I’m a latecomer to Tyler Cowen’s immensely successful book, [amazon_link id=”0525952713″ target=”_blank” ]The Great Stagnation[/amazon_link], but as the months of 2011 have rolled by, the title seems more perceptive than ever. Stagnation is a kind description of what’s happening to the western economies now. Certainly, the success of the book shows that it struck a chord.

For those who’ve not read it, let me sum up the argument. The advanced industrial economies – this is mainly about the US – have reached a technological plateau and growth is not going to regain its earlier rates for a long time. Cowen’s description is that all the ‘low-hanging fruit’ in terms of benefits from technological innovation have gone. (He focuses very much on the internet as the locus of innovation.) As evidence, he cites the failure of real median incomes to grow. Much of the online innovation we see brings only private benefits, he argues, so the super-wealthy in finance have prospered but no-one else; whereas past innovation had public benefits too. Further evidence comes from the increase in spending on government consumption, health and education without any corresponding improvement in outcomes.There is still some innovation, of course, but Cowen concludes: “The revenue-intensive sectors of our economy have been slowing down, and the big technological gains are coming in revenue-deficient sectors.” Whereas GM and Ford created hundreds of thousands of jobs, Google’s and Facebook’s employment-creation has been in the low thousands. So not only has the innovation not led to revenues and profit, neither has it led to jobs. With neither labour nor capital making any gains, the productivity effect of the internet must be illusory.

There’s much in the book to agree with. However, I’d make the following comments.

1. The observed outcomes for median incomes, or for the health of the average American, will reflect more than just technological changes. There has been an interplay between innovation and rent-seeking behaviour by powerful groups (mainly financiers but also the health care big business), played out in the US political process. Although the UK has been similar, other countries which do have the internet but not the same politics and power structures have not experienced the same stagnation of median incomes.

2. Innovation is much more than the internet. Not only do some internet/computer companies make a lot of revenue, there are also innovations in biotechnology, materials, nanotech, robotics, green tech – almost all enabled by very cheap computer processing power and communications. I don’t think there’s any doubt that some of these will be enormously profitable and create jobs (although if I knew which, I’d be running my own investment fund.)

3. The book only touches on globalisation – another internet/ICT-enabled phenomenon, but distinct from technological change. One can debate what part it has played in the absence of job creation in the US but it seems in important element in the mix.

4. Job creation comparisons are not straightforward. The mass production businesses of the previous generations of technology were centralised hierarchies, albeit with large supply chains too. Internet era businesses are decentralised and networked, so it’s possible that a reasonable comparison of business ecologies would give similar numbers – or not; I just don’t know. But there’s also a whiff of lump of labour fallacy here, of the kind that shows up in every consultancy study that claims X industry has created Y thousand jobs; we know that economies adjust to the resources and technologies available, meaning aggregate employment rates depend on labour market structures (taxes, participation rates) and the level of demand. I’d suggest low US job creation at present has more to do with weak demand than with Google.

Having said all this, I think it’s an important book and valuable contribution to the policy debate. It must be right to highlight the importance of technology, something all too often overlooked in economic policy. Cowen calls for a culture more welcoming to science, and a much greater degree of civility in politics. Who can disagree with that, looking at the extraordinary spectacle of American politicians squabbling their way over the edge of the precipice of default? I wish the book had included more about rent-seeking and power structures in the analysis as these seem to me at least as important as technological change in trying to understand the important shifts in the leading economies. The historical examples suggest that in the end it’s ordinary consumers who benefit from innovation, but the process is tempestuous and characterised by power struggles. The power struggles are being played out right now, and the median wallet is currently losing.

[amazon_image id=”0525952713″ link=”true” target=”_blank” size=”medium” ]The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better[/amazon_image]

Here’s a quotation from Mill’s [amazon_link id=”0199553912″ target=”_blank” ]Principles of Political Economy[/amazon_link] that modern economists should take to heart:

For practical purposes, Political Economy is inseparably intertwined with many other branches of social philosophy. Except on matters of mere detail, there are perhaps no practical questions, even among those which approach nearest to the character of purely economical questions, which admit of being decided on economical premises alone.

Perhaps one of the many consequences of the Great Financial Crisis will be the welcome revival of Political Economy.

[amazon_image id=”0199553912″ link=”true” target=”_blank” size=”medium” ]Principles of Political Economy and Chapters on Socialism (Oxford World’s Classics)[/amazon_image]

You can never read too many books about the Industrial Revolution, in my view. This is partly because I grew up in a Lancashire mill town, with family members working in the cotton industry – until the mills closed in the late 1970s, their machines taken straight to the museums. But of course, it’s everybody’s heritage. The decisive shift to the modern world started in those decades of industrial invention from the late 18th century. The answer to the question, What did the Victorians ever do for us? is almost everything.

