There are a number of critical issues facing the industrialized economies; notably the increasing concentration of income among the very wealthy and changes in the nature of employment. Thus the increasing income associated with growth in the economy has, in the past couple of decades, accrued largely to the highest income group in society. Arguably then, given recent trends, whether or not economic activity expands is of less consequence and interest for most of society than it was in earlier decades. It is, however, presumably easier to manage public policy in the context of increasing total production and income than of a more stagnant economy.
Whether or not the industrial economies are likely to continue to grow at rates similar to those of the past few decades is the subject of much discussion among economists and business people. Note that we’re talking here about the long run trend rate of growth, not the annual rates of growth that vary substantially as a consequence of cyclical developments.
The different views on the prospects for productivity growth are illustrated in a couple of books that I’ve recently read. There are other views on the process that leads to productivity growth, notably those of Paul Romer, a recent Nobel laureate. This note is not intended to be in any sense exhaustive!
The long-term trend rate of growth in economic activity, as conventionally measured by growth in Gross Domestic Product, depends on two factors: growth in productivity (output per unit of labour used) and growth in the employed labour forc. Since population and labour force growth are declining in most of the industrialized world, future economic growth and improvements in the standard of living will be increasingly dependent on growth in productivity. Studies that have attempted to determine the factors underlying productivity growth have examined the influence of the amounts of labour and capital used per unit of output and have found that these factors account for part, but not all, of productivity growth. As the OECD has noted:
“After computing the contributions of labour and capital to output, the so-called multi-factor productivity (MFP) can be derived. It measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organisational innovation.”
Erik Brynjolfsson and Andrew McAfee argue in The Second Machine Age , that productivity growth will remain strong as the innovations of the digital age percolate through the economy. In contrast, Robert Gordon, in his fascinating history of the inventions and innovations leading to the strong productivity growth in the first half of the 20th century , argues that the digital age cannot match the revolutionary changes in living standards and production methods resulting from the inventions – such as the steam engine, electricity, indoor plumbing – that occurred in the 19th century.
Brynjolfsson and McAfee – henceforth B&M– argue that the prospects for the further expansion of digital technology are enormous, citing ‘Moore’s Law’ – that computing power will double annually at a constant pace for the foreseeable future – and the fact that digitization has increased at a faster rate in the past couple of decades than heretofore. Further, they argue that the prospects for associated productivity growth are equally large.
Thus, they take issue with those (such as Gordon) who argue that innovation, technical progress and therefore productivity growth, are slowing down as the growth stimulated by the major 19th century innovations and inventions is exhausted.
B&M argue that information and communication technology (ICT) has the potential for important impacts on many sectors of the economy just as did the invention of steam power and electricity, what they call General Purpose Technologies (GPT). They argue that ICT, like GPTs, is pervasive, will improve over time and is able to spawn new innovations. Steam revolutionized transportation and electricity changed everything including allowing the possibility of the digital revolution!
Further, B&M agree with other analysts such as Romer and Arthur that it’s not simply a question of exploiting a major innovation such that there is no more fruit to be reaped; rather it’s a question of “recombining things that already exist”. And, say B&M, the GPT of ICT is doing this. As examples of how this has occurred they cite the development of the Web from pre-existing elements and a “simple PC application called a browser”. Further, these authors argue that the enhanced communicative power of the internet makes it more likely that recombinants will be developed more quickly than they would have heretofore. As they say: “The theory of recombinant innovation stresses how important it is to have more eyeballs looking at challenges and more brains thinking about how existing building blocks can be rearranged to meet them”. Moreover, they argue that “the main impediment to progress has been that, until quite recently, a sizable portion of the world’s people had no effective way to access the world’s stock of knowledge or to add to it.”
Gordon, on the other hand, argues that the inventions of the current ‘industrial revolution’ – relating to entertainment, communication and internet technology – did not have, and are not having, the same effects on living standards, quality of life and life expectancy as did all the inventions of what he calls “the special century” such as electricity, the internal combustion engine, means of communication and indoor plumbing. Further, he argues that the quality improvements that have taken place since the 19th century are underestimated and that the great inventions of that century, especially electricity and the internal combustion engine, continued to alter production methods beyond recognition, not just in the 1920’s but in the 1930’s and 1940’s as well.
In contrast, Moore’s Law, which stated that the number of transistors on a computer chip would double every two years, has ceased to operate. According to Gordon, the doubling time increased to 8 years in 2009 although by 2014 it had dropped to 4 years.
Both Gordon and B&M note a number of ‘headwinds’ that will make good economic performance hard to achieve in the future:
• Gordon notes “the gradual disappearance of good, steady, middle level jobs that have been lost, not just to robots and algorithms but to globalization and outsourcing, to other countries and the concentration of job growth in routine manual jobs with relatively low wages”.
• Other ‘headwinds’, including income inequality, slowing levels of growth in educational improvement, demographic changes, and fiscal issues combine to imply “barely positive growth in the bottom 99 per cent of the income distribution.”
As Gordon notes, not all of these headwinds directly affect productivity growth.
B& M also note these ‘headwinds’ and a number of other issues related to the productivity question:
• GDP is not a good indicator of economic wellbeing; e.g. the enjoyment we get from the internet is probably far in excess of the value of the computer hardware that we use.
• Income distribution has shifted markedly against labour in favour of capital and, within labour, in favour of highly skilled/educated labour.
• The ease of communication – physical and digital – has led to huge increases in the incomes of superstars further exacerbating the increasing inequality of income and wealth.
• Future growth in productivity may well lead to lower employment.
• Employment is declining rapidly in jobs doing repetitive/clerical tasks but will be sustained in jobs requiring human interaction and complex communication, indeed anything that requires the simplest kind of decision- making. They cite the example of a robot ‘trained’ to fold towels: “it took … more than twenty-four minutes per towel. The robot spent most of that time looking to learn where the towel was and how to grasp it.”!! So, they claim, with reason I think, that jobs like cooks, gardeners and home health aides are not about to be replaced by machines anytime soon.
But, ultimately B&M conclude, “we need to think much more deeply about what it is we really want and what we value, both as individuals and as a society. Our generation has inherited more opportunities to transform the world than any other. That’s a cause for optimism, but only if we’re mindful of our choices. Technology is not destiny. We shape our destiny.”