By Fabrizio Carmignani, Griffith University
The economic profession lacks a unified theory of economic growth. Textbooks and academic journals contain a plethora of models and paradigms which generate different (and sometimes contradictory) predictions about the mechanics of the growth process.
Amid this intellectual confusion, an element in common to the bulk of modern growth models from Solow’s neoclassical growth theory (1956) onwards, is the central role of “technological” improvements in promoting and sustaining the long-term expansion of GDP.
In economics, technology refers to the way in which inputs to the production process are transformed into output. Technological improvements increase the productivity of inputs, meaning that more output can be obtained from the same quantity of inputs. Hence, a country cannot sustain GDP growth if its technology does not improve.
New ideas and discoveries are what lies beneath technological improvements. The discovery of electricity and the development of the internal combustion engine are just two of the several technological innovations of the 19th century, which allowed the world economy to grow so fast for the first seven decades of the 20th century.
Of course, ideas do not need to be limited to acts of engineering. Henry Ford’s decision in 1914 to pay wages well above the ongoing market rate (today we call this the “efficiency wage”) was an idea that pushed productivity as much as Ford’s other innovative mass production techniques.
For over two and a half centuries, since the first industrial revolution (1760-1830), technology advances have been at the root of an unprecedented increase in per-capita incomes in human history. But is it possible that we are coming towards the end of this era of fast economic growth?
Forget the Mayan prophecy and fear Gordon’s prediction
In August 2012, Northwestern University Professor Robert J Gordon published a paper to challenge the nearly universal assumption that economic growth is a continuous process that will persist forever.
Gordon’s argument is worryingly simple: unless we are able to generate a new industrial revolution (or better, a sequence of new industrial revolutions), economic growth in advanced economies will inevitably revert to close to zero by the end of this century and stay there indefinitely.
This argument draws on the observation that economic growth was effectively close to zero throughout human history until around 1750. Then, industrial revolutions happened. The first one (steam and rail-roads) caused an initial growth acceleration in those countries (particularly the UK) that adopted the new technologies.
But it was the second industrial revolution (electricity, internal combustion engine, chemicals, petroleum, running water) and spinoff inventions (aeroplanes, interstate highways, etc) that was really responsible for almost a century of rapid productivity increase between the end of 1800s and the early 1970s. It was during this phase that GDP growth reached its peak in technologically advanced economies.
We are currently experiencing the third industrial revolution (computers, the web, mobile communication). According to Gordon’s data, however, it has determined a milder and shorter-lived impulse to productivity than the second industrial revolution. Consequently, economic growth has started to decline. At the current rate of decline, growth will return to its pre-1750 level by 2100.
Clearly, a new technological push could halt the decline and start a new phase of high productivity and GDP growth. But Gordon argues that this is not likely to happen. Sure enough, we live in a world where new technological products become available almost continuously. But not all inventions are created equal.
The sharp acceleration of growth followed the second industrial revolution, not the third one, whose effects seem to have been rather limited. But the second industrial revolution consisted of inventions that, in the words of Gordon, “could happen only once”. It is therefore difficult that industrial revolutions like the second one can happen again in the future.
Or, to put it differently, technology will continue to improve. But these improvements will not be of the kind needed to give new impetus to productivity and GDP growth. Faltering innovation will ultimately lead to a future of stagnation.
Time proved the Mayans wrong. What about Gordon?
A future of near-zero growth, with stagnant per-capita incomes, is something that most (albeit not all) would fear. Without economic growth it is hard to improve living standards, reduce poverty, and promote social and human development.
But there might be reasons not to despair. First of all, Gordon’s analysis is limited in several respects. He explicitly focuses on countries at the frontier of technological innovation; that is, the UK until 1906 and the US afterwards. So, what he predicts is that economic growth in the US, and by extension in the other most technologically advanced-economies, will go down to zero by 2100.
However, the world consists of many countries that are not at the frontier. For these countries, positive growth will persist beyond 2100 until they have caught up with the US. At that point, growth will be probably zero for all countries, but at least disparities in per-capita income across countries will have been significantly reduced.
Second, predictions for the long-term are always difficult to make. This is particularly true in economics. Regardless of the quality of the data and how reasonable the underlying intuition is, any prediction on what economic dynamics might look like in 2100 is necessarily highly speculative. It is therefore unsurprising that Gordon himself sees his paper as “deliberately provocative”.
Third, arguing today that a wave of technological progress of breadth and relevance comparable to the second industrial revolution will not happen sometimes in the distant future is, again, a mere speculation.
Certainly, technological progress is not going to happen just by assumption. Some innovations might be less growth-enhancing than others. But in today’s dynamic and highly interconnected economic systems, entrepreneurs continuously seek the opportunity to innovate in order to adjust to shocks and changing environments. It is because of this “entrepreneurs’ resilience” that technological progress occurs and there are no reasons to believe that it will not eventually evolve into a new industrial revolution.
The concept of resilient dynamism — that is, the ability of organisations operating in complex and dynamic systems to adapt and respond to shocks and new challenges — is at the centre of the discussion at the World Economic Forum in Davos. Perhaps a little wind of optimism will come down from the Swiss Alps to restore hope after Gordon’s deliberate provocation.
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Fabrizio Carmignani receives funding from the Australian Research council for a project on the estimation of the piecewise linear continuous model and its economic applications.
This article was originally published at The Conversation. Read the original article.