Monday, October 20, 2014

Growth Out of Time

CAMBRIDGE – Robert Gordon of Northwestern University is a distinguished economist whose work in macroeconomics and studies of long-term economic growth have properly earned him high regard. So his recent exercise in speculative future history, which asks whether economic growth in the United States has come to an end, has attracted much favorable attention. But a basic flaw in Gordon’s argument is immediately apparent – and becomes glaringly so on closer examination.

Gordon distinguishes three Industrial Revolutions that have driven economic growth and improved living standards since the eighteenth century: IR #1 (“steam, railroads”), whose defining inventions date from 1750 to 1830; IR #2 (“electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum”), whose defining inventions date from 1870 to 1900; and IR #3 (“computers, the web, mobile phones”), dating from 1960. The core of his article contrasts the transformational impact of IR #1 and, especially, IR #2 on per capita GDP and the quality of life with the relatively trivial consequences of IR #3.

The vulnerability of Gordon’s argument is his shortened time horizon for IR #3. Consider the following four sentences in his paper:

·         “Both the first two revolutions required about 100 years for their full effects to percolate through the economy.”

·         “At a minimum, it took 150 years for IR #1 to have its full range of effects.”

·         “The inventions of IR #2 were so important…that they took a full 100 years to have their main effect.”

·         “…[T]he productivity impact of IR #3 evaporated after only eight years, compared to the 81 years (1891-1972) required for the benefits of IR #2 to have their full impact…”

The last sentence is crucial: Gordon cuts off IR #3 circa 2005 – that is, 45 years from its onset, but less than half the time allowed for IR #1 and IR #2 to run their respective courses. To take a salient example from the prior industrial revolutions, this is as if the impact of the railroads on the US economy were to be measured as of 1873, 45 years after construction began on America’s first line, the Baltimore & Ohio.

In 1873, the retailer Montgomery Ward was just a year old, and the first Sears Roebuck catalogue was still 20 years away. Together, these companies invented mail order as the “killer app” of the railroad age, creating a continental market for consumer goods, with all of the economies of scale that followed.

Or, to take another example, what if we stopped measuring the economic impact of electrification only 45 years after the first generating plant, Thomas Edison’s Pearl Street Station, became operational in 1882? At that point, America’s manufacturing industries were just discovering the benefits of flexible (re)configuration, which enabled distribution of generated electric power, while America’s home-appliance industry was in its infancy.

Gordon asserts that “the era of computers replacing human labor was largely over” during the past decade. Innovation in information and communications technology (ICT) focused first on electronic commerce, “itself largely completed by 2005.” After that, “labor-saving innovation” took a back seat to “a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages.”

In thus truncating and trivializing the ongoing ICT revolution, Gordon misses two fundamental processes. First, and most evident, the rise of e-commerce is far from over. In the US, the most advanced country in this respect, e-commerce has just reached 10% of total retail spending, and is continuing to grow at double-digit rates through the slow recovery from the Great Recession. At the same time, something much more significant is happening beneath the economic surface.

From the early days of the computer revolution, researchers and popularizers envisioned “artificial intelligence” as the ultimate killer app (literally, in the case of the computer HAL in the film 2001: A Space Odyssey). Decades of frustration are now yielding to success: the application of sophisticated statistical techniques to the accelerating accumulation of unprecedented quantities of so-called Big Data that the Internet simultaneously generates and captures. For proof of artificial intelligent “life,” consider the “virtual assistants” populating smart phones, beginning – but just beginning – with Apple’s Siri.

The next wave of IR #3’s consequences can be discerned in systems that capture the intention behind a search request and couple it to a completed transaction, and in the application of predictive analytics to industrial supply chains and service provisioning. If these innovations’ prospective impact on productivity and GDP growth cannot be quantified, well, that is the way it is with future history.

Flawed as Gordon’s reading of IR #3 is, his concluding concern for the future of innovation in the US is well founded. Of the assorted “headwinds” that he cites, the enormous increase in inequality and the plateau reached in educational attainment represent threats that differentiate America’s position from that of other advanced countries. But Gordon ignores the greatest threat to continued US global leadership in innovation: the delegitimation over the past generation of the state’s role as an economic actor.

As I illustrate and analyze at length in my new book, Doing Capitalism in the Innovation Economy: Markets, Speculation and the State, the state has become central to the Innovation Economy’s dynamics. It funds the upstream research that generates discovery and invention; supports the creation of new networks, from canals to the Internet; and serves as a creative customer for innovative products, as it did during the computer revolution’s nascence.

The state must also preserve continuity in the market economy when the speculative bubble that has funded its transformation bursts. And here, too, Gordon disappoints. The only reference to government in his paper is not even to this stabilizing role. Rather, it is to the asserted headwind represented by the very debt incurred to prevent the global financial crisis of 2008 from triggering a second Great Depression.

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  1. CommentedMyrtle Young

    Innovation for me should apply not only to be more fame but also to lessen the problem of our society. Great inventors should formulate and create an amazing inventions that could help us in minimizing such crimes and help to grow our economy. Do you enjoy innovations that can save you money, time and even your life? If so, here are some upcoming cases of future tech that will satisfy your inner futurist. You can get an loan for the new invention you want.

