David R. Henderson  

Robert J. Gordon on Growth

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I'm a big fan of much of the work of Northwestern University economist Robert J. Gordon. His latest piece, "Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds," is no exception. I have some criticisms. Indeed, my main criticism is that his bottom line is implausible. More of that in a follow-on post tomorrow. For now, because it's gated, I'll highlight his basic argument plus some of the best parts.

Briefly, his argument is that there have been 3 industrial revolutions: (1) steam and railroads from 1750 to 1830, (2) electricity, the internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, and petroleum from 1870 to 1900, and (3) computers, the web, and mobile phones from 1960 to now. Each of these has brought a burst of productivity increases over decades with (3), though, causing a growth revival only from 1996 to 2004. He emphasizes that what can be done once, when it's a move from one level to another, can't be done again. As he puts it, "A common feature of this innovative revolution was that many of the improvements could only happen once." So, for example, "The U.S. was transformed from 75 percent rural to 80 percent urban, and that could not happen again."

Here are some highlights:

But the biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.

Life expectancy was only 45 years in 1870, compared to 79 years recently. Why? Infant mortality resulted from poor sanitation, water-transmitted diseases, and contaminated milk. The first attempts at urban sanitation infrastructure emptied the waste into the rivers because there was a theory at that time that rivers were self-cleansing. And there were further causes of low life expectancy: hard physical labor and work-related injuries. In 1900, 13,000 people died in railroad deaths, about a quarter of them railroad employees, and others included both passengers--because boilers would blow up--or pedestrians run down by the railroad. There was also violence and lynching.

These quotes above remind me of a similar point Gordon made in his 2000 article in Journal of Economic Perspectives titled "Does the 'New Economy' Measure up to the Great Inventions of the Past?" Here's one highlight from that article:
The urban streets of the 1870s and 1880s were full not just of horses but pigs, which were tolerated because they ate garbage. In Kansas City, the stench of patrolling hogs was so penetrating that Oscar Wilde observed, "They made granite eyes weep." The increasing production of animal waste caused pessimistic observers to fear that American cities would disappear like Pompeii--but not under ashes. Added to that was acrid industrial smog, sidewalks piled high with kitchen slops, coal dust, and dumped merchandise, which became a liquid slime after a rain. All of this was made worse in the summer, which was almost as unbearable outdoors as inside, especially with the heavy clothes of the day. Rudyard Kipling said of Chicago, "Having seen it, I desire urgently never to see it again. Its air is dirt." Added to putrid air was the danger of spoiled food--imagine meat and poultry hung unrefrigerated for days, spoiled fruit, bacteria-infected milk, and so on. Epidemics included yellow fever, scarlet fever, and smallpox. Many hospitals were deathtraps.

Gordon also "gets" the huge benefits of the car. It was a bigger boon to rural than to urban dwellers. By 1926, he notes, "93 percent of Iowa farmers owned motor cars." Incidentally, my father was the only person I knew in his generation who put his car on blocks in the garage over the winter. He did this through the winter of 1960. So we went from mid-October to late March without a car. Here's a great paragraph in Gordon, excerpted from a 1972 book by James J. Flink:
The benefits of automobility were overwhelmingly more obvious: an antiseptic city, the end of rural isolation, improved roads, better medical care, consolidated schools, expanded recreational opportunities, the decentralization of business and residential patterns, a suburban real estate boom, and the creation of a standardized middle-class national culture.

On life expectancy:
Life expectancy began to grow rapidly as horse-created diseases were reduced; running water and water-treatment plants largely eliminated water-borne diseases; and regulations [DRH note: I'm skeptical about regulation being an important cause] and refrigeration prevented the spoilage of milk and meat. The Jungle, Upton Sinclair's sensational muckraking expose of the Chicago stockyards, helped push popular and political sentiment to create the Food and Drug Administration in 1906.

