It is mainly during the last 300 years that sustained economic gains to certain people have occurred. For the most part these people were living in industrializing Western-style, market-based economies. From the longer-term historical perspective of human existence over 50,000 years this sustained, broad-based economic progress has been a relatively short-lived aberration.
AS M.C.K. notes: “Before 1750, the standard of living improved at a glacial pace, if at all. Farming in the early 18th century was not that different from farming in Biblical times. The Romans had invented plumbing before the very concept was forgotten for millennia. Then, something happened. Within two centuries the biggest material problems of pre-industrial life had been solved: food was plentiful, water was clean, indoor temperatures were controlled, and distance no longer prevented the speedy transit of goods and messages. Devastating wars and deep depressions did nothing to slow this forward march of progress”.
The question as to whether the rapid economic growth in per capita consumption established on the basis of the industrialization will continue into the indefinite future or whether growth will regress toward its longer-term low trend amounts to whether technical progress and innovation will continue into the future. The implicit assumption of most – not all* – economics texts is that growth will continue indefinitely. An intriguing, pessimistic answer to the issue of ongoing growth for the US economy, is given in a paper by Robert Gordon (2012), published as an NBER Working Paper. Gordon claims that US productivity growth did slow markedly after the early 1970s. He further forecasts that growth is likely to decelerate further over the next century to negligible levels –to below 0.5 per cent annually. In short, Gordon’s claim is that US economic growth will almost end. This claim is made only for the US but, in a globalized world, a forecast slowing of technical invention and innovation has broader relevance for a world community whose living standards are, in the main, converging to US levels.
Gordon’s core argument is that a “Second Industrial Revolution” drove sustained growth in the US from 1870-1900. This involved the discovery and use of “general purpose technologies” for example, electricity, the internal combustion engine, running water and sewerage (the flush toilet was a significant innovation that greatly improved human health), radio and telephone communications, chemicals and petroleum. Machines displaced animal and human muscle in a major way. This ‘Revolution transformed life in deep and broad ways – indeed, in ways that were much more profound than the First Industrial Revolution (the age of steam and the steam-powered railway from 1750-1830) and the Third Industrial Revolution (the age of information – computers, semi-conductors and the internet that began around 1960 but which really took off in the 1990s). The depth and broadness of the Second Revolution can be tested subjectively by asking whether people would prefer to do without their computers or without running water and inside lavatories.
Non-subjectively Gordon assembles evidence of a gradually slowdown in economic growth over recent decades. According to him, innovation during this time has been slower and narrower in its impact. As examples Gordon claims that transport and energy technologies have barely changed in half a century.
Other future hurdles to US growth include population aging and loss of the demographic dividend, leveling of US educational standards along with increasing education costs, increasing inequality with most growth in incomes accruing to the top 1 per cent of earners, globalization and consequent factor price equalization, increasing resource usage and resource management costs (with global warming being a “payback” for past growth) and finally with high public and private debt.
To conclude these are real problems and many have a sense of inevitability associated with them. But perhaps things are not as black as Gordon suggests. A possible offsetting policy for the demographic problems identified is to substantially increase the level of skilled immigration. The endogenous growth theorists would argue that such things as resource constraints will direct technical progress into sought resource-conserving areas while problems of rising inequality and poor management of the environment can, again, be addressed by using public policies. Moreover, provided the associated environmental problems in emerging economies are addressed it is difficult to see globalization as anything other than a force for mutual economic advantage – in the absence of spillovers that is what classic “gains-from-trade” arguments tells us.
The really difficult issue to evaluate is whether technological discoveries and innovations already made have picked most of the “low hanging fruit” leaving only less significant technological opportunities in the future. The hypothesis of overall diminishing returns to such efforts is plausible but seems to involve the same act of a priori faith as the unrestrained optimism of those who believe that substantial technical advances will occur indefinitely. It might be that Gordon simply suffers a lack of imagination! Might it be that solar or electro-magnetic devices might be devised which provide abundant clean energy at close to zero cost, that travel might become instantaneous through technologies that scramble and reassemble humans, that replicator technologies might be developed that lead to the low cost manufacturing of anything, that communication costs might feel to almost zero and that medical technologies might provide cures for most diseases and potentially lengthen human life indefinitely. This sounds like science fiction
One set of arguments deduced to show that innovation will get harder is due to Jones (2009). The gist of this argument is:
- If knowledge accumulates as technology advances, successive generations of innovators face an increasing educational burden. While innovators can compensate by lengthening educational investments and narrowing expertise, these responses come at the cost of reducing individual innovative capacities because of a greater reliance on teamwork. This has negative implications for economic growth.
This explains why productivity growth rates did not accelerate through the 20th century despite an enormous expansion in collective research effort. Upward trends in academic collaboration and lengthening doctorates, which have been noted in other research, can be similarly explained. The knowledge burden mechanism suggests that the nature of innovation is changing, with negative implications for long-run economic growth.
Finally, an important issue is whether a slowdown in technical advance matters much. Provided that globally population and natural resource usage issues can be addressed, perhaps the world can (after some urgent intra-national and inter-national redistributions) simply enjoy itself by consuming more services (the arts, education) without necessarily much more growth in material outputs. This of course does not nullify the Gordon argument but it does make us worry less about its implications.
The requirement that resource scarcity issues be addressed in a world economy where emerging nations such as the BRICs are developing rapidly in terms of living standards is crucial. This is particularly important with respect to the issue of climate change. Indeed while Gordon focuses on the costs of addressing climate change it is also important to examine the consequences of not successfully addressing it. Part of the issue here is to devise policies around the world to do this. The record so far does not inspire overwhelming confidence since the two largest Greenhouse gas emitters (China and the US) have not so far agreed to comprehensively limit their emissions. Another part of the issue is technological and relates to the role of new non-polluting secondary energy generation technologies that will power homes, industries and transport. This type of innovation will not necessarily increase consumption per head greatly – the Gordon issue – but will prevent living standards from falling markedly if the effects of unmitigated climate change would have proven as severe as many anticipate. The key possible technological advances here lie in the area of new nuclear, solar cell and wind power technologies. Here very significant breakthroughs are being made in terms of providing cost-efficient new energy technologies in areas such as photovoltaics. Through learning-by-doing and other efficiency improvements the costs of producing photovoltaic cells has fallen markedly since 2008 – in many situations to at or below grid parity (Bazilian et al., 2012).
*Interestingly the main preexisting pessimistic school of thinkers about growth are the neo-Malthusians, such as the Club of Rome “Limits to Growth” thinkers. They combined hypothesis of continuing population and economic growth in the face of resource constraints as drivers of a future where society will overshoot its capacity to sustain growth and will hence collapse driving down both population size and consumption standards. Implicit in their argument is a particular form of “technological pessimism” as discussed in this post. Other growth skeptics include Cowen (2012), who has similar views to Gordon, and Jones (2009) whose theoretical and empirical arguments are discussed below. .
M. Bazilian, I. Onyeji, M. Liebreich, I. MacGill, J. Chase, J. Shah, D. Gielen, D. Arent, D. Landfear & S. Zhengrong, “Re-considering the Economics of Photovoltaic Power, mimeographed, Bloomberg New Energy Finance, 2012.
T. Cowen, The Great Stagnation; How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, (e-book), January 2011
R. J. Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, NBER Working Paper 18315, August 2012
B. Jones, “The Burden of Knowledge and the “Death of the Renaissance Man”: Is Innovation Getting Harder?”, Review of Economic Studies, 2009.
M.C.K. “Productivity and growth. Was that it?”, The Economist, September 8, 2012. (2177)