The Rise and Fall of American Growth

Robert Gordon’s magnum opus, The Rise and Fall of American Growth: the US Standard of Living Since the Civil War (out in mid-January), is going to be an essential read for anyone interested not only in US economic history but also American economic prospects. The book is a comprehensive overview of growth from 1870 on, with a close focus on innovation and productivity. It does not consider at all macroeconomic policy, and is not much interested in events such as the Great Depression or the creation and later collapse of Bretton Woods. This is the supply-side story. This is not a criticism; as it is, the book weighs in at 650 pages – 730 with notes etc.

The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World)

There are three sections: the first covers 1870 to 1940; the second 1940-2015; the third is about the sources of growth and why it was fastest from the 1920s to 1950s (this is just about the US so this is earlier than European readers would recognise as the peak growth era) – and is slowing now. The final chapters are a kind of crescendo, for the whole book is organised to support Gordon’s well known thesis that the days of miracle and wonder, the rapid growth era of the early to mid-20th century, is long gone, and slower growth lies ahead of us. As he writes in the introduction: “Our central thesis is that some inventions are more important than others, and that the revolutionary century after the Civil War was made possible by a unique clustering, in the late 19th century, of what we will call the ‘Great Inventions’.” [his italics] By Great Inventions, he means electricity, water supply and sewage systems, the internal combustion engine, radio then TV, and innovations that reduced household drudgery such as refrigerators and washing machines. The core of his argument is that these so transformed health, life expectancy and connectivity that no future invention could possibly have such a dramatic impact on people’s living standards.

Who could argue with the idea that this era saw such dramatic change in human lives? For that matter, it is also hard to argue with the headwinds he notes about growth now: demographic change with ageing populations, and inequality, limiting the mass market for future innovations. The final chapters particularly emphasise the damaging effects on the economy of greatly increased income and wealth inequality. Hear, hear. 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). (A minor European carp – he also claims that it is only Americans who invent things now, when it would be more accurate to say it is only Americans who commercialise them to massive scale, especially in digital.)

Sure, we won’t repeat the impact of connecting houses to the electricity grid; but if we can keep them connected while generating power at simlar cost with zero greenhouse gas emissions, well that would be a Great Invention with the potential to utterly transform humanity’s prospects. We won’t see the same gains in life expectancy as with the previous introduction of public health measures and antisepsis, but if we can increase the quality of health and life for the over-60s, that would be a very big deal.

A second issue is that 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. “This book … focuses on the aspects of improvements of human life that are missing from GDP altogether.” For example, he writes, just as important as the calorific intake, or price of a given quantity of meat, is the fact that Americans’ diets changed from the monotony of ‘hogs’n’hominy’ in the 1870s to a much more varied diet by the 1920s. I wholeheartedly agree with this approach. 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.

Yet in the later chapters of the book, turning to modern growth, Gordon does an about turn, saying: “The impact of innovations and technological change [since 1970] was measured by their effect on total factor productivity.” If this is going to be the yardstick in the ‘race between the decades’, he should have addressed here the questions about the measurement of GDP and productivity in the modern US economy, based as it is on services and intangibles.

For instance, he says: “Nothing in the history of price index bias compares with the omission of automobile prices from the official price indexes over the entire period from 1900 to 1935.” His data in chapter 5 show a decline in quality-adjusted prices between 1906 and 1940, from $650 to $266, which does not seem to support the broad claim. Even the decline in the per capita ratio of quality adjusted price to nominal disposable income (from 2.47 to 0.46) presented there looks smaller than some other innovation-related price declines, similarly omitted from or understated in, official price indexes. The book does not explain, but it would need to go into the figures in more detail if the argument is to turn on the GDP and TFP statistics. Anyway, there are two points about current and future growth. One is about the extent to which innovation is slower, or its effects less important – case unproven, in my eyes. The other is the issue of headwinds slowing down whatever innovation-driven growth there might otherwise be – a stronger case, well expressed in the final chapters.

The obsession with things having been much better, innovation- and growth-wise, in the old days is an irritation, and does make the reader wonder how much the narrative has been bashed into shape to fit the conclusion. Having said that, the wealth of detail in the book far outweighs this annoyance. It is stuffed with wonderful evocations of the effects of economic growth, with institutional details, with tables and charts of useful historical data. The history is brought alive by such things as recounting the living conditions of different kinds of families – midwestern farms with their space and light, compared with New York tenements – or discussing the effect of food quality standards – dairy products stopped being watered down, but butter lost the distinctive taste and smell of its ‘terroir’. Some parts of the story will be familiar to some readers; if you have read a lot already about the history of the computer industry, or Ford’s creation of the assembly line and the mass market, the capsule versions here will not add much. But the book as a whole is a tremendous achievement. If not for the holiday, I wouldn’t have been able to read it from page 1 to page 650; I’m very glad I was able to do so.

Share

Understanding innovation and growth

I’ve been dipping into the truly fascinating World Intellectual Property Report from WIPO, published last week. The overview chapter has a beautifully clear overview of economic growth, and the role of innovation and IP rights. The rest of the report falls into two sections: case studies of historical breakthrough innovations (airplanes, antibiotics, semiconductors); and case studies of newer innovations with breakthrough potential (3D printing, nanotechnology and robotics).