Eventually in the 1930s and 1940s sulfa and antibiotics were invented, but by then life expectancy had turned a decisive corner. Little known is the fact that the annual rate of improvement of life expectancy in the first half of the 20th century was three times as fast as in the last half.


So why the pessimism? Gordon points to six "headwinds" that he thinks will reduce growth: demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.

His tentative bottom line:

A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.

Notice, by the way, that this highly pessimistic exercise still gives positive growth so that the economists' optimism about the future that Bryan Caplan has written about still holds, albeit in muted tones.

Tomorrow, I'll give some criticisms.


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COMMENTS (5 to date)
Lee Waaks writes:

I think Gordon's view is flawed. George Reisman argues in his book Capitalism that if we can dramatically increase saving and investment, we can still have huge productivity gains because we can always marginally improve returns all over the place with existing technology/production methods. The real problem is not stagnation but capital destruction by the state.

Tame writes:

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Evan Soltas writes:

This is an interesting review, and I think you do a good job highlighting the best part of the paper, reminding readers of the huge marginal technological value of early innovations (like indoor plumbing) often taken for granted.

I responded to Gordon's paper here on my blog: http://esoltas.blogspot.com/2012/09/gordon-on-growth.html

Mike W writes:

I wonder, did the economists of the day anticipate the productivity gains from the innovations of the previous "industrial revolutions"? Probably not.

Is it possible the stagnationist economists of today just do not have the imagination to see the revolutions of the future? Probably. If they could they would be venture capitalists and not economists.

Mark Bahner writes:

Hi,

I find it absolutely astounding that the virtually all economists don't seem to know what causes economic growth.

Speaking as an engineer, there isn't a similar problem in my profession. We know what keeps bridges up: duct tape.

But I digress.

Julian Simon knew what caused economic growth. The cause of economic growth is (free) human minds. So the more (free) human minds there are, the faster the economy will grow. This can be seen in the world per-capita GDP from 1700 to the present. In every 50-year period, per-capita world GDP (adjusted for inflation) rose at a faster rate.

Time period...Percent Annual Per Capita GDP Growth

1700-1750.......................0.16
1750-1800.......................0.18
1800-1850.......................0.87
1850-1900.......................1.65
1900-1950.......................1.76
1950-2000.......................2.83

So we should expect that, as long as there are more and more (free) human minds, economic growth should get faster and faster.

The other point is that human minds doesn't necessarily mean *human* minds. One can talk to one's iPhone and get intelligent responses. So we need to factor in how many "human brain equivalents" (HBEs) that computers are adding. That's pretty straightforward, from a hardware standpoint. Various experts have estimated the processing speed of the human mind. Hans Moravec estimated it at about 500 trillion operations per second (500 teraflops) and Ray Kurzeil has esimated it at 20 quadrillion operations per second (20 petaflops). I've taken Ray Kurzweil's estimate of 20 petaflops for a single human brain, and his estimates of the trends in processing power per $1000 of microprocessing power, and multiplied it by the number of $1000 computers in existence. That produced an estimate of the number of "human brain equivalents" (HBEs) added every year by (personal) computers.

The numbers are striking. Per my calculations, computers added only 1 human brain equivalent (HBE) in 1996, and only 1000 HBEs in 2006. And they will add only 1 million HBEs in 2016. But by 2024 they will add 1 BILLION HBEs. And by 2033, 1 TRILLION HBEs.

So by this estimate, I predict that world per-capita GDP will, within the next one to two decades, be increasing routinely at more than 5 percent per year, which is faster than the world economy has ever grown in all of human history.

And when this happens, I will be waiting for a call from the Nobel committee about my Economics prize. (I don't mind sharing it with Arnold Kling. And possibly Robin Hanson. ;-))

P.S. If I plug in a dramatic increase in the rate of population growth into a standard Solow growth model, I get a dramatic *decrease* in the rate of economic growth. What's up with that?

Solow growth model spreadsheet

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