Already a Bloomberg.com user?
Sign in with the same account.
On Oct. 8 the International Monetary Fund lowered its global growth forecast for 2013, from 3.9 percent to 3.6 percent. The fund also warned of an “alarmingly high” chance that growth would slip below 2 percent next year. The number crunchers at the IMF, like most economic forecasters, rely on the basic assumption that over time, growth will do what it always has done: It will trend upward, and the ups will be greater than the downs. A group of economists who take the long view of history—a very, very long view—are now challenging the conventional wisdom.
The standard theory of economic growth comes from two papers penned in the 1950s by Robert Solow that would eventually earn him the Nobel Prize. Before Solow, growth was seen as simply a function of population and capital accumulation: More money plus more people equals more growth. The Massachusetts Institute of Technology economist pointed out that technology had something to do with growth, too. Technological advances, such as the mechanization of looms or the computerization of spreadsheets, increase the economy’s productive potential.
In a new paper for the National Bureau of Economic Research, a private, nonpartisan research organization, economist Robert Gordon argues that there’s no reason to assume productive technology will continue to materialize and supply the economy with periodic boosts. The Northwestern University professor points to a surprising finding by economic historians. From the 13th to 18th centuries, the economy of the British Isles expanded at a per capita rate of just 0.2 percent per year. Then, with the dawn of the first Industrial Revolution in the 19th century, growth shot up, powered by steam engines and railroads, and the U.K. became what Gordon calls the “frontier” economy—that is, the fastest-growing nation on earth.
In the 20th century the title passed to the U.S. The spread of indoor running water, the internal combustion engine, and electricity lifted the nation’s annual per capita growth from the less-than-1 percent range, where it had hovered for centuries, to 2.5 percent by 1930. Yet within a couple of decades, the boom began to peter out. According to Gordon, it’s been downhill since 1950, with annual growth averaging just 2.1 percent per capita through 2007. “We knew in 1956 that there had been no economic growth before 1750, it’s just that our horizon was too short,” says Gordon. “We’d had 100 years of progress. We now have a lot more perspective.”
If the U.S. continues on its current trajectory, by 2100 the world’s biggest economy will wind up back where it started, at 0.2 percent growth per annum. Gordon doesn’t rely on an equation to produce this number, but a question: What proof do we have that a new technology will arrest the slide? Not the Internet, he says.
In Gordon’s view, the Net isn’t that big a deal, at least not when judged by the standards of the last 300 years. That’s an argument he first trotted out in 2000, at the height of the dot-com bubble. Running water and electricity freed housewives to enter the labor force. The internal combustion engine facilitated travel at speeds undreamed of in the age of sail and hoof. Gordon offers a thought experiment that, he says, has resonated with audiences at academic symposia: Imagine having to do without all the inventions of the last 10 years. Now imagine going without your indoor toilet. Which scenario do you prefer?
Gregory Clark, an economics professor at the University of California at Davis, believes Gordon is being too pessimistic. He notes that it can take a century for a new invention to increase productivity. The modern steam engine was introduced in 1707, yet railroads didn’t start changing travel until the 1830s. Clark places his faith in science rather than technology. The beginning of the U.K.’s golden age of growth coincided with the popularization of the scientific method, which offered a way to record, prove, and test assumptions, and ultimately changed the way people thought. “Improvements in knowledge have eventually showed up as gains in production technique,” Clark says, adding that “there’s no sign of a slowdown in the accumulation of knowledge.”
Gordon counters that many of the advances in productivity of the last several hundred years were one-time gains. Women can enter the workforce once. A country can get its citizens off the farm and into school only once. The speed of intercontinental travel has stalled. “Airplanes fly slower now than in 1958 because of the need to conserve fuel,” writes Gordon. His argument is similar to one made last year by Tyler Cowen, an economist at George Mason University, who has argued that growth is a game of catch-up to modernity and the developed economies have already caught up.
“It’s a good moment to ask questions,” says economist James K. Galbraith of the University of Texas at Austin. “The economics profession has laid itself open to its lack of depth on important questions.” Galbraith is frustrated that standard growth models don’t factor in the cost of resources, such as oil. Economists, he says, tend to believe, as Solow did, that technology will overcome problems like the U.S. economy’s dependence on oil. “That’s a spiritual view,” says Galbraith. “I’m all for spiritual views if it helps them keep their chin up. In the meantime, we have climate change to deal with.”
The bottom line: Economists are debating whether technological innovation can jolt the U.S. economy out of its slow-growth track.