Luckily, there have been lots of excellent new books about the Industrial Revolution and the Enlightenment, the intellectual context for practical innovation. These include the academic – such as Joel Mokyr’s [amazon_link id=”0691120137″ target=”_blank” ]Gifts of Athena[/amazon_link] and [amazon_link id=”0140278176″ target=”_blank” ]The Enlightened Economy[/amazon_link] – and the more accessible – such as Jenny Uglow’s [amazon_link id=”0571216102″ target=”_blank” ]The Lunar Men[/amazon_link] and Richard Holmes’s [amazon_link id=”0007149530″ target=”_blank” ]The Age of Wonder[/amazon_link].

I’ve just finished reading William Rosen’s [amazon_link id=”1845951352″ target=”_blank” ]The Most Powerful idea in the World: A story of steam, industry and innovation[/amazon_link]. It doesn’t make this first rank, although its ambition is commendable. The idea is to set the conventional history of inventions of this and that – Watt’s condenser, Stevenson’s Rocket – in the context of social and legislative innovations, such as the enabling patent laws and the emergence of a class of self-improving practical artisans in Britain. This is obviously a fruitful approach, and one that has become much more widespread in recent years. The Lunar Men is a brilliant example of bringing the social and political context to life. In the academic literature, Paul David is an economic historian who, along with Mokyr, did much to reattach innovation to the specifics of its time.

Unfortunately, Rosen doesn’t manage to make his account sparkle, and I think it’s because he can’t resist including technical detail, at the expense of the story. For example, there are too many paragraphs like this one: “And so the challenge of converting the reciprocating motion of the early atmospheric engines into rotary power occupied a fair chunk of the 18th century. The fundamental problem of direct conversion was not ignorance; the crank and the cam were well known to Newcomen and his successors. In fact they were known to his predecessors…” and on for another half page before we get a diversion into biomechanics and kinetic energy for the next couple of pages. If the kinetic energy is actually important to the story, I need the beginner’s guide; if not, these pages should have been edited out. I also got the sense, whenever Rosen heads into economic territory, that headstrong concepts such as ‘supply’ and ‘demand’ are in danger of bolting, with the author hanging terrified onto the reins.

Having said this, this is a mostly very readable book which is obviously based on a vast amount of research. It will introduce people to some of the key technologies of the Industrial Revolution, and above all to the important idea that their impact would have been far less if the innovators had lived in a different time and place. Its emphasis on the importance of patent protection is timely, too. Innovation, in other words, is a social system as well as a technological one – as today’s debates over intellectual property in the digital world demonstrate all too clearly. Rosen does not make the link explicit – he is certainly not making a foolishly simplistic argument that because patents were essential for Boulton and Watt to build and sell their improved steam engines, strong enforcement of DRM is essential for innovation now. However, the book does do us the service of underlining the need for careful thought about the legal framework for an innovative economy – and in fact, for thinking there’s every reason to believe a patent framework established about a quarter of a millennium ago is unlikely to be suitable in the modern, intangible economy.

[amazon_image id=”1845951352″ link=”true” target=”_blank” size=”medium” ]The Most Powerful Idea in the World: A Story of Steam, Industry and Invention[/amazon_image]

George Orwell’s essays are always worth revisiting. As he says in [amazon_link id=”0141036613″ target=”_blank” ]Books v Cigarettes[/amazon_link], there are “books that become part of the furniture of one’s mind and alter one’s whole attitude to life.” Certainly some of his, including [amazon_link id=”0141185295″ target=”_blank” ]The Road to Wigan Pier[/amazon_link] and [amazon_link id=”0141184388″ target=”_blank” ]Down and Out in Paris and London[/amazon_link], which I first devoured as an idealistic teenager and have returned to over the years, fall into that category. But this morning it was the essays collected in Books v Cigarettes that I turned to, prompted by a feature about the demise of Borders in the face of rivalry from Amazon. And not just Amazon as a retailer of physical books at cut prices, but Amazon as purveyor of e-books. This week the Association of American Publishers reported that e-book sales were up 160% in the first half of 2011, while sales of physical books had slumped.

The title essay of the Orwell, noting that factory workers regard book-reading as an expensive hobby not for the likes of them, compares the cost of reading favourably with the cost of other forms of entertainment. As Orwell puts it, they wouldn’t spend twelve and sixpence on a hardback that might take a whole day to read, but thought nothing of spending several pounds on a day out at Blackpool. But, he adds, “It is difficult to establish any relationship between the price of books and the value one gets out of them.” There are several complicating factors.

