The end of growth

In this post: 
Robert J. Gordon. The Rise and Fall of American Growth: The U.S. standard of living since the Civil War.  Princeton University Press.

Sometimes, it’s healthy to read something that substantially disturbs your prior beliefs. Reading “The Rise and Fall of American Growth” certainly disturbed me and disturbed me so much that it actually prompted me to write about it. Instead of writing a piece for an academic journal, I ended up starting this blog.

What is it that is so disturbing about this book? Gordon analyses the trends in productivity growth in the US from 1870 to the present, showing that much of the productivity growth happened in two surges. The big surge happened from 1920 to 1970 (50 years with average growth in productivity close to 2% per year), a little spurt in the Dot Com Era from 1994 to 2004 (10 years with 1%). Outside of these periods, growth happens on the order of between 0.4% and 0.6% per year.* Why does this matter? Because, in the long run at least, productivity is the primary driver the kind of economic growth that makes societies more prosperous and increases standard of living. This is not just economics, but a (if not the) problem for all of society.

In a scenario with 1.9% growth, productivity will double in 38 years. With 0.4%, it takes 175 years. With 1.9%, every generation gets twice as well-off as the one before. With 0.4%, every fourth generation. Add to that the benefits of growth were shared quite equally up to 1970 and quite unequally afterwards and you see scenarios with very different economic possibilities for our grandchildren… This is the case even if you factor in that Gordon may be under-estimating current production (e.g. because the increasing amount of free labor and free innovation that gets done in the economy tends to go unmeasured in official statistics).

Before I dive into the most interesting part of the book, I should say that this is an immensely and impressively thorough historical account of changes in the (American) standards of living over a time. It’s wonderful and insightful and well-documented, if occasionally a bit arcana. The whole book is an almost 800 page tome that most people (even professional academics) will not read. The working paper that preempted the book is available here and Gordon presents his findings in short form in this video.

Gordon’s analysis of why this is the case and what it means for our future is based on two big ideas (presented in his chapter 17 and 18).

The first is that the inventions of the future will not match the inventions of the past. The big surge in growth happened when the effects of major inventions (electricity, automobiles, airplanes, telephones and all the other things that make our modern world recognizably modern) kicked in. The little spurt happened when computers and the internet diffused and changed workplaces. The technologies that are forecastable today, to Gordon, have nowhere near that transformative potential. Medical innovations, robots, 3D printing, big data, artificial intelligence and driverless cars will have impact, but nothing huge.

I may be cognitively captured and too enthralled by technological optimism, but I just can’t imagine this being the long-run case. I’m sceptical of big data in some regards – advertising doesn’t add much to the economic pie. I’m concerned about how our medical system is doing. I appreciate of the argument that driverless cars and trucks can’t have far-reaching impact and will only be transformative in narrow areas of the economy. However, I do think that people misunderstand 3D printing when they say that it’s trivial, because other forms of production are cheaper. Prototyping (which is how 3D printing is typically used) and at-home production are neat (and will enable more distributed forms of innovation), but the real point of 3D printing is being able to produce previously unproducable things. And I can’t imagine that robotics and automation and artificial intelligence won’t change things in the not-too-distant future.

Gordon also misses technologies that are emerging now. We can’t even imagine what a technology like CRISPR might mean for health and food production, or what quantum computing could do. He also misses important aspects of improvement, e.g. that although airplanes don’t go much faster today than they did 30 years ago, flying is now much, much cheaper  and accessible and that this actually matters. And the lack of flying cars that Gordon laments? Probably doable, maybe not desirable. Add to this whole mix that the history of technology is one of ever expanding possibilities of novel combinations and I do think there is good reason to not take this point too seriously. Is it a sobering antidote to hype and optimism? Sure. Do I believe it? Not really.

Gordon’s second big idea is that the economy faces a set of head-winds that slow down growth and development in standards of living. These are economic inequality, education, demographics and government debt. The argument about rising economic inequality in the US (and elsewhere), the top 1%, downward pressure on wages, etc. is well-known. Educational attainment similarly is faltering and less education means less productivity (more education, ideally but not always practically, should allow you to do more valuable work). Demographics is a headwind, because Western populations are aging, leading to lower labor force participation (I’m also worried about young people not getting into the labor force, but that’s an aside), leading in turn to less production. Government debt calls for increased taxes or reduced  transfers, also suppressing growth.

I’m more convinced by these concerns than the concerns about technology. In part, rising inequality is an effect of technological change, because entrepreneurs get rich (I think most people are fine with that, compared to how acceptant they are of inherited wealth, CEO compensation and Wall Street). Faltering education is a very US phenomenon, but still an issue elsewhere. In my geography, the better questions are if people are learning the right things (not necessarily) and when the higher education system will undergo fundamental change (soon, hopefully). Demographics are a big deal, especially for how they impact resistance to technological change and influence policy (less investments in education and R&D, more protectionism, less globalization, etc.). I lean (softly) in favor of countercyclical stimulus and (strongly) in favor of the idea that private organizations are too short-term focused for their own good, so more than increased taxes and reduced transfers, I actually worry about governments not being able to invest in important things that business does not invest  in (fundamental research and cultivation of emergent industries).

These headwinds are things to take seriously, irrespective of whether you accept Gordon’s argument about the potential of technology to enhance productivity in the future.  If you accept both the idea of headwinds and low-impact technologies, there is much to be concerned about. If you only accept the idea of headwinds, you might think that technology can make up for (or at least compensate for) them by boosting productivity. To me, the scale of technology’s effect seems to be determined very much at the level of organizations, and thus my interest in studying them. A whole host of dynamics influence how organizations adopt, change, enable and constrain, resist, displace, underutilize, react to, create and innovate technologies and in turn how the effects of those technologies manifest themselves. It’s an open question where we’ll end up.

 

Upcoming posts:

  • The end of scarcity. We need something to balance out Gordons dystopia, so I will review Brynjolfsson & McAfee’s much more optimistic argument in the very near future. UPDATE: Link to the post.
  • Economic Possibities for our grandchildren. In 1938, John Maynard Keynes wrote an essay with this title about the effects that technological change and what it would mean for the future. I’ll revisit the essay and its predictions about abundance, freedom from economic problems and the possibilities of leisure and why they may not have come to full fruition.
  • Producing lives. Some of Gordon’s argument about how (too much) progress has happened in entertainment, together with his soberingly pessimistic outlook reminded me of a classic of critical thinking, Herbert Marcuse’s 1964 book “One-dimensional man”. I haven’t read that in a long time, but I will and when I do I’ll post a review.

 

* These numbers are different from what people usually think of as ‘growth’. Usually, economists talk about growth in GDP (gross domestic product), which measures what an economy produces. The growth that Gordon talks about is growth in productivity, which gets measured as TFP (total factor productivity). Simply put, TFP is GDP without increased investment and increased labor. Or, in equation form, GDP = TFP x capital x labor (you also have to balance for the different contributions of capital and labor, but save that for another time), implying that TFP = GDP/(labor x capital).

One thought on “The end of growth

  1. Pingback: The end of scarcity (maybe) | The Gale

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