Arnold Kling  

The Rest of The Great Stagnation

Lindsey on the Great Nick Rowe vs. Scott Sumner...

I was planning to review Tyler Cowen's e-book while I read it, but then we lost power, and my Kindle was working while my Internet connection was not, so my comments on the entire rest of the book are below the fold...

In chapter two, he says that health care, education, and government have slow productivity growth, and those are becoming larger sectors. This may be true, but one way to look at it (and in fact, what his arguments often amount to) is that what those sectors have in common is that there is a lot of mis-allocation of resources, because of government action. Mis-allocating resources is not the same thing as low productivity growth. But overall, the points in this chapter are well taken.

Chapter three talks about the Internet. Cowen sees is at as a boon to certain types of consumption, but he constantly says that it does not generate revenue. The picture he paints is of a technology that is complementary with leisure but not with, say, capital and manual labor. This is the sort of thing that in my view cries out for a general equilibrium model, using international trade theory. Remember my partial equilibrium story of technological unemployment?

Cowen writes as if the economic gains from the Internet are mostly behind us, and they were not very much to begin with. I think it is more likely that most of the gains are in front of us. Cultural and institutional adaptation takes a long time. Automobiles had penetrated to a tremendous extent by the late 1920s, but it was not until the 1950's that we could see the realignments that the automobile produced. Meanwhile, we had the Great Depression.

Similarly, I would say that although the Internet had achieved a lot of penetration by 2000 or shortly thereafter, it could be another ten years or more before we see the realignment that it might produce. Meanwhile, we are in the midst of a deep recession.

Chapter four talks about government. Cowen argues that some technologies, including motorized transportation and centralized data storage, facilitate large corporations and larger government.

I like his technological story for the growth of government. However, I have a very different view of the arc of technology than he does. In Cowen's view, we had "a lot" of innovation a hundred years ago, but now innovation requires more difficult scientific work, and so it has slowed down. Innovation created economic growth, which helped spur the demand for government services and to make it possible for government to exercise greater control. But now that innovation is slowing, the surplus available to go to government is diminishing.

My view of the arc of technology is that from 1800-1950, the technologies promoted mass society. Mass workers, mass consumers, mass media, large-scale factories, etc. However, since then, the most important technologies have favored decentralization. The computer and the Internet enhance the power of individuals and make it more difficult for large corporate congomerates and centralized governments to work effectively. Economies of scale still exist, but do niche markets. Most important, the diseconomies of scope are now severe.

Cowen attributes political dissatisfaction and turmoil to the phenomenon that our expectations have gotten out of hand relative to what the economy can provide. I attribute political dissatisfaction and turmoil to what I call the discrepancy between knowledge and power. Power became more concentrated in the era of mass technologies and it has continued to become more concentrated.. However, knowledge has become more dispersed. This dispersal of knowledge eventually will lead to the dispersal of power, but the incumbent political powers will resist that dispersal.

Cowen wants to explain the financial crisis as a result of people not perceiving the slowdown in economic growth. They borrowed too much against future income that could not be realized. I want to explain the crisis in part as a result of the knowledge-power discrepancy. The largest banks and their regulators had too much power and too little knowledge.

Cowen's prescription is for all of us to lower our expectations until the economy proves that it can grow again. He suggests that we raise the status of scientists in order to encourage more talented people to go into science.

Again, I disagree with his view of innovation as driven by scientific "aha" moments. In my view, culture and institutions are more important.

About twenty years ago, William Gibson remarked that "The future is here. It's just not very evenly distributed." I think that this process of adapting to technology is more important than the "aha" moments. The distribution of the technological innovations of the past twenty years has much further to go, in my view.

I think that our biggest problem with adapting to the latest technology is that the scale of our institutions is too large. I would feel better if the United States were an aggregation of dozens of Denmarks or Hong Kongs.

Cowen's thesis is interesting. I recommend the e-book. Contrary to what one of my commenters suggests, this is not because I got a free copy to review. I paid the same exorbitant $4 (that is four dollars, not four hundred) that you would have to pay.

COMMENTS (12 to date)
Hugh writes:

I too enjoyed the book - and paid for it!

From a business point of view one of the main changes introduced by the internet has been email. We can argue as to how positive the effect of email has been - but whatever the effect was it's now baked into the income numbers we look at today.

In other words, I tend to agree with Cowen when he says that the internet has been better for entertainment than for revenues.

