Monday, November 24, 2014

The Future of Economic Progress

WASHINGTON, DC – Slowly but surely, the debate about the nature of economic growth is entering a new phase. The emerging questions are sufficiently different from those of recent decades that one can sense a shift in the conceptual framework that will structure the discussion of economic progress – and economic policy – from now on.

The first question, concerning the potential pace of future economic growth, has given rise to serious disagreement among economists. Robert Gordon of Northwestern University, for example, believes that the US economy will be lucky to achieve 0.5% annual per capita growth in the medium term. Others, perhaps most carefully Dani Rodrik, have developed a version of growth pessimism for the emerging economies. The key premise, common to many of these leading analysts, is that technological progress will slow, including the catch-up gains that are most relevant for emerging and developing countries.

On the opposite side are the “new technologists.” They argue that we are at the beginning of a fourth industrial revolution, characterized by truly “intelligent machines” that will become almost perfect substitutes for low- and medium-skill labor. These “robots” (some in the form of software), as well as the “Internet of things,” will usher in huge new productivity increases in areas such as energy efficiency, transport (for example, self-driving vehicles), medical care, and customization of mass production, thanks to 3D printing.

Second, there is the question of income distribution. In his instantly famous book, Thomas Piketty argues that fundamental economic forces are fueling a persistent rise in profits as a share of total income, with the rate of return on capital constantly higher than the rate of economic growth. Moreover, many have observed that if capital is becoming a close substitute for all but very highly skilled labor, while education systems need long adjustment times to supply the new skills in large quantities, much greater wage differentials between highly skilled and all other labor will cause inequality to worsen.

Perhaps the US economy in ten years will be one in which the top 5% – large capital owners, very highly skilled wage earners, and global winner-take-all performers – get 50% of national income (the percentage is not far below 40% today). Though national circumstances still differ greatly, the fundamental economic trends are global. Are they politically sustainable?

The third question concerns the employment effects of further automation. As was true in previous industrial revolutions, human beings may be freed from much “tedious” work. There will be no need for cashiers, call operators, and toll collectors, for example, and less need for accountants, travel or financial advisers, drivers, and many others.

If the “technologists” are half-right, GDP will be much higher. So why should we not rejoice at the prospect of a 25- or 30-hour workweek and two months of annual leave, with intelligent machines taking up the slack?

Why, with all this new technology and imminent productivity increases, do so many continue to argue that everyone has to work more and retire much later in life if economies are to remain competitive? Or is it just the highly skilled who have to work harder and longer, because there are not enough of them? In that case, perhaps older workers should retire sooner to make room for the young, who have skills more appropriate to the new century. If such a shift were to increase overall GDP, fiscal transfers could pay for early retirement, while retirement itself could become a flexible and gradual process.

Finally, there is the question of climate change and possible natural-resource constraints, issues that have become more familiar over the last decade. Will these factors impede long-term growth, or can a transition to a clean-energy economy fuel another technological revolution that actually increases prosperity?

As these questions move to the top of the policy agenda, it is becoming clearer that the traditional focus on growth, defined as an increase in aggregate GDP and calculated using national accounts invented a century ago, is less and less useful.

The nature and measurement of economic progress should involve a new social contract that allows societies to manage the power of technology so that it serves all citizens. Working, learning, enjoying leisure, and being healthy and “productive” should be part of a continuum in our lives, and policies should be explicitly aimed at what facilitates this continuum and increases measured wellbeing.

The trends underpinning widening inequality will have to be counteracted using many policy instruments, with tax regimes and life-long, inclusive, and affordable education and health care at the center of the effort to ensure equity and social mobility. Though the quality of human lives can still be greatly improved, even in the advanced countries, focusing on aggregate GDP will be less helpful in achieving this goal.

The questions surrounding future economic growth are becoming clearer. But we are only at the start of the process of creating the new conceptual framework needed to enable national and global policies to advance the cause of human progress.

Read more from "Piketty's Charge"

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    1. CommentedDirk Ouellette

      EROEI (energy returned on energy invested) calls all the shots as it has since the primordial ooze. Little else matters for humans or any other living thing.
      Humanity, particularly in the "first" world countries, have been on a hayride of fun and thrills since the discovery of coal and then petroleum. We can throw in nuclear as a bit of extra juice, but we all know the dangers, and EROEI of the nuclear industry. That is to say, without massive government protection, nuclear is D E A D as an energy source. So, with the EROEI of petoleum, coal , sunshine, hydro, wind, becoming, or already on the downhill slide, $$$$$$$$$ will be the factor in gathering and using our energy resources.
      We have a huge world population directly related to the cheap energy we've been extracting for 300 years. As that energy becomes too expensive to use for the vast majority, the "vast majority" will become much less vast.
      The economists with their charts, graphs, PhD's, computer models, corporate backers, are swiftly becoming the necromancers sitting to the side of the various rulers, whether corporate or governmental. As a whole, useless time and money wasters.
      Education is always an answer, but what kind of education? I think education cognizant of the future realities of terribly expensive energy, other than water, animal (human and otherwise), and mechanical.
      Believe in the technologists if you will, but kepp at least one eye to their real successes, as opposed to their virtual, self agrandizing stories. I think you will see, that for that "vast majority" of humanity, it is back to the future of preindustrial civilization.
      Keep dreaming though. It is often a good release mechanism

    2. Portrait of Pingfan Hong

      CommentedPingfan Hong

      All the quetions mentioned in the article are rooted in the human nature of competition, which is coded in our gene. Otherwise, why do we just suggest obolishing the grading system in schools, and all pupils will get the same pass regardless of their efforts?

    3. CommentedVal Samonis

      EDUCATION is the key globally. However, it seems to be undergoing revolution (high tech & systemic/institutional) and we do not know yet what transpires for the 21st C.So this is an unknown unknown. Some known unknowns include: roles of governments in economic growth, the nature of entrepreneurship the global digital era, etc.

      Val Samonis

    4. CommentedProcyon Mukherjee

      The challenge of economic progress is that the capital stock is rising at a greater rate than the rate of increase of income; for those at the lower half of the income hierarchy, the rate has actually gone down. This dysfunctional arrangement cannot be cast away as mere consequential evidence that technological progress leaves demented earnings for those at the bottom of the chain.

      Martin Wolfe has today rightly pointed out that managerial marginal product, although it has reached its peak, can hardly be measured and Picketty is so right to point that out that it is a significant area of concern how the rise of managerial remuneration has created such a distortion and skewedness in the last two decades alone, when the value of contribution is so much murky.

    5. CommentedZsolt Hermann

      I think the questions regarding the future of global economy can be approached better and more precisely if we accept the principle that economy, trade is nothing else but the external, practical representation of the interrelationships in between people.
      If we also accept the other principle that humanity has evolved into a globally interconnected and interdependent network, which is not man-made but an evolutionary necessity, than we can easily deduce that we are existing in a given system, with given, unchangeable conditions we have to adapt to.
      From there it is not difficult to deduce that in this given global, integral system constant quantitative growth is not possible, as such thing does not exist in a sensitively balanced, closed and finite natural ecosystem we are also part of, and that when each and everyone depends on each and every other, and are also fully responsible for each other, the present ruthless, exploitative and wasteful competition has to be replaced by a globally mutual, complementing cooperation.
      Social interconnections and economy based on natural necessities and available resources and means, mutually cooperating with each other.