Tuesday, September 17, 2013

The Pessimists

We’ve covered the work of Robert Gordon here before. Gordon’s ideas rest upon what we explored here last week – that progress was pretty much nonexistent for most people before 1870. Gordon…”suggests not just that economic growth was a one-time thing centered on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100.” Why? Because not all inventions are created equal, the low-hanging fruits have been harvested already, and some things can only be done once.

Gordon divides the Industrial Revolution into three periods, similar to what we have seen before:
•IR #1 (steam, railroads) from 1750 to 1830;

•IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and

•IR #3 (computers, the web, mobile phones) from 1960 to present.

It [his paper] provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972.
Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanisation, transportation speed, the freedom of women from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.
The inventions of the second Industrial Revolution (that is, the one between 1870 and 1960) are much more transformative than the incremental improvements and frivolous mass entertainment of today:
The paper explains this history by a simple proposition. The great inventions of IR #2 were just more important than anything that has happened since. The speed of transportation was increased from that of the 'hoof and sail' to the Boeing 707. The temperature of a room was wildly variable in the 19th century but by now is a uniform 70 degrees year round. The transition from rural to urban in the US could only happen once. Only once could electricity be invented and create rapid transit, machine tools, consumer appliances, and the entire electricity-dependent set of entertainment devices from the radio to the TV to the internet and its multiple spin-offs such as the iPod, iPhone, and iPad. The loss of the impetus of IR #2 inventions makes a big difference in the future of human wellbeing.
Even if we could come up with inventions as transformative as those of the Second Industrial revolution,
Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.
Which I’ve always found a bit strange, since some of those headwinds are self-imposed political choices, not absolute hard limits like demographics, the laws of thermodynamics, or the scarcity of resources. We could theoretically undo them with social change, which would be beneficial on many levels. Is he saying that the thing holding back economic growth is partly the composition of the economic system itself? That although the economic system needs growth like a fire needs oxygen, it creates social conditions inimical to growth (exponentially increasing debt, extreme social inequality, lower birth rates due to poverty)? Talk about a Catch-22 situation!

The conclusion:
This paper is deliberately provocative. The numbers in the 'exercise in subtraction' have been chosen to reduce growth to that of the UK for 1300-1700. The outcome may turn out to be much better than that. But the point of this article is that it is likely to be much worse than any epoch of US growth since the civil war.

The physician Jan Vijg embarked on a second career writing a book about technical stagnation. His arguments are a bit different: that success breeds a series of elites who favor the status quo and are risk-averse. As empires become more successful, civilizations become more complacent in their standard of living. It is this that breeds a lack of innovativeness. According to Vijg, truly innovative ideas are more likely come about in periods of chaos and instability, when there is less to lose. The Warring States period in China and the early Industrial Revolution were periods like this. During the Cold War, the United States made massive investments in science, landing men on the moon. Today those programs are defunded and mothballed.

Rather than allowing disruptive ideas to tip the apple cart, elites increasingly make it harder for newcomers to challenge their power, and the system descends into stasis, even as it needs to innovate if it needs to survive. It seems to me that this could apply to politics as well as technology. Vijg talks about things regulatory burdens to eliminate competition and needless patents. He also talks about the desire to preserve existing profits rather than be truly innovative. According to Vijg there are at least three major obstacles to technological progress: regulatory constraints, advanced business models that effectively seek the highest profit at the lowest possible risk, and a lack of capital. In a sense, these same obstacles were encountered by previous successful societies in their glory days. He ties this to numerous historical examples from the Roman Empire to Imperial China. From a review at the Amazon page for the book:
One of the foremost of Vijg's ideas is how early technological progress and the innovative spirit that brings it about is stymied by newly found status quo. He maintains that as a result of the steady profits brought about by technological advances, governments, corporations, medical establishments and researchers of all kinds become increasingly wary of taking risks. There are fewer and fewer people, in the words of former IBM chairman Tom Watson, who would be willing to take a chance, put their heads on the block, and try something new. Vijg is very astute to point out the three major components responsible for creating this anti-innovation environment: regulations, a profit-seeking and risk-averse business model, and the lack of capital. As a result of these contrary forces, society becomes more prone to producing people who are increasingly content and hence increasingly averse to innovation. As this formula of temporary success is repeated over time, innovation steadily declines. In turn, wealth and national power are also likely to decline as they feed on past and present production success without an explicit vision of changing the future production model.

In his thesis on the regulatory hindrances and the role of risk-averse business leaders, Vijg details the ill effects of regulations and aversion to risk, and rightfully ties the causes to the negative contribution of the apparatchik class, which he calls the "bureaucrats of the empires." This self-imposed, self-important and self-preserving class has permeated every successful society. Unable to contribute to the creation of wealth or innovation, this class, whether in Rome, China, the former Soviet Union or the United States, uses thousands of opaque and unnecessary regulations to control organizations, corporations, and society as a whole. As Vijg notes, even academic research -- particularly medical research -- is no longer a safe haven from these increasing regulations.
This seems provocative to me, since we are told that capitalism is the engine of innovation, and that "creative destruction" is inherent to the system. Yet, as followers of the Zeitgeist movement might attest, this is often not the case. Capitalism tends to create giant monopolies that dominate the market, and these monopolies don't like disruption and undermine political, social and even technological innovation if they cannot profit directly from it (just ask Preston Tucker). The same goes for political monopolies. His connection to the fate of previous societies is interesting. Indeed, Western Europe lost the ability to make concrete, and the Chinese who had measured time by sophisticated water clocks in the eleventh century were awed by the mechanical clocks shown to them by Jesuits in the 1580s because their time measurement methods had degraded so much. His thesis is somewhat reminiscent of Joseph Tainter's work.

