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Missing the Economic Big Picture

BERKELEY – I recently heard former World Trade Organization Director-General Pascal Lamy paraphrasing a classic Buddhist proverb, wherein China’s Sixth Buddhist Patriarch Huineng tells the nun Wu Jincang: “When the philosopher points at the moon, the fool looks at the finger.” Lamy added that, “Market capitalism is the moon. Globalization is the finger.”

With anti-globalization sentiment now on the rise throughout the West, this has been quite a year for finger-watching. In the United Kingdom’s Brexit referendum, “Little Englanders” voted to leave the European Union; and in the United States, Donald Trump won the presidency because he convinced enough voters in crucial states that he will “make America great again,” not least by negotiating very different trade “deals” for the country.

Let us orient ourselves by considering what the economic-policy moon looks like today, particularly with respect to growth and inequality. For starters, technological innovation in areas such as information processing, robotics, and biotechnology continues to accelerate at a remarkable pace. But annual productivity growth in North Atlantic countries has fallen from the 2% rate to which we have been accustomed since 1870 to about 1% now. Productivity growth is an important economic indicator, because it measures the year-on-year decline in resources or manpower needed to achieve the same level of economic output.

Northwestern University economist Robert J. Gordon maintains that all of the true “game-changing” innovations that have fueled past economic growth – electric power, flight, modern sanitation, and so forth – have already been exhausted, and that we should not expect growth to continue indefinitely. But Gordon is almost surely wrong: game-changing inventions fundamentally transform or redefine lived experience, which means that they often fall outside the scope of conventional measurements of economic growth. If anything, we should expect to see only more game changers, given the current pace of innovation.