Floccina writes:

One data point:
In our company the internet has reduced the need for sales and marketing people allowing us to get the same revenue with fewer people.

There is a lot of consumer surplus created for me by the internet. I can order things that I cannot get locally. The number of these things is growing all the time. The long tail.

Bret Swanson writes:

Lots of good points.

Here was my review of Cowen's essay in Forbes:

"Tyler Cowen's Techno Slump"

Yancey Ward writes:

I like Silas Barta, and I always respect his thinking, but I was at a loss to explain his constant flogging of the "free review" copy issue. Perhaps he could explain?

MernaMoose writes:

I have to mostly agree with your assessments, Arnold.

Cowen writes as if the economic gains from the Internet are mostly behind us, and they were not very much to begin with. I think it is more likely that most of the gains are in front of us.

Right on. The fact that we know shifts are happening due to the internet, but it's not clear yet how the shifts are going to settle out, is part of what makes business decisions difficult today. It can be a huge risk factor when you're trying to figure out where to put your capital and other investments.

One point I sort of disagree with though, take this as food for thought.

I think that our biggest problem with adapting to the latest technology is that the scale of our institutions is too large. I would feel better if the United States were an aggregation of dozens of Denmarks or Hong Kongs.

You're absolutely right that we need more decentralization. But I don't believe it means we should necessarily have to break the nation up into smaller parts. Or similarly, that it's necessary to break our large corporations down into smaller companies.

I remember reading a history book years ago, about how classical China administered their provinces (Vietnam being a prime example). The story line was always something like this: the provinces were happiest and flourished best, when the central government was distracted with other problems and didn't micromanage the provinces. Sure, sometimes taxes were on the heavy side, but for that the provinces got Chinese military protection when they needed it. And in Asia you can believe, there were times they needed.

I believe there are still substantial benefits to be gotten from large, even huge corporations and governments, in today's world. What the world needs, more than anything else, is a new upper management philosophy. The top brass needs to get out of the business of micromanaging the provinces. The "alliance" of the organization's piece-parts needs to be looser, not tighter. Let the local admins make the bulk of the big decisions based on the localized knowledge they have.

The problem is that our top leaders are just not very good at keeping their fingers out of the pots that their chefs have on the stoves.

Now that I think of it, if somebody wanted a crusade to push a worthwhile new management philosophy, here you have it in a nutshell: Management According to MernaMoose.

Oh and btw I have to say it. Cowen's book might have some interesting ideas but I still think his central thesis amounts to The Tiniest Fogbank in the World.

ChrisH writes:

Please consider doing another review, not of the content, but of the format and marketing approach.

You had two books published last year. Would you rather have done 15, in smaller chunks like this? Compare and constrast.

Chris T writes:

So far I've gleaned from all this that Cowen doesn't really understand technology or the internet (particularly what it is). He's not alone though, I've seen the same mistakes committed by quite a few other economics bloggers, including Krugman and Summers. Odd considering how fundamental technology is when it comes to the economy. It gives me even less confidence that the macroeconomics profession has any idea what it's doing.

Kling seems to be getting it though.

Chris T writes:

Krugman and Summer

My error, should be Sumner.

stevelaudig writes:

There is no discussion of military spending while he discusses government spending. This failure calls the entire work into question even though it is a prime example of one of his main points: mis/calculation of risk. It seems to me that virtually all military spending is premised on some calculation of risk. there is no purer instance.

blink writes:
I disagree with his view of innovation as driven by scientific "aha" moments. In my view, culture and institutions are more important.

Cowen's suggestion to raise the status of scientists appears addressed to culture and institutions. Is there really a disagreement? If so, what would count as evidence one way or the other?

Tom Grey writes:

The world, esp. China and India (2/5s) is certainly not stagnating. They are busy busy catching up.

Their catching up, copying, replacing "overpaid" office workers with outsourced workers only half as productive per head, but at only 20% the cost, a big profit win for the corporations.

the economic gains from the Internet
are going to the poor who, using the internet, become middle class.
Similarly, the very poor don't yet get so much from cars, already over 100 years old.

But on stagnation ... in 1968, it was thought there would be HAL like speaking computers by 2001.
10 years later, still waiting...
Some tech problems, like Jetson's anti-gravity, are harder than others.

Demaratus writes:

Mr. Kling,

Do you think the "automobile reallignment" occured before or after the government distorted the transportation market by building the interstate highway system? If it occured after, than I think that point is incorrect.

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