Tyler Cowen may be the best-known of the critics.Several years ago he wrote a book entitled The Great Stagnation, arguing that the United States was stuck on a technical plateau, that it had "eaten the low-hanging fruit of modern history," and that today's technological breakthroughs produce enormous happiness gains, but surprisingly little additional economic activity. This article from The Economist sums up his thesis:
There are two kinds of economic growth possible in this world. One can take good ideas already in use elsewhere, adopt them, and make use of underused stocks of people and capital. That's what China and India are currently doing, and we shouldn't mistake their rapid growth for something it's not. Or one can come up with new ideas and apply them in ways that allow the economy to grow.

The rich world has been stuck doing the latter for most of the last century, and lately they haven't been doing it as well. Mr Cowen looks at growth rates of output and median income over the last few decades and notes that there's a steady downward trend. And this trend is due, he says, to the exhaustion of the supply of low-hanging economic fruit.

What low-hanging fruit? Educational fruit, for instance. Decades ago, the rich world was moving most of its population from very low levels of education to university educations, and was shifting lots of potential geniuses from the fields to the factories to the research labs. That was relatively easy to do and it fueled a big growth boom. These days, improvements in educational attainment are quite hard. Nearly half of all young people now go to college. Moving marginal students into college will require a lot of effort and won't yield large gains. That doesn't mean it isn't worth doing, he says. It simply means that easy gains from education are gone.

Americans enjoyed low-hanging land fruit for much of their country's history. Immigrants poured into the American continent and hoovered up cheap land for high-yielding farms, high-yielding mines, and high-yielding cities while Europeans had to go through the slow process of shifting land uses. But these days, those low-hanging land dividends are also gone.

But the big setback for society, according to Mr Cowen, is the end of the exploitation of the major innovations of the last two centuries. The 1700s and 1800s yielded revolutionary innovations in industry, chemistry, and electricity. Rich countries spent the 1800s and 1900s figuring out how to exploit those innovations to their fullest, and as recently as the 1950s and 1960s, these experiments were producing products that utterly changed the way people lived. During the lifetime of those born in the 1930s and 1940s, household technology changed fantastically: refrigerators, laundry machines, dishwashers, radios, televisions, electric light, air conditioning, cheap automobiles, and so on. But with a few exceptions (among them computers, on which more later) today's households don't look that much different from their 1970s counterparts. Products have improved, but the development of revolutionary new technologies has slowed substantially. The progress of technology has plateaued.

Mr Cowen supports this assertion by referencing counts of major innovations, by tracking patents, and by asking readers to trust their own experience. Growth is slowing because economies have already gotten most of the innovative benefit out of previous big leaps and are now squeezing out more marginal gains. If we think on many of the big innovations of recent decades, in health care or finance say, we find that they either have primarily private benefits or produce benefits of questionable value.

The internet, on which he has a lot to say, has had enormous benefits, but a striking amount of online activity is free and internet businesses create few new jobs (and displace lots of others). The result is growth in utility without much of a contribution to GDP, which would be fine except that countries and people have bills to pay, on things like health care, pensions, and government debt. Complicating matters is the fact that the fastest growing contributors to measured GDP—the government, education, and health sectors—deliver returns that are very difficult to measure. This suggests, he says, that rich world GDPs are likely overstated; we're poorer than we thought. And that, Mr Cowen concludes, will make it very difficult for us to make good on the many, many obligations accumulated while we assumed that our previous growth trajectory would continue.
The great stagnation (The Economist)

Unlike Gordon, Cowen is actually optimistic that growth will return in the long run, but even this puts him outside of the opinion of other right-leaning/libertarian economists. Here's a podcast with Cowen on the topic and a partial transcript.

And there are other critics who have an even more bearish outloook, such as James Howard Kunstler, who believes we will actually regress in the near future to a nineteenth-century living standard centered around agrarian and household economies devoid of most modern technology. A sample of his opinions:
We’re not going to “tech” our way through the array of mega-problems we face, in particular the energy predicament. The American mind-space today is clogged with cargo-cult fantasies about electric cars, nano-manufacturing, and “information” technology that would allow the trajectory of progress to continue just as we have known and loved it. This too, like the end of suburbia, will lead to vast disappointment. We’re heading instead into a “time-out” from technological progress, duration unknown, which will probably also result in the loss of some tricks we’ve already learned. The leading wish-fulfillment fantasy, of course, is that we will change out all the gasoline and diesel cars for electric cars. This is not going to happen. We will be a far less affluent society. There will be much less capital available to devote to auto loans. Our towns, counties, and states are all going broke and will not be able to keep the stupendous roadway system in repair. That’s a major reason why we have to return to living in walkable towns instead of disaggregated suburbs, and why we desperately need to repair the regular (not high-speed) rail system.
Reality Check (Clusterfuck Nation)

Later we'll take a look at some optimistic views, and I'll discuss some things that seem to be missing from both camps.

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