Economics Links, 2/12/2026

Michael Magoon on postwar economic growth theory; Phil Magness on post-liberals; Schuyler Louie and others on housing demand; Casey Handmer on energy in the future

Michael Magoon writes,

Among the postwar development and growth economists, American economist Robert Solow (shown above) stands out as the figure who most clearly crystallized the era’s intellectual transformation. While others offered narratives of modernization, institutional insight, or descriptive measurement, Solow provided a precise analytical framework that revealed the deep structure of economic progress.

One of the projects of MIT economics in the postwar period was the neoclassical production function. Solow had studied under Wassily Leontief, who pioneered input-output tables. This method of analysis treated production as a rigid recipe for combining inputs to produce outputs, with no ability to adjust methods in response to market conditions. You need a fixed amount of tomatoes to make a salad, and if you have just three tomatoes, then you can’t get any more salad by piling on more lettuce or cucumbers.

Solow rebelled against this, and along with other MIT economists he worked instead with a mathematical model in which one can always get more output by using additional amounts of one of the outputs, but just with diminishing returns. You get more salad with more lettuce, but you are getting less satisfaction at the margin.

If the overall recipe has constant returns to scale (double all the inputs and you double output), this production function has the appealing property that in a competitive economy each input into the production process earns its marginal product. This enabled the MIT economist to predict that wages, in particular, would reflect the marginal product of labor, rather than be driven down to a margin of immiseration, which is what Marx predicted.

Phil Magness writes,

In a 2007 blog post, Deneen predicted an impending societal collapse from environmental degradation, noting “in all likelihood we’ll experience some severe civilizational dislocation in coming months and years as a result of peak oil.”

The post-liberal right is smugly ignorant of economics. So they grab onto fads like “peak oil” theory.

Schuyler Louie and others write,

We find that average income growth relates strongly to house price growth and that house prices generally keep pace with average income. However, there is almost no connection between average income growth and growth in housing supply. Instead, housing supply growth has a strong positive relationship with population growth. In fact, almost all metro areas saw housing units grow faster than their population—even in expensive residential markets like Los Angeles or San Francisco.

Pointer from Moses Sternstein, The authors are arguing against the view that supply restrictions are what drive up prices in places like LA or SF. Suppose we observe in city A that incomes are high and house prices are high, while in city B incomes are moderate and house prices are moderate. The authors want to argue that this observation comes from people with high human capital moving to city A. That could be the explanation. But another possibility is that supply restrictions in city A raise the cost of housing, so that people on moderate incomes leave city A. The average income in city A is high because moderate-income people cannot afford to live there.

My point is that the correlation of income with house prices does not necessarily have the causal relationship that the authors claim for it.

Casey Handmer writes,

At Terraform Industries, we’re pioneering the technology to convert cheap solar power, air, and water into synthetic natural gas and other hydrocarbons. Within the next five years, solar cost reductions will drive our process to be cost-preferred in all hydrocarbon import markets, and geological sources of oil and gas will never again be able to compete. Our grandchildren will be swimming in copious cheap energy and wondering what all that drilling was for.

Pointer from The Podcast Browser. You can read Claude's comments here.

In short, Handmer's fundamental thesis about learning curves has strong academic backing, but mainstream energy economists tend to emphasize integration challenges, grid constraints, and the gap between panel costs and total system costs that he sometimes treats as secondary concerns.

substacks referenced above: @

5 Idea Friday: market viz; zombie funds; still no housing shortage; illiquid becomes liquid; bring your own energy (coal too)

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The postliberal war on economics

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How Economists Turned the Study of Progress into a Science (1950–1980)