The Accident of Economic History

Must-read article: The Blip: What if everything we’ve come to think of as American is predicated on a freak coincidence of economic history?

This is a necessary companion piece to Sunday's post about diminishing returns to scientific discovery and innovation. It centers around the work of a couple of clear-seeing economists (a rarity nowadays). One is Robert Gordon, whom we've covered here many times before, but it goes into much greater depth and detail about his arguments:

Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the aging of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality. Over the past year, some other economists who once agreed with Gordon most prominently Tyler Cowen of George Mason University have taken note of the recent discoveries of abundant natural-gas reserves in the United States, and of the tentative deflation of health-care costs, and softened their pessimism. But to Gordon these are small corrections that leave the basic story unchanged. He believes we can no longer expect to double our standard of living in one generation; it will now take at least two. The common expectations that your children will attend college even if you haven’t, in other words, or will have twice as rich a life, in this view no longer look realistic. Some of these hopes are already outdated: The generation of Americans now in their twenties is the first to not be significantly better educated than their parents. If Gordon is right, then for all but the wealthiest one percent of Americans, the rate of improvement in the standard of living year over year, and generation after generation will be no faster than it was during the dark ages.

Gordon’s second prediction is almost literary in its scope. The forces of the second industrial revolution, he believes, were so powerful and so unique that they will not be repeated. The consequences of that breakthrough took a century to be fully realized, and as the internal combustion engine gave rise to the car and eventually the airplane, and electricity to radio and the telephone and then mass media, they came to rearrange social forces and transform everyday lives. Mechanized farm equipment permitted people to stay in school longer and to leave rural areas and move to cities. Electrical appliances allowed women of all social classes to leave behind housework for more fulfilling and productive jobs. Air-conditioning moved work indoors. The introduction of public sewers and sanitation reduced illness and infant mortality, improving health and extending lives. The car, mass media, and commercial aircraft led to a liberation from the narrow confines of geography and an introduction to a far broader and richer world. Education beyond high school was made accessible, in the aftermath of World War II, to the middle and working classes. These are all consequences of the second industrial revolution, and it is hard to imagine how those improvements might be extended: Women cannot be liberated from housework to join the labor force again, travel is not getting faster, cities are unlikely to get much more dense, and educational attainment has plateaued. The classic example of the scale of these transformations is Paul Krugman’s description of his kitchen: The modern kitchen, absent a few surface improvements, is the same one that existed half a century ago. But go back half a century before that, and you are talking about no refrigeration, just huge blocks of ice in a box, and no gas-fired stove, just piles of wood. If you take this perspective, it is no wonder that the productivity gains have diminished since the early seventies. The social transformations brought by computers and the Internet cannot match any of this.

But even if they could, that would not be enough. The growth rate is a heavy taskmaster, Gordon says. The math is punishing. The American population is far larger than it was in 1870, and far wealthier to begin with, which means that the innovations will need to be more transformative to have the same economic effect. I like to think of it this way, he says. We need innovations that are eight times as important as those we had before.

And the necessary counterpoint is provided by Erik Brynjolfsson, another economist whom we've covered quite a bit here. The thing is Brynjolfsson’s argument isn't exactly a refutation of Gordon in any way. To me, it's more complementary. His argument is that the computer revolution is in its early stages and is as transformative as earlier revolutions:

The second industrial revolution itself, he said, proved the point. After factories were electrified, Brynjolfsson explained, the amazing thing is productivity didn’t increase in those factories for 30 years. 30 years! It sometimes take a while for humans to figure out how to use innovations, he said, and perhaps we are just now beginning to comprehend the full possibilities of computerization. In Brynjolfsson’s view, we are now in the beginnings of the new machine age, an extended moment of revolution in artificial intelligence. A child’s PlayStation, he said, is more powerful than a military super computer from 1996; a chess program contained on a cell phone can defeat every grandmaster. Brynjolfsson pointed out that Watson, the IBM AI project, having successfully amassed enough everyday knowledge to defeat the grand champions on Jeopardy!, was now applying for jobs at call centers, and getting them. In finance, and in law, and getting them.