  2. CommentedAnonymous HopefulSkeptic

    With respect to an enlightening perspective on how empires decline, I highly recommend Martin Armstrong's piece:

  3. CommentedAnonymous HopefulSkeptic

    State propaganda is in full swing. The current "recession" is more akin to the Long Depression experienced near the end of the 19th Century that lasted over two decades.
    While it is correct to say that Gordon's analysis cuts the time frame too short, there is a danger that the effects of excessive money printing are yet to be felt. Everywhere one looks, the assets that matter most to the working and middle class continue to rise, and the purchasing power of the dollar continues to decline.
    Since the inception of the Federal Reserve, the purchasing power of the dollar has lost 95% of its purchasing power,r:5,s:0,i:102&biw=1263&bih=625,r:9,s:0,i:114&biw=1263&bih=625
    How do empires die? They die by a long-term loss in their purchasing power and through overspending on unwinnable wars and government spending. Rome and the United Kingdom are perfect examples of how this happens. If we hope to attain a different fate from them, then we ought to reconsider the ever-increasing amount of money we are spending just to keep government running. As for preventing a Great Depression via the Keynesian madness, just ask the Japanese or British people how much they enjoy having a 200% debt-to-GDP ratio (or higher depending on how the liabilities are hidden through clever accounting practices).

    I agree with your overarching contention, however. It is quite possible that the world economy will in 10 or 20 years time after a subsequent massive crash undergo another period of rapid economic expansion. There is the great possibility that technologies such as 3D printing could foster in a new Global Industrial Revolution.
    Consider Dr. Carlota Perez's (University of London, London School of Economics (LSE)) Schumpterian analysis which suggests that the "creative destruction" of the technological age is only in its infancy and that the fruits of the labor of new technology have yet to be realized. If she is right, which is quite likely, then your analysis is the proper one. The next economic revolution will be quite unimaginable to most people. 3D printers are already being utilized to create parts to make automobiles, so it is quite possible that the long-term economic and societal effects of 3D Printing have not yet been felt.

  4. CommentedJoshua Ioji Konov

    The Mr. Gordon, theoretical conclusions for the governmental expansion into innovation and business for balancing the market is realistic if a new system of economics does not boost business diversity and overall business activities... the natural rising governmental involvement in wealth distribution could be prevented by expanding the role of small and medium businesses & investors by enhancing the market security above all.... see

  5. CommentedAndrew Thacker

    I would also comment;

    IR 1 made it possible to grow the economy by making it easier to make stuff, which consumed more resources, and which required more people to enter industry but more people to sell to.

    IR 2 was essentially about improving the quality of people's lives in terms of comfort and entertainment and more stuff to buy ... but still demanding more resources, and more people to make the new economy work and more people to buy the new stuff.

    IR 3 is essentially about empowering more individuals and businesses to make more stuff ... but with fewer people ... it still demands more resources and more people to buy the stuff created ... but because fewer people are required, fewer people have the disposable income to buy the stuff ... because of more competition and because the middle class income is declining, this forces businesses to look to leverage IR 3 to improve productivity even more .... which means using fewer people ...

  6. CommentedAndrew Thacker

    Patrick Lietz has it right. "to have continuing economic growth we need increasing quantities [of energy] every year"

    I would add that debt/money is issued based on the faith that it will be paid back with interest. The "interest" can only be created if the economy grows. If energy supplies cant grow, then the economy cant grow (laws of physics) .. and when bankers realise this then less debt/money will be created ... and we will be caught in a vicious circle of decline.

  7. CommentedPatrick Lietz

    Frank O'Callaghan has it right. All our Industrial Revolutions depended on the extractions of cheap energy. First coal and then oil. However, to have continuing economic growth we need increasing quantities every year at lower prices. Alternatives such as renewable and nuclear energy are too expensive, and that is why growth is over.

      CommentedAndrew Purdy

      Growth is only "over" if new great sources of energy are never discovered. It might be more correct to say growth is on hold until the energy to fuel growth is found.

  8. CommentedProcyon Mukherjee

    Gordon’s analysis has some important insights like “it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements which ultimately tap the full potential of the initial invention.” If one looks at the progress of some of the earlier innovations, we do not see sufficient follow-through innovations in the last several decades that are needed to improve the productivity frontier. His reference to some of the headwinds like, “the twin educational problems of cost inflation in higher education and poor secondary student performance” and debt overhang and its impact are important pointers that growth could actually stymie given the subtractions overpowering the additions. The reference to U.S. labor productivity growth in the current times, which lags the earlier trends due to lack of ‘labor saving innovations' as innovation in mobile devices has not done much in that area (subtractions and additions have balanced out as given in the thought experiment of Option A vs Option B as old technology is replaced by new technology). Some of Gordon's trend charts are alarming, to say the least.

    The real issue is what happens to the bottom 99% and there the study could have gone beyond the general impact of globalization on American wages, which is largely going through a contraction. Innovation needs to touch their lives, is the key point, which made all the difference in IR1 and IR2.

      CommentedAndrew Purdy

      IR#3 could have a second leg. The problems of doing useful AI are not just hard, they are very very very hard. We could be well into IR#4 before IR#3 has its second leg.

  9. CommentedFrank O'Callaghan

    After rthe looting of public wealth in the "privatizing" of the 70s to 90s the next phase was the looting of the public treasury through tax cutting the very wealthy and increasing public debt.

    The world economy is now threatened by the gross inequalities we have generated.

  10. CommentedPaul Mathew Mathew

    Growth is over because Cheap Oil is over.

    Why do you think we are engaging in filthy expensive extraction techniques like fracking, tar sands and deep sea drilling?

    We are mining the dregs...

    See Heinberg End of Growth