The End of Growth

The two pieces that follow, from Martin Wolf of the Financial Times and Michael Feller of Macro Strategists, explore the implications of a new paper by Robert Gordon on the limits to growth.

Wolf:

Might growth be ending? This is a heretical question. Yet an expert on productivity, Robert Gordon of Northwestern university, has raised it in a provocative paper. In this, he challenges the conventional view of economists that “economic growth ... will continue indefinitely.”

Yet unlimited growth is a heroic assumption. For most of history, next to no measurable growth in output per person occurred. What growth did occur came from rising population. Then, in the middle of the 18th century, something began to stir. Output per head in the world’s most productive economies – the UK until around 1900 and the US, thereafter – began to accelerate. Growth in productivity reached a peak in the two and a half decades after World War II. Thereafter growth decelerated again, despite an upward blip between 1996 and 2004. In 2011 – according to the Conference Board’s database – US output per hour was a third lower than it would have been if the 1950-72 trend had continued (see charts). Prof Gordon goes further. He argues that productivity growth might continue to decelerate over the next century, reaching negligible levels.

The future is unknowable. But the past is revealing. The core of Prof Gordon’s argument is that growth is driven by the discovery and subsequent exploitation of specific technologies and – above all – by “general purpose technologies”, which transform life in ways both deep and broad.

The implementation of a range of general purpose technologies discovered in the late 19th century drove the mid-20th century productivity explosion, Prof Gordon argues. These included electricity, the internal combustion engine, domestic running water and sewerage, communications (radio and telephone), chemicals and petroleum. These constitute “the second industrial revolution”. The first, between 1750 and 1830, started in the UK. That was the age of steam, which culminated with the railway. Today, we are living in a third, already some 50 years old: the age of information, whose leading technologies are the computer, the semiconductor and the internet.

Prof Gordon argues, to my mind persuasively, that in its impact on the economy and society, the second industrial revolution was far more profound than the first or the third. Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared. Prof Gordon notes that “little known is the fact that the annual rate of improvement in life expectancy in the first half of the 20th century was three times as fast as in the last half.” The second industrial revolution transformed far more than productivity. The lives of Americans, Europeans and, later on, Japanese, were changed utterly.

Many of these changes were one-offs. The speed of travel went from the horse to the jet plane. Then, some fifty years ago, it stuck. Urbanisation is a one-off. So, too, is the collapse in child mortality and the tripling of life expectancy. So, too, is control over domestic temperatures. So, too, is liberation of women from domestic drudgery.

By such standards, today’s information age is full of sound and fury signifying little. Many of the labour-saving benefits of computers occurred decades ago. There was an upsurge in productivity growth in the 1990s. But the effect petered out.

In the 2000s, the impact of the information revolution has come largely via enthralling entertainment and communication devices. How important is this? Prof Gordon proposes a thought-experiment. You may keep either the brilliant devices invented since 2002 or running water and inside lavatories. I will throw in Facebook. Does that make you change your mind? I thought not. I would not keep everything invented since 1970 if the alternative were losing running water.

What we are now living through is an intense, but narrow, set of innovations in one important area of technology. Does it matter? Yes. We can, after all, see that a decade or two from now every human being will have access to all of the world’s information. But the view that overall innovation is now slower than a century ago is compelling.

What does this analysis tell us? First, the US remains the global productivity frontier. If the rate of advance of the frontier has slowed, catch-up should now be easier. Second, catch-up could still drive global growth at a high rate for a long time (resources permitting). After all, the average gross domestic product per head of developing countries is still only a seventh of that of the US (at purchasing power parity). Third, growth is not just a product of incentives. It depends even more on opportunities. Rapid increases in productivity at the frontier are possible only if the right innovations occur. Transport and energy technologies have barely changed in half a century. Lower taxes are not going to change this.

Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so. Similar developments are occurring in other high-income countries.

For almost two centuries, today’s high-income countries enjoyed waves of innovation that made them both far more prosperous than before and far more powerful than everybody else. This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up fast. The elites of the high-income countries quite like this new world. The rest of their population like it vastly less. Get used to this. It will not change.

Feller summarizes the Gordon paper as well, citing Wolf, but then goes on to offer a range of fascinating connections in the history of economic thought:

These are questions others have asked as well, ranging from the longue durée historians of the Sorbonne, who are attempting to pinpoint capitalism’s demise by 2100 (economic systems, like those of feudal Europe or the Roman Empire, apparently last 600 years), to UBS strategist Andy Lees, who last year provocatively claimed the world had hit its innovation peak in the 1840s.

Furthermore, these questions are not new. William Morris, better known for his wallpaper designs, wrote of a cashless society in late Victorian England. In 1516, philosopher Thomas More described the isle of Utopia where gold and silver were cast aside for pursuits of real prosperity, the metals only used for the “humblest items of domestic equipment”.

And of course, there was John Stuart Mill, who in 1848 would advance the notion of the ‘stationary state’, where objectives of economic quality were to be pursued over objectives of economic quantity. This no-growth model would later have appeal for Kibbutzniks, survivalists, and environmentalists such the authors of the 1972 Club of Rome report – who reintroduced Mill’s concept of the limits of growth to a new Malthusian audience. Even John Meynard Keynes, an admirer of Mill, would at times lament the obsession politicians would come to have with GDP, an instrument of measurement he helped devise for limited use during the Second World War.

Yet Mill’s legacy is perhaps most relevant today with global populations now stabilising, the risks of catastrophic climate change becoming ever more apparent, technology supplanting labour and productivity seen by many economists as the last great hope for growth. Indeed, outside of canonising modern liberalism or the idea of falsification in the scientific method, Mill’s most important contribution to political economy was arguably his theory of development: that growth was a function of capital, labour and land (or natural resources). Mill felt that sustainable development was only possible if growth in labour was exceeded by growth in land and capital productivity, rather than debt. With middle class wages stagnating and the so-called 99% seeing few of the economic gains that we are supposed to have made since the economic deregulation of the 1980s, Mill’s dictums speak a remarkable truth across the gulf of time.

In a week where prominent fund manager Bill Gross likened America’s credit-based economic model to a crystal meth addiction (like any ‘hopium’ or narcotic, debt borrows the benefits of tomorrow for the enjoyment of today) and when central banks, from Australia to Russia, are joining peers in Europe, Britain, the US and Japan in pushing down rates or pump-priming markets with liquidity, one can see another of Mill’s classic warnings – the tyranny of the majority – coming true, with quick fixes and short-term solutions the order of the day.

Yet no country is as perhaps as apt for Mill’s analysis than China: a country that is in a self-imposed demographic decline, where utilitarianism and capital factor productivity have been warped into a fixed-asset bubble and where land is quite literally denuded