Don’t take growth for granted

22nd September, 2012

One economist believes modern inventions are puny compared to earlier innovations. Does this mean that human progress has hit a dead end?

The summer’s most talked about working paper in economics is by Robert Gordon, and it is simply titled “Is US Economic Growth Over?” And well he might ask: GDP per capita, the most obvious measure of economic growth, is lower today than it was when the financial crisis began in 2007.

The western world’s failure to recover from the crisis surely explains why Gordon’s gloomy thesis is getting so much attention, but, in fact, he takes great pains to avoid drawing conclusions from any short-term difficulties – even if the short term has now lasted more than half a decade.

Gordon has been arguing since the days of the dotcom mania that the information revolution looks rather puny compared with earlier waves of innovation, such as the internal combustion engine, indoor plumbing, electrification and the telephone – all of which took hold from about 1850 to 1900. This claim was plausible then and it’s plausible now. (Would you rather give up the smartphone, Facebook and broadband – or hot running water and your flush toilet?)

Let’s take this line of argument further. Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards. Many have seen this as an encouraging trend, but Gordon draws a different lesson: growth is a recent phenomenon, so why assume that it will last?

If Gordon is right to claim that modern inventions are less impressive than those of the late 19th century, we would expect to see slow growth in US real GDP per capita. And, indeed, growth has been slowing since the 1960s, even setting the current recession to one side. (World GDP per capita growth, by contrast, has been just fine, as others close the gap on the US.)

All these observations raise uncomfortable questions. But for some answers, we need to ponder the likely forces at play. Both Gordon and Tyler Cowen, author of The Great Stagnation, point out that some easy gains – such as sending children to secondary school or allowing women to have careers – can only be enjoyed once. Important inventions, too – such as the car, the washing machine and the lavatory – admit only gradual improvement after the first few decades.

Demographics and debt accumulation have both speeded up growth in the past and, as the pendulum swings back, demographics and debt repayment will reduce it in the future.

Then there are pure resource constraints. Even assuming that climate change can be managed, there are limits to the rate at which we can burn fossil fuels, grow food and mine metals. Renewable energy sources are available, but less plentifully than we might hope. If economic growth is to continue unabated, it will have to be of a more ethereal kind, with energy and resource consumption becoming ever less significant.

Despite all this, I remain an optimist. The economist Michael Kremer pointed out two decades ago that with more people around, there are simply more possible sources of new ideas, and that high populations have tended to enjoy higher economic growth per person, despite resource constraints.

My inner contrarian also tells me to ignore Robert Gordon. During the dotcom boom I cited his work to anyone who would listen, but we are all stagnationists now. And yet: innovation won’t happen by magic. I argued in my last book, Adapt, that scientific and technical progress now seem to require larger teams, more cross-disciplinary work, more money, and older, more specialised scientists. It has become an organisational challenge that we are yet to take as seriously as we should. We’ve lived with astonishing economic growth for 250 years; perhaps we are starting to take this exciting companion for granted.

Also published at ft.com.

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