First, books are an experience good. You have to read them to know what they’re worth to you, and so evaluate the price with little information about quality. This is why reviews matter, why authors deliver series of books, and why Sherwin Rosen’s ‘superstar’ or winner-takes-all economics apply in publishing.

Secondly, books are a good example of consumption of goods as a signal. Millions of people bought Stephen Hawkings [amazon_link id=”0553175211″ target=”_blank” ]A Brief History of Time[/amazon_link], but only a tiny fraction of them read it. It was probably, like making coffee in a cafetiere, a signal of being middle class and cultured. Coffee table books are all signals, as are fashionable recipe books, and – in their own way – old paperbacks of George Orwell’s work scattered around the house.

Thirdly, books have a new social value. They bring people together in book groups. They are gifts in the gift economy of book swaps – we have one at the local station. They are useful small presents when wine or chocolates won’t do.

None of which is relevant to the brutal competitive struggle in book retailing, where Amazon is coming to have a dominant position. Publishers share some of the blame, as they all let Amazon have discounts which enable it to undercut bricks and mortar booksellers, especially independents. The short term lucre blinded the publishing industry to the longer-term strategic issues. There are two areas for competition authorities to look, I think. One is whether the barriers to entry to online bookselling have become insurmountable, with any book needing to be on Amazon to sell – or whether, on the other hand, the technologies which enable on-demand printing and online access to customers make it possible for a book to by-pass Amazon. The other is the retailing of e-books, where the pricing – just below hardback price – is clearly not reflective of either marginal or average cost and could only be justified as the recovery of capital investment. Even so, if e-book prices are cross-subsidising the prices of particular e-book devices, that would be a cause for concern too. These are empirical questions and I hope competition bodies are checking it out.

I’m sad about Borders. Their range had narrowed and dumbed down in recent years, but the stores have always been pleasant enough places to hang out. Still, as Orwell wrote in Bookshop Memories, “In a town like London there are always plenty of not quite certifiable lunatics walking the streets, and they tend to gravitate towards bookshops, because a bookshop is one of the few places where you can hang about for a long time without spending any money.” That was Borders’ problem – extracting the money. You can hang about in a cinema all afternoon, of course, but only after handing over the £15 for the 3D experience.

[amazon_image id=”0141036613″ link=”true” target=”_blank” size=”medium” ]Books v. Cigarettes (Penguin Great Ideas)[/amazon_image]

In the rogues’ gallery of disastrous economic policies, the protectionism of the United States in the Great Depression, codified in the notorious Smoot-Hawley tariffs, has pride of place. A new book by Douglas Irwin, [amazon_link id=”069115032X” target=”_blank” ]Peddling Protectionism: Smoot-Hawley and the Great Depression[/amazon_link], examines the effect the legislation had: did it, as believed, play a central role in bringing about a collapse in global trade and seriously exacerbating the depression? Irwin concludes that the Act was based on no economic logic, and was a blatant example of pork-barrel politics. Even so, it played a subsidiary role to demand shocks (especially monetary ones) in prolonging and deepening the weakness of the economy. The book is very informative on the Congressional politics of the time, and the current role of Congress in setting trade policy. There is nobody to match Irwin on this subject, and it’s a short and accessible book. It is a great introduction for students as well as general readers.

However, the status of the Smoot-Hawley tariff as a bogey man has proven useful ever since, Irwin suggests. The great inertia of the American political system means that the post-war openness to trade is actually hard to overturn in practice. The experience of the post-crisis policy reaction is certainly encouraging in this respect, although I’m not sure I’m as relaxed about the dangers as the book suggests I ought to be. Still, fears of a return to Great Depression style protectionism have not entirely come to life, although there is evidence of a pick-up recently in protectionism. The excellent CEPR Global Trade Alert reports on this document policy reactions in some detail. The book concludes that the far greater openness of the US (and other economies) now than in the 1930s make protectionism a less likely policy reaction; but equally, if governments ever do reach for those trade policies, the disruption will be far greater.

[amazon_image id=”069115032X” link=”true” target=”_blank” size=”medium” ]Peddling Protectionism: Smoot-Hawley and the Great Depression[/amazon_image]

[amazon_image id=”1907142193″ link=”true” target=”_blank” size=”medium” ]Tensions Contained… for Now: The 8th GTA Report (Global Trade Alert)[/amazon_image]