Emily Skarbek  

How We Count Counts: Diane Coyle on The Rise and Fall of American Growth

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Diane Coyle has reviewed Robert Gordon's new book (out late January), The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War.

Gordon's central argument will be familiar to readers of his work. In his view, the main technological and productivity enhancing innovations that drove American growth in the early to mid 20th century - electricity, internal combustion engine, running water, indoor toilets, communications, TV, chemicals, petroleum - could only happen once, have run their course, and the prospects of future growth look uninspiring. For Gordon, it is foreseeable that the rapid progress made over the past 250 years will turn out to be a unique episode in human history.

Coyle zeros in on the two main mechanisms to which Gordon attributes the slowing of growth. The first is that future innovation will be slower or its effects less important. Coyle finds this argument less convincing.

"What I find odd about Gordon's argument is his insistence that there is a kind of competition between the good old days of 'great innovations' and today's innovations - which are necessarily different.

One issue is the extent to which he ignores all but a limited range of digital innovation; low carbon energy, automated vehicles, new materials such as graphene, gene-based medicine etc. don't feature. The book claims more recent innovations are occurring mainly in entertainment, communication and information technologies, and presents these as simply less important (while making great play of the importance of radio, telephone and TV earlier)."


While I have yet to read the book, Gordon makes several similar arguments in an NBER working paper. There he gives a few examples of his view of more recent technological innovations as compared to the Great Inventions of the mid-20th century.

"...more familiar was the rapid development of the web and ecommerce after 1995, a process largely completed by 2005. Many one-time-only conversions occurred, for instance from card catalogues in wooden cabinets to flat screens in the world's libraries and the replacement of punch-hole paper catalogues with flat-screen electronic ordering systems in the world's auto dealers and wholesalers."

In other words, the benefits of the computer revolution were one time boosts, not lasting increases in labor productivity. Gordon then invokes Solow's famous sentence that "we [could] see the computers everywhere except in the productivity statistics." When the effects do show up, Gordon says, they fade out by 2004 and labor productivity flat lines.

Solow's interpretation (~26 mins into the interview) of where the productivity gains went is different, and more consistent with Coyle's deeper point. In short, the statistics themselves doesn't capture the full gains from innovation:

"And when that happened, it happened in an interesting way. It turned out when there were first clear indications, maybe 8 or 10 years later, of improvements in productivity on a national scale that could be traced to computers statistically, it turned out a large part of those gains came not in the use of the computer, but in the production of computers. Because the cost of an item of computing machinery was falling like a stone, and the quality was at the same time, the capacity at the same time was improving. And people were buying a lot of computers, so this was not a trivial industry....You got big productivity gains in the production of computers and whatnot. But you could also begin to see productivity improvements on a national scale that traced to the use of computers".

Coyle's central criticism is not just on the interpretation of the data, but on an interesting switch in Gordon's argument:

"... throughout the first two parts of the book, Gordon repeatedly explains why it is not possible to evaluate the impact of inventions through the GDP and price statistics, and therefore through the total factor productivity figures based on them - and then uses the real GDP figures to downplay modern innovation."

Coyle's understanding of the use and abuse of GDP figures leads her to the fundamental point:

"While the very long run of real GDP figures (the 'hockey stick of history') does portray the explosion of living standards under market capitalism, one needs a much richer picture of the qualitative change brought about by innovation and variety. This must include the social consequences too - and the book touches on these, from the rise of the suburbs to the transformation of the social lives of women."

To understand Coyle's insights more deeply, her discussion with Russ Roberts gives a fascinating discussion of GDP (no, really!).

In my view, it seems to come down to differing views about where Moore's Law - is taking us. The exponentially increasing computational power with increasing product quality at decreasing prices - has never happened at such a sustained pace before. The technological Great Inventions that Gordon sees as fundamental to driving sustained growth of the past all were bursts of innovation followed by a substantial time period where entrepreneurs figured out how to effectively commodify and deliver that technology to the broader economy and society. What is so interesting about the pattern of exponential technological progress is that price/performance gains have not slowed, even as some bits of these gains have just shown signs of commodification - Uber, 3D printing, biosynthesis of living tissue, etc.