Economists often note that even experts are very bad at predicting the world to come and constantly underestimate it. Optimists like Brynjolfsson say that though productivity gains from computer technologies have declined since 2004, that’s no reason to expect the decline to continue. They see prospects. A recent McKinsey report detailing economic sectors that might grow found, for instance, great possibilities in intelligent machines: trillions of dollars in the so-called Internet of Things, for instance, and 3-D printing.

The funny thing is, Brynjolfsson himself is usually placed in the pessimist camp! The reason is because the book he co-wrote with Andrew McAfee makes the argument that most mainstream economists refuse accept despite the overwhelming evidence: the computer revolution is actually destroying jobs! Growth without jobs is something we're not set up for:

It turns out the optimist’s case is darker than I expected. The problem is jobs, he said. Sixty-five percent of American workers, Brynjolfsson explained, occupy jobs whose basic tasks can be classified as information processing. If you are trying to find a competitive advantage for people over machines, this does not bode well: The human mind did not evolve to multiply triple-digit numbers, he told me. The robot mind has. In other words, the long history of Marx-inflected pleas, from Bartleby through to Fight Club, that office work was dehumanizing may have been onto something. Those jobs were never really designed for the human mind. They were designed for robots. The existing robots just weren’t good enough to take them. At first.

If even your optimists are pessimistic, you might want to be concerned. Put together, both of these cast a dark view on growth. Gordon, in my view, is dead on, but if anything he's too optimistic! He talks about headwinds, but he underestimates the greatest headwind of all - the dwindling availability of raw materials including fossil fuels, and environmental destruction caused by pollution, including climate change. Agricultural output will be hammered by climate change and the rest of the economy will be hammered by the substitution of lower-grade sources of energy for cheap, easily accessible crude oil. From this article (worth reading in full):

Regarding the scarcity of resources issue, none other than the World Bank produced a detailed study of demand and supply projections for the immediate future. The study projects that, on the basis of current consumption and immediately precedent rises in it, the demand for food will rise by 50% by 2030, for meat by 85%, for oil by 20 million barrels a day, and for water by 32%, all by the same year. This is met by alarming statistics and predictions from the supply side. In their report, they state that global food growth rates fell by 1.1% over the past decade, and are continuing to fall, while global food consumption outstripped production in seven of the eight years between 2000 and 2008. Further, the Food and Agricultural Organization and the UN Environment Program estimate that 16% of the arable land used now is degraded. Intensifying competition between different land uses is likely to emerge in future, including food crops, livestock, etc., and the world’s expanding cities. Current rates of water extraction from rivers, groundwater and other sources are already unsustainable in many parts of the world. Over one billion people live in water basins in which the physical scarcity of water is absolute; by 2025, the figure is projected to rise two billion, with up to two thirds of the world’s population living in water-stressed conditions (mainly in non-OECD countries). On oil, the International Energy Agency has warned consistently that there is a significant risk of a new “supply crunch” as the global economy “recovers.” Additionally, the IEA’s chief economist argues that peak production could take place by 2020 (from the “World Development Report 2011, Background Paper: Resource Scarcity, Climate Change and the Risk of Violent Conflict,” www.worldbank.org ).

But a key point made by the article is: All of America's history has occurred during this period of extraordinary growth. America's entire history has coincidentally overlapped with the first and industrial revolutions. Thus, is is questionable whether our society can even exist without it. From the article:

The whole of American cultural memory, the period since World War II, has taken place within the greatest expansion of opportunity in the history of human civilization. Perhaps it isn’t that our success is a product of the way we structured our society. The shape of our society may be far more conditional, a consequence of our success. Embedded in Gordon’s data is an inquiry into entitlement: How much do we owe, culturally and politically, to this singular experience of economic growth, and what will happen if it goes away?