The lessons drawn should not be surprising but seem hard for people looking at future growth prospects to absorb. For example, big innovations can affect growth through several routes (for example with antibiotics by the impact on human capital); their economic transformations are far-reaching, unpredictable and can take a long time; all breakthough innovations require continuous follow-on innovations, both technical and organizational; the specifics of the innovation ecosystem matter greatly, and have a geographical dimension; the structure of the ecosystem will change as the technology matures, steadily involving more professional and formal structures. Interestingly, the historical examples suggest that the IP system made far less difference to the wide dissemination of the technologies than the absorptive capacity of each country.

The report is free to download and – unusually for such official reports – a very good read. Its case study approach is illuminating and I learned a lot about the technologies I’m less familiar with.

200 years of innovation

200 years of innovation

Share

Happy fish and economic growth

From The Theory of Economic Growth by Arthur Lewis (after whom my department building is named):

“[T]he advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice … We do not know what the purpose of life it, but if it were happiness then evolution might just as well have stopped a long time ago, since there is no reason to believe that men are happier than pigs or fishes. What distinguishes men from pigs is that men have greater control over their environment; not that they are more happy. And on this test, economic growth is greatly to be desired. The case for economic growth is that it gives man greater control over his environment and thereby increases his freedom.”

Theory of Economic Growth

Shades of Sen’s capabilities approach. Lewis is quoted in H.W.Arndt’s The Rise and Fall of Economic Growth.

Development as Freedom

Share

Growth, happiness and misbehaving

I’m enjoying reading Richard Thaler’s┬áMisbehaving: The Making of Behavioural Economics. At about the half way stage, there hasn’t been anything startlingly new in terms of the economic content, as the book is addressing general readers rather than economists who have already read widely on the subject. It is very well written and also interesting to hear from Thaler what it felt like to be one of the pioneers in this field.

Misbehaving: The Making of Behavioural Economics

There are also some very interesting new (to me) insights. For instance, I’d never really thought before about the importance of changes from the reference point in prospect theory. Thaler writes: “Kahneman and Tversky recognized that we had to change our focus from levels of wealth to changes in wealth. This may sound like a subtle tweak, but switching the focus to changes as opposed to levels is a radical move….. Changes are the way humans experience life.”

This is the consequence – obvious when you think about it – of the hedonic treadmill, of acclimatising to a situation. Over in the well-being literature, this is often taken as helping explain the Easterlin paradox, the implication being that “we”/policy should help push people off the hedonic treadmill above high-enough income levels, by demoting or even somehow halting growth. But it seems to me to imply the contrary, that it makes growth very important for well-being. Just as some of the empirical work indicates.

I’ll review the book when I’ve finished – which will be at the weekend as I need something smaller to pack in my bag for the train tomorrow.

Share

Cities, infrastructure and growth

By way of a follow up to yesterday’s post on the new book Urban Economics and Urban Policy, I read recently a very interesting paper by David Starkie (Investment and Growth: The Impact of Britain’s Post-War Trunk Roads Programme, In Economic Affairs, Feb 2015) in which he argues that the construction of the British motorways in the 1960s and 70s had no discernible effect on productivity and growth. One reason was that pre-existing commercial traffic was intra-regional whereas the motorways radiated out from London. Contrast yesterday’s map of how the motorways were planned:

Motorway planning

Motorway planning

with this map from the article showing road freight patterns in the 1950s, before the construction of the motorways.

1950s road freight

1950s road freight

A second reason was that the productivity advantage from time saving was eaten by higher real wages and lower labour productivity. Although it is always hard to discern the effect of specific investments or technologies in GDP growth figures (as the cliometrics literature dating back to Vogel has found over and over – see Nick Crafts on why one should not read too much into the small numbers), I wholly agree with David’s conclusions:

“First, economic relationships are complex and changes can lead to unexpected consequences….Second, the time taken for institutions and commercial structures to
adapt to change can extend over decades, which suggests that the impact on output and growth will be long-term… [Third], as the structure of the economy adapts to transport improvements, there is not necessarily a (sizable) net gain but a partial shift in activity into new economic sectors and geographical areas.”

I’ve argued on the FT’s blog The Exchange that standard cost-benefit analysis does not do a good job when it comes to big infrastructure projects (like a motorway or HS2) because it is a tool for assessing marginal changes, not ones which might involve large non-linearities – behaviour changes or network effects.There is some work being done on non-marginal CBA (eg Cameron Hepburn’s paper for example) but it is not (yet?) standard practice.

Like many/most economists, I think we need much more infrastructure investment now – see for example the report of the LSE Growth Commission, Investing for Prosperity. My reading of the trunk roads article is that David Starkie would be more sceptical than I am but we certainly share the point about complex, long and uncertain responses; it isn’t about saving 20 minutes on your journey time to increase the amount of time you can spend in a meeting at the other end.

Investing for Prosperity: A Manifesto for Growth

Share