There are good reasons to think that in the past we have failed to capture all the gains from innovation in measures of total factor productivity and labor productivity, as Gordon rightly points out. But if this is true, it seems strange to me to look at the current patterns of technological progress and not see the potential for these innovations to lead to sustained growth and increases in human well-being.

This is, of course, conditional on the political economy in which innovation takes place. The second cause for low future growth for Gordon concerns headwinds slowing down whatever innovation-driven growth there might be. Here I look forward to reading the relative weights Gordon assigns to factors such as demography, education, inequality, globalization, energy/environment, and consumer and government debt. In particular, I hope to read Gordon's own take (and others) on how the political economy environment could change the magnitude or sign of these headwinds.

The review is worth a read in advance of what will likely prove to be an important book in the debate on development and growth.




COMMENTS (16 to date)
Thomas writes:

Productivity increases (ceteris paribus) should show up in price indices. But, as I have said, "price indices are approximations wrapped in estimates surrounded by great statistical uncertainties."

Swami writes:

Allow me to repeat my comment from Coyle's site....

I never fail to be amazed at people who look back and see 250 years of progress which — at the time it was occurring was viewed as all played out — and then assume this time it REALLY IS played out.

In the murky fog of the future we have the very real possibility of machines which make machines, computers which make better computers, 3 D printing, artificial intelligence, virtual reality, and so on. I think it is every bit as likely that technology will increase at a faster rate and add more value than it has in the past. But we will see.

If we do see unprecedented gains, I bet everything I own that the world will be chalk full of short sighted people who continue to say “it really is played out this time.”

Oh, and WELCOME EMILY!

mico writes:

I'm not sure why I am reading a review of a book review on econlog; could have at least found someone who had read the book to review the book review, if the book review really needed reviewing.

On the topic, not convinced that growth is strongly tied to technologies. North Korea has all the highest technologies the US had in the 1960s, yet can't reproduce US living standards of the 1860s. So, not too interested in the work of someone starting with the assumption that economic development is tied to technologies.

Jody writes:
not convinced that growth is strongly tied to technologies. North Korea has all the highest technologies the US had in the 1960s, yet can't reproduce US living standards of the 1860s.

Perhaps, growth is not monocausal? Perhaps in some economies, let's call them unconsrained, per capita growth is limited only by technological advances and other innovations (e.g., processes). Perhaps elsewhere additional constraints otherwise impede per capita growth so that technology-driven growth is not evident. Such constraints could, for instance, be related to institutions, culture, or capital.

Perhaps, studying all of these drivers and limiters on growth are useful even if you need to get them all "right" to be at the per capita economic frontier.

mico writes:

If you grant that process and institutional improvements matter too - maybe as much, maybe more than technological improvements - then certain technological improvements being one-offs has no very interesting historical consequences.

That's assuming the proposition that certain technological improvements are one-offs is even worth talking about, despite that it seems to me to be both unsubstantiable and unfalsifiable with present knowledge.

David R. Henderson writes:

Excellent post, Emily.

David R. Henderson writes:

@Swami,
If we do see unprecedented gains, I bet everything I own that the world will be chalk full of short sighted people who continue to say “it really is played out this time.”
There are many measurement problems with such a bet. But you and I might be able to fashion a bet that we could approach Bob Gordon with, something along the lines of “By year X (where X is less than 10 years from now), such and such will or won’t happen."

JK Brown writes:

Well, yes, the introduction of a new form of energy as well as a new power production plant is something of one off innovations. But also, those innovations and others completely replaced the old methods. It is hard to make say a motorcycle with an internal combustion engine look like a horse. Or an electric motor resemble a steam engine powering a shop.

On the other hand, today's innovations don't so much replace the visual/interactive features in our daily lives as they completely transform what goes on inside. Since the 1980s, there have been great advances in power electronics that has dramatically improved the utility of the "ancient" technology of a motor. Why? Because the expense and limiting factor was controlling the voltage and current to to the "motor" rather than the windings and stator design. Or consider more mundane improvements using encoders and microchips with cheaper simple DC motors instead of more expensive stepper motors. Look at the smart phone, which really only packed a lot of technology that used to take a lot of space and power into a hand-sized device using a common interface.

But we do seem to be on a cusp for the migration of technology that has been developing but slow to be implemented for similar reasons that technologies developed in the 1920s pushed into workshops and manufacturing the 1930s: The government imposed high cost of labor. New Deal policies worked to keep labor prices high especially in the face of deflation in the price of produced goods. The move to over-price labor with such high minimum wages today has already caused some to move to computer/smart screen technology to replace expensive unskilled labor. This technology has been simmering but not really selling, until recently.

ThomasH writes:

What worries me about Gordon's speculations is that the downside of acting on them is much worse than the upside. If we assume that real growth cannot exceed 1.x% business and governments may make investment decisions based on that. We already have seen massive underinvestment by governments during the 2008-15 slump and the CEB has revised downward its growth projections. It seems too easy to create a self-fulling prophecy.

Kirk writes:

But surely a slowdown is what we would expect given the earlier inventors simply weren't up against the regulatory and tax burdens of entrepreneurs today? The freer market of the 19th - early 20th century economy must have allowed for faster innovation and growth than the more inhibited late 20th - early 21st century one. We could also add to this the incredible growth of tort law in the 20th century to the point where we may as well use whatever is Latin for "seller beware" as a real inhibitor to progress (let's see VW try caveat emptor as a defence today! Instead they'll be paying billions).

It's doubtful the slowdown of growth is due to some 'fundamental' lack of good new ideas, it seems more like a natural response to the growth of government and sellers liability, indeed my guess is a truly free market today would be even more innovative than that of a hundred years ago, if we let it.

About the growth of human flourishing, I am pushing a paradigm-shifting model of social and economic life.

The prosperity of a population of living things is limited in this model by (1) resource patterns in the world and (2) the ability of the living things to cooperate in exploiting those patterns. This model differs from established models of economics in its emphasis on real resources in a real universe and the unforgiving necessity to find and exploit those resources.

One discovery about a thriving population (from my thought-experiment use of this model) is that the members of a population may be incapable of perceiving the resources which feed their thriving. A spontaneously-connected network of specialists may be composed of members incapable of perceiving the network.

I would claim that the present human population now exists by drawing from resources which were mostly unknown 200 years ago and which are scarcely known even now. I would predict likewise (although this is just a hopeful guess) that 100 years from now our descendants will be thriving by living upon resources which none of us now can even name.

Swami writes:

@David R. Henderson

Yeah, it would be a difficult bet to structure. And to clarify I am by no means certain we will see continued progress. What I am certain of is that IF we do see progress, it won't slow down the next short sighted generation from assuring us it is over because they can't envision where progress will come from.

I am really just saying that the complex adaptive problem solving system of modern society is smarter than we are. I recognize that the system can create the unimaginable, but some people just resist or deny this notion.

Jerry Ward writes:

As machines make more and more things, it's hard for me to see anything but a potential explosion in output, in GDP.

But as most human labor becomes less and less competitive with those machines the method of income allocation built into of 20th century capitalism (income roughly proportional to productivity) will become increasingly less useful.

We can potentially have a huge increase in total output, but a very disruptive social problem in how to allocate that output.

Swami writes:

@David R. Henderson

Yeah, it would be a difficult bet to structure. And to clarify I am by no means certain we will see continued progress. What I am certain of is that IF we do see progress, it won't slow down the next short sighted generation from assuring us it is over because they can't envision where progress will come from.

I am really just saying that the complex adaptive problem solving system of modern society is smarter than we are. I recognize that the system can create the unimaginable, but some people just resist or deny this notion.

Vincent Geloso writes:

I think the case against Gordon is overstated here! Many national accounting go in the sense of saying that his claims are conservative. Now I am not saying its all right (I am not convinced by secular stagnation), but the case against Gordon is not strong either

See problems here: http://notesonliberty.com/2016/01/07/women-and-secular-stagnation/

Elbert van Donkersgoed writes:

@Jerry Ward

As machines make more and more things, it's hard for me to see anything but a potential explosion in output, in GDP.

I think you are right that we face a future of machines making more and more things. But that does not result in an explosion of GDP. It will deflate prices. Could well be that GDP does not move even as quality of life changes (improves) dramatically.

You are also right to flag the likelihood that "the job" will have a dramatically different role when technology does the production. For a couple of centuries "the job" was our primary wealth distribution mechanism. What will be the next wealth distribution mechanism?

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