Going beyond this thought means, what if we have succeeded not because of the way we have structured our society, but in spite of it? In Morris Berman's estimation, American culture and expansionist capitalism are inextricably joined. In fact, it is what defines American culture and social relations. From a recent speech:

In March of last year, the Pew Charitable Trust released the results of a poll that revealed that most Americans have no objection to the existence of a small, wealthy elite—the famous 1%. Not at all. Their goal is to become part of that elite, and they are deluded enough to think that they can. This is one reason why the Occupy Wall Street movement had such a short lease on life, and why social inequality was a nonissue in the last presidential election, not even mentioned in the pre-election debates. Rich or poor, nearly every American wants to be rich, and in fact sees this as the purpose of life. In this sense, we have the purest democracy in the history of the world, because ideologically speaking, the American government and the American people are on the same page. To quote Calvin Coolidge, “The business of America is business.” Hustling is what America has always been about.

This is why our elected leaders have a vacant quality about them. After all, the American Dream is about a world without limits, about always having More. But More is not a spiritual path, nor is it a philosophy of life. It has no content at all, and this why, when you look into the eyes of an Obama or a Clinton or a Hillary Clinton—probably our next president—you see not merely nothing, but a kind of terrifying nothingness. Unfortunately, this vacant look characterizes a lot of the American population as well: the microcosm reflects the macrocosm, as the medieval alchemists were fond of saying. Once again, this is evidence of a pure democracy: nobodies elect nobodies to office, and then everyone wonders “what went wrong.” All of this reflects the power of horizontal understanding: what you see is what you get.

The problem with the philosophy of More is that More, as already noted, doesn’t have any intrinsic meaning. After all, once you have it, you then want—More! That’s the American Dream. But the awareness of this dynamic—assuming we ever get to that point—puts us in a particular bind, at least as far as serious social change is concerned. We are finally talking about a kind of conversion experience; and beyond the individual level, which is itself no small achievement, that can only happen when history presents us with a no-win situation. The bald fact is that we cannot maintain the American Dream—now foolishly being pursued by the Chinese—because we are running out of resources, oil in particular. The American Dream cannot survive without energy, and lots of it.

And in a similar vein, from Michael Seidel:

Some of the good things in life are corrupted or degraded if we turn them into market commodities. So when we decide when to use markets, it’s not enough to think about efficiency. It’s not even enough to think about market freedom. We also have to decide how to value the goods in question, be they health, education, national defense, criminal justice, environmental protection, and so on.

These are moral and political questions, not merely economic ones. And to decide them democratically we have to debate them, case by case, just as we have begun to do here, the moral meaning of these goods and the proper way of valuing them.

This is the debate that we didn’t have in the age of market triumphalism. And as a result, without quite realizing it, without ever deciding to do so, we drifted from having a market economy to becoming a market society.

In Berman's account, America is less of a civilization than a get rich quick scheme. I've often noted that our architecture does not look like we intend to be here for more than one or two generations. Apart from a few great cities, many of which are now semi-abandoned and in various states of decay, our architecture is less "buildings," than "sheds" - temporary utilitarian structures erected for convenience with little or no aesthetic value because their inhabitants do not intend for them to last very long.

The model for this is the boom town. Be it oil or gold or minerals or lumber, the extractive culture builds quick shelters for convenience, intending to move on to the next "boom." But what if there are no more booms? What if the United States as a culture, as a society, as a civilization, is just a massive boom town on the scale of the nation-state? And do places like Detroit, Youngstown, Camden and Stockton signify that the boom is already coming to an end? What, if anything, of America will remain? Will there be any signs of our occupation of this continent five hundred years hence, besides mounds of trash and toxic waste?

I apologize, this post is longer than I wanted. But it's important to note that the desire to return to historic growth is nothing more than a modern cargo cult. We may laugh at the ignorance of the Melanesian natives who built planes and control towers out of sticks and stones intending to magically make cargo planes once again appear as they had during the war. But our modern "scientific" society run by economists betrays the exact same lack of understanding about where our wealth comes from. Are we much different from the Aztecs who sacrificed humans to the gods to make the crops grow again? I'm not so sure.

But then again, what do I know?