Might growth be ending? This is a heretical question. Yet an expert on productivity, Robert Gordon of Northwestern University, has raised it in a provocative paper. In it, he challenges the conventional view of economists that "economic growth will continue indefinitely."
Unlimited growth is a heroic and foolish assumption. Here's why.
Throughout most of history, next to no measurable growth in output per person occurred. What growth did occur came from rising population. Then, in the middle of the 18th century, something began to stir. Output per head in the world's most productive economies -- the UK until around 1900 and the US, thereafter -- began to accelerate. Growth in productivity reached a peak in the two and a half decades after World War II. Thereafter growth decelerated again, despite an upward blip between 1996 and 2004. In 2011, US output per hour was a third lower than it would have been if the 1950-72 trend had continued. Prof Gordon goes further. He argues that productivity growth will continue to decelerate over the next century, reaching negligible levels.
The core of Prof Gordon's argument is that growth is driven by the discovery and subsequent exploitation of specific technologies and -- above all -- by "general purpose technologies," i.e. those that transform the lives of most people in ways both deep and broad.
The implementation of a range of general purpose technologies discovered in the late 19th century drove the mid-20th century productivity explosion. These included electricity, the internal combustion engine, domestic running water and sewerage, communications (radio and telephone), chemicals and petroleum. These constitute "the second industrial revolution". The first, between 1750 and 1830, started in the UK. That was the age of steam, which culminated with the railway. Today, we are living in a third, already some 50 years old: the age of information, whose leading technologies are the computer, the semiconductor and the Internet.
Prof Gordon argues persuasively that in its impact on the economy and society, the second industrial revolution was far more profound than the first or the third. Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionizing speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionized communications, entertainment and, above all, domestic labor. Society industrialized and urbanized. Life expectancy soared. Prof Gordon notes that "little known is the fact that the annual rate of improvement in life expectancy in the first half of the 20th century was three times as fast as in the last half." The second industrial revolution transformed far more than productivity. The lives of Americans, Europeans and, later on, Japanese, were changed utterly.
But many of these changes were "one-offs." To wit: The speed of travel went from the horse to the jet plane, but that is, and will remain, the extent of progress in this arena insofar as it may benefit the average person. Urbanization, too, is a "one-off": We will not become any more urbanized, at least not in any way that will benefit the vast majority of people. So too with regard to the collapse in child mortality and the tripling of life expectancy: There will be no appreciable progress in these areas either, not for the vast majority of us. So too with regard to control over domestic temperatures. So too with regard to the liberation of women from domestic drudgery. Transport and energy technologies have barely changed in half a century. Conclusion: These revolutions, and the benefits from them for the vast majority of us, are done.
By the standards of the past, today's information age is full of sound and fury, signifying little.
Many of the labor-saving benefits of computers occurred decades ago. There was an upsurge in productivity growth in the 1990s. But that effect has pretty much petered out.
In the 2000s, the impact of the information revolution has come largely via enthralling entertainment and communication devices. But how important is this? To answer this question, Prof Gordon proposes a thought-experiment: You may keep either the brilliant devices invented since 2002, and Facebook, . . or running water and inside lavatories. Does that make you change your mind? I thought not.
What we are now living through is an intense, but narrow, set of innovations in one important area of technology. Does it matter? Yes. But how much? We can, after all, see that a decade or two from now every human being will have access to all of the world's information. But the view that overall innovation that benefits all of us in a major way . . is now significantly slower than a century ago (and likely to remain so), . . is compelling.
There are major obstacles to rising standards of living for ordinary Americans, among them the reversal of the demographic dividend that came from the movement of women into the labor force; the leveling-off of overall educational attainment, continuing globalization, rising resource costs, high fiscal deficits and rising private indebtedness. The rise in the real disposable incomes of those outside the top 1% will stop. Contrary to the pep talks of most of the world's economists and politicians, this is not going to change. The vast majority of our workers are, in all likelihood, therefore, going to experience a kind of permanent "recession.'
For almost two centuries, today's high-income countries enjoyed waves of innovation that made them both far more prosperous than before, and far more powerful than everybody else. This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up in the developing world fast. The elites of the high-income countries quite like this new world (investment opportunities in the developing world are great). But the rest of the population in high-income countries like this new world vastly less. And for good reason.
Get used to this. It's not going to change.
1 | 2