The Inexorable (?) Decline of Growth

Robert Gordon has a new paper, well worth reading, on the future of economic growth.  His main argument is that the past 250ish years of economic growth have been primarily due to three principal waves of innovation and their subsequent diffusion.  Industrial Revolution #1 was, essentially, steam and basic mechanization.  IR 2 was modern chemistry, metallurgy, electricity, and plumbing.  IR 3 was the digital revolution.  His thesis, though I’m doing it violence with the summary, was that there’s no reason to believe economic growth will continue indefinitely and that the experience of IR 3’s influence on growth suggest that humankind has captured most of the intensive economic growth opportunities available, and that in the future rates of growth will converge to something only slightly above the population growth rate.

My first critique is an easy but still important question – isn’t it premature to declare the ICT (information & communications technology) revolution “over”?  After all, Gordon himself suggests that the second Industrial Revolution continued to percolate through society and deliver great productivity growth up until about 1970.  If I’ve learned anything from working as a consultant, it is that the process of innovation-adoption at large enterprises is noticeably slower than the pace of innovation itself.  Exploiting revolutionary new tools requires getting rid of the dead weight…and dead weight tends to have executives who will fight to the death for it.  Even if digital technology stopped advancing today, we would have years of growth left from full penetration of what exists already.  And it hasn’t stopped advancing, nor is there any reason to think that it will.

Following on from that last statement, I’d point out that the exponential nature of processing speed growth means that progress is usually weighted heavily towards the end of the time period in question.  Things move most slowly in the beginning – the speed of digital innovation over the last 20 years (1992 – 2012) vastly outpaced that of the 20 years prior (1972 – 1992).  This pattern will likely continue.  Furthermore, the more processing grows and the more capable limited A.I. applications become (think ATMs replacing tellers altogether, not Skynet), the more radically you can improve productivity.

I also have my doubts about the methodology of Gordon’s method of calculating productivity improvement.  Specifically, he mentions that the way he calculated it was (basically) real GDP divided by hours worked, including the private sector, economy, and government.  Well, the last few decades have seen a big transition of labor out of higher-productivity sectors (manufacturing, agriculture) into low-productivity sectors (medicine, education)…if automation took off to the extent that everybody could quite their job and become full-time writers or students living an extremely comfortable life, this would be an epochal economic event barely reflected in Gordon’s methodology.  I’d be more convinced if there was similar slowing productivity in the manufacturing sector (which I doubt a great deal), or even in the private sector as a whole.

There’s a lot more in here that’s worth mulling over. Read the paper.  I think I shall tackle the political economics aspect of his paper tomorrow.  He does make the point that indoor plumbing has transformed life in a way that nothing since has done…but I’d be wary of suggesting that nothing else could.  There are all sorts of science-fiction-y things under development that have the potential to completely reshape our daily lives in ways that are impossible to imagine.

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