteeism from school and therefore missed learning opportunities as well as lower levels of intellectual development (Bloom, Canning & Jamison 2004; Currie 2009).  Even when these children are in school, they may have more difficulty focusing and performing to the best of their abilities because they feel unwell or have lower energy levels.  Parents could be forced to frequently take time off of work to care for their sick children, potentially reducing their income even further if they do not have carer's leave (Currie 2009).  To make matters worse, poor health conditions from childhood could persist into adulthood.  All of these factors negatively impact the younger generation's ability to work efficiently, further their education, find decent employment and earn money as adults so that they can take care of themselves and their families, thus perpetuating the vicious cycle.  In fact, evidence has shown that individuals who were unhealthy as children go on to lead shorter and less productive lives (Bloom, Canning & Jamison 2004; Hodge 2014b)

In developing countries, the intergenerational effects of poor health and poverty are magnified by very limited or even non-existent social services.  In many cases when a family is struck by illness, older children (especially girls) become caregivers for younger siblings, their parents and even grandparents and therefore may miss out on going to school often or even altogether (UNFPA n.d.; Kangethe 2010).  Without outside intervention, the same issues almost inevitably repeat themselves when these children who have not had the benefit of a complete and thorough education go on to have children of their own (often at a very young age) and must try to support their families.

There is some evidence to suggest that the intergenerational cycle of poverty may begin during pregnancy (Currie 2009).  The "fetal programming hypothesis" theorizes that the environment in utero can result in changes in the epigenome that lead to disease, however this is very difficult to prove as the resulting conditions can take years to surface (Petronis 2010).  A study published in 2007 found that women from low socioeconomic areas of California had a 6% greater chance of giving birth to low weight babies (Curry & Moretti).  The women in this cohort were also more likely to have had low birth weights themselves as infants.  The decreased birth weights reported in this case could be attributed to poor nutrition during pregnancy and/or reduced levels of maternal education associated with low socioeconomic status (Currie 2009; Hodge 2014).  These findings becomes particularly pertinent when coupled with data from the UK indicating that individuals born in 1958 with low birth weights were more likely to be unemployed in adulthood (Currie & Hyson 1999; Case, Fertig & Paxson 2005).

It is quite clear that without efforts to address inequalities between socioeconomic groups, there is a strong probability that parents who are affected by ill health, poor levels of education and poverty will pass those issues on to their children.

So with all of this information in mind, why did the Australian Prime Minister promise to invest in infrastructure including roads, bridges, airports, railways and ports in his election campaign? Should he have mentioned investing in anything else?

Solid infrastructure such as roads and railways, etc enable economic growth as it makes the transport of people and goods easier, safer and faster.  Mr. Abbott undoubtedly knew that the populous would be supportive of better mobility, which is why he was so keen to include that promise as part of his campaign platform.  But, there is a saturation point at which point the benefits cease to continue expanding for each individual transport-related improvement.

Mr. Abbott should have included health and education-related infrastructure such as schools and hospitals in his investment plans seeing as human capital has so many benefits for sustaining long-term economic growth and staving off stagnation. 

A short story from my archives:

When I was in Uganda, I became infected with malaria and soon learned just how disruptive the effects of illness can be.  It was so commonplace there that every time someone was sick, everyone (especially locals) would instantly assume that it was malaria and most foreigners who were there for an extended period of time considered it a right of passage.  When I had it, I could barely function.  I struggled to get out of bed and made it halfway to work at which point I realized that I only had enough energy left to make it back home.  We had planned a weekend tour of the Queen Elizabeth National Park and I was only able to wake up for short periods of time to take pictures before going back to sleep in the back of the van.

This is one of those pictures.  The bags under my eyes show just how thoroughly exhausted I was by the illness.

Even after receiving treatment, it took me quite a while to get my energy levels back to normal so that I could go back to work on a more full-time basis and feel like I was really present and actively contributing.  Evidently, I should have been more diligent in my prevention efforts instead of allowing myself to become so blasé about getting malaria, but it was difficult to keep myself from falling in with the local mindset, especially when the side effects of my antimalarials were so strong and undesirable. 

Investing in people through health and education is evidently worthwhile from all perspectives, including those related to economic growth.



Bloom DE & Canning D 2008, Population Health and Economic
Growth, Commission on Growth and Development Working Paper No. 24.
Available at <>.[15 April 2014].

Bloom DE, Canning D & Jamison DR 2004, ‘Health, wealth and welfare’, Finance and Development, vol. 41, no. 1, pp. 10-15.  Available from: <>. [6 May 2014].

Case A, Fertig A & Paxson C 2005, ‘The lasting impact of childhood health and circumstance’, Journal of Health Economics,  vol. 24, no. 2, pp. 365-389.  Available from:
<>. [7 May 2014].

Currie J & Hyson R 1999, ‘Is the impact of health shocks cushioned by socioeconomic status?  The case of low birth weight’, The American Economic Review, vol. 89, no. 2, pp. 245-250.  Available from: <>. [7 May 2014].

Currie J & Moretti E, ‘Biology as Destiny? Short and Long-Run Determinants of Intergenerational Transmission of Birth Weight’, Journal of Labor Economics, vol. 25, no. 2, pp. 231-264.  Available from: <>. [7 May 2014].  

Currie J 2009, ‘Healthy, wealthy, and wise: Socioeconomic status, poor health in childhood, and human capital development’, Journal of Economic Literature, vol. 47, no. 1, pp. 87-122.  Available from: <>. [7 May 2014].

Hodge A 2014, Topic 6: Health and Economic Development from a Micro Perspective, lecture notes distributed in Health and Development PUBH7113 at The University of Queensland, Brisbane, 16 April 2014.

Kangethe S 2010, 'The Dangers of Involving Children as Family Caregivers of Palliative Home-Based-Care to Advanced HIV/AIDS Patients', Indian Journal of Palliative Care, vol. 16, no. 3, pp. 117-122.  Available from: <>. [15 April 2014].

Petronis A 2010, ‘Epigenetics as a unifying principle in the aetiology of complex traits and diseases’, Nature, 465:721-727.  Available from: <>. [16 April 2014].

Russell S 2004, 'The Economic Burden of Illness for Households in Developing Countries: A Review of Studies Focusing on Malaria, Tuberculosis and Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome',  The American Journal of Tropical Medicine and Hygiene, vol. 71, supply 2, pp. 147-155.  Available at <>. [15 April 2014].

UNFPA n.d., Caregiving: Women and HIV/AIDS: Confronting the Crisis.  Available from: <>. [16 April 2014].