Is growth over?

Two economic historians at Chicago’s Northwestern University are at the centre of this discussion.

Robert Gordon takes the view that the era of high growth is unlikely to come back. We have only met Gordon once – he gives the appearance of being quite reserved – his book, however, is anything but. The other side is Joel Mokyr, who we know much better – an enormously vivacious man, at least by the standards of economists, with twinkling eyes and a kind word for everybody, who writes with infectious energy consistent with his generally positive outlook on the future.

Gordon has gone out on a limb and predicted that economic growth will average a meagre 0.8% per year over the next 25 years.

“Everywhere I look” – he said during a debate with Mokyr – “I see things standing still. I see offices running desktop computers and software much as they did 10 or 15 years ago. I see retail stores where we are checking out with bar code scanners the same way we did before; shelves are still stocked by humans, not by robots; we still have people slicing meat and cheese behind the counter.’’ Today’s inventions, in his view, are simply not as radical as electricity and the internal combustion engine were.

Gordon’s book is particularly daring. He gleefully takes on the set of future innovations that futurologists predict and one by one explains why, in his opinion, none of them would be as transformational as the elevator or air conditioning, and none would to take us back to an era of fast growth. Robots cannot fold laundry. 3D printing won’t affect large-scale manufacturing. Artificial intelligence and machine learning are “nothing new.” They have been around at least since 2004 and have done nothing for growth. And so on...

It is clear of course that nothing Gordon says precludes the possibility that something entirely unexpected, perhaps some hitherto unimagined combination of familiar ingredients, will prove to be transformative. It is just his hunch that it won’t.

Mokyr, on the other hand, sees a bright future for economic growth, spurred by nations competing to be the leader in science and technology, and the resulting rapid spread of innovation worldwide.

He sees the potential for progress in laser technology, medical science, genetic engineering, and 3D printing. To Gordon’s claim that nothing much changed in fundamental ways in how we produce in the last few decades he counters that, “The tools we have today make anything that we had even in 1950 look like clumsy toys by comparison.”

But mostly, Mokyr thinks that the way the world economy has changed and globalisation produces the right environment for innovations to bloom and change the world in ways that we cannot even begin to envision. He predicts that one factor that will accelerate growth is that we will be able to slow down the ageing of the brain. Which, of course, would give us more time to have better ideas. Mokyr, engaging and creative as ever at 72, is a good example for his thesis.

The fact that two brilliant minds come to such radically different conclusions about growth highlights what a vexing a topic it has been.

Of all the things that economists have tried (and mostly failed) to predict, growth is one place where we have been particularly pathetic. To name just one example, in 1938, just as the US economy was going back into high growth mode after the Great Depression, Alvin Hansen (who was not a nobody – he was the co-inventor of the IS-LM model that most students of economics will remember from their first macro class, and a professor at Harvard), coined the term “secular stagnation” to describe the state of the economy at the time. His view was that the American economy would never grow again because all the ingredients of growth had already played out. Technological progress and population growth in particular, were over, he thought.

Most of us today who grew up in the West grew up with fast growth or with parents who were used to fast growth. Robert Gordon reminds us of our longer history: it is the 150 years between 1820 and 1970 that are exceptional, not the period of lower growth that followed. Sustained growth was virtually unknown until the 1820s in the West.

Over the period 1500 to 1820, annual GDP per capita in the West went from 780 to 1240 dollars (in constant dollars), a paltry annual growth rate of 0.14%. Between 1820 and 1900, growth was 1.24%, eight times more than in the previous three hundred years, but still much less than the 2% that it would hit after 1900. If Gordon is right and we end up with a 0.8% growth rate, we would simply be returning to the average growth rate over the very long run (1700-2012). This is not the new normal, it is just normal.

Of course, the fact that sustained growth over a long time, the kind that we saw over most of the 20th century, was unprecedented, does not mean that it could not happen again.

The world is richer and better educated than it was ever before, the incentives for innovation are at an all-time high, and the list of countries that could lead a new innovation boom is expanding. It could well be the case, as some technology enthusiasts believe, that growth explodes again in the next few years, fuelled by a fourth industrial revolution, perhaps powered by intelligent machines capable of teaching themselves to write better legal briefs and make better jokes than humans.

But it could also be, as Gordon believes, that electricity and the combustion engine brought about a one-time shift in how much we can produce and consume. It took us some time to reach this new plateau and there was fast growth along the way, but we have no particular reason to expect that this episode would repeat itself. Nor, we might add, do we have definitive proof that it won’t. Mostly, what is clear is that we don’t know and have no way to find out other than waiting.

The war of the flowers

Abhijit’s parents did not really believe in toys. He spent long afternoons playing war games with flowers. The buds of the ixora, with their long stems and pointy heads, were the enemy, purportedly throwing stones at his foot soldiers, the long and fleshy leaves of the portulaca. The tuberoses were the health workers, operating on the casualties of war with toothpicks and bandaging them with soft petals of jasmine.

Abhijit remembers these as some of the most pleasurable hours of his day. That should surely count as well-being. But none of his enjoyment was captured by the conventional definition of GDP. Economists have always known this, but it deserves emphasis: when a rickshaw puller in Abhijit’s native Kolkata takes the afternoon off to spend with his lady love, GDP goes down, but how could welfare not be higher?

When a tree gets cut down in Nairobi, GDP counts the labor used and the wood produced, but does not deduct the shade and the beauty that are lost.

GDP values only those things that are priced and marketed. This matters because growth is always measured in terms of GDP. 2004, the year when TFP growth, after jump starting in 1995, slowed down again, is when Facebook began to occupy the outsized role that it currently plays in our lives. Twitter would join in 2006, and Instagram in 2010.

What is common to all these platforms is the fact that they are nominally free, cheap to run, and wildly popular. When, as is now done in GDP calculations, we judge the value of watching videos or updating online profiles by the price people pay – which is often zero – or even by what it costs to set up and operate Facebook, we might grossly underestimate its contribution to well-being. Of course, if you are convinced that waiting anxiously for someone to like your latest post is no fun at all, but you are unable to kick the Facebook habit because all your friends are on it, GDP could also be overestimating well-being.

Either way, the cost of running Facebook, which is how it is counted in GDP, has very little to do with the well-being (or ill-being) that it generates.

The fact that the recent slowdown in measured productivity growth coincides with the explosion of social media, poses a problem because it is entirely conceivable that the gap between what gets counted as GDP and what should be counted in well-being widened exactly at this time. Could it be that there was real productivity growth, in the sense that true well-being increased, but our GDP statistics are missing this entire story?

Robert Gordon is entirely dismissive of this possibility: in fact, he reckons that Facebook is probably responsible for a part of the productivity slowdown—too many people are wasting time updating their status at work. This seems largely beside the point, however. If people are actually much happier now than they were before, who are we to pass judgment on whether it is a worthwhile use of their time, and therefore whether it should be included in well-being calculations?

Good Economics for Hard Times

Excerpted with permission from Good Economics for Hard Times: Better Answers to Our Biggest Problems, Abhijit V Banerjee and Esther Dufflo, Juggernaut.