Global Growth: One Moment In Time

Bob Gordon argues that the past two centuries or so represent a unique period in human history (excerpt):

Is US economic growth over? Faltering innovation confronts the six
Robert J. Gordon, 11 September 2012

It is time to raise basic questions about the process of economic growth, especially the assumption – nearly universal since Solow’s seminal contributions of the 1950s (Solow 1956) – that economic growth is a continuous process that will persist forever.

• There was virtually no growth before 1750;
• There is no guarantee that growth will continue indefinitely.

…The focus is on per-capita real GDP growth in the frontier country since 1300, the UK until 1906 and the US afterwards. Growth in the frontier economy gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing since. The paper is about 'how much further could the frontier growth rate decline?'

Figure 1 takes the history of economic growth back to the year 1300. Clearly there was almost no growth through 1700, then a gradually accelerating rate of growth. The blue line in Figure 1 represents growth in the frontier country – the US after 1906 and Britain before because 1906 seems to be the consensus of modern growth data for the cutover. The key point is the big peak in US growth between 1928 and 1950, the years that span the Great Depression and WWII. Leaving aside the debate about what could have caused a concentration of economic growth in a period dislocated by depression and war, the remaining conclusion of Figure 1 is that growth has steadily declined in each interval plotted since 1950.

The paper is deliberately provocative and suggests not just that economic growth was a one-time thing centred on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns. Indeed, this is already evident in much of the innovation sector…

…The analysis in my paper links periods of slow and rapid growth to the timing of the three industrial revolutions:

• IR #1 (steam, railroads) from 1750 to 1830;
• IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900;
• and IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972…

…Then diminishing returns set in – air conditioning was here and the interstate highways had been largely completed. The US entered the “dismal age” of slow productivity growth between 1972 and 1996. After being the mysterious 'Missing in Action' component of growth, computers and their brethren the internet and world wide web, pushed the growth of productivity in Figure 4 upwards, but only for the eight years 1996-2004.

• IR #3 appears to have lasted only eight years, compared to the conjectural 100 years for IR #2.
• Since 2004 productivity growth has been almost as slow as in the previous dismal period of 1972-96.

The paper explains this history by a simple proposition. The great inventions of IR #2 were just more important than anything that has happened since…

…The loss of the impetus of IR #2 inventions makes a big difference in the future of human wellbeing….The actual outcome shown in Figure 5 is that the benefits of actual productivity from the IR #3 internet revolution only closed 9% of the 69% gap created by the end of the IR #2 inventions.

Despite my views on the “middle income trap”, Gordon’s hypothesis does resonates with me, although my viewpoint is primarily demographic rather than innovation and productivity, and more from the perspective of developing economies than developed economies.

As developing countries approach higher income status, they run up against two boundaries – as incomes increase, population growth slows as people get healthier, live longer, marry later and produce fewer children; and second, technological constraints (the productivity slowdown Gordon is talking about).

At the limit, global growth potential is a function of the technological and innovation capability of the world’s most advanced economy – hence the focus on “frontier country” in the article. It doesn’t actually matter which country is being referred to, as long as it is the primary source of innovation. So it’s not that global growth is necessarily dependent on US growth, just that the US currently represents the country most likely to be on the limit of the global production frontier.

But given these conditions, I would not bet against zero or even negative headline growth for the global economy in 100-200 years time. If all countries become “developed” (sufficient in both human and physical capital) – and we’re still a ways from that point – then productivity growth via technological advances and innovation becomes the main impetus for growth. If in turn the pace of that has slowed, or is missing, then even per capita growth will return to its very long run average of zero.

None of us will ever live to see that point, but it does bear thinking about.

Technical Notes:

1. Gordon, Robert J., “Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, VoxEu, September 2o12
2. Gordon, Robert J., “Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, Centre for Economic Policy Research, CEPR Policy Insight No 63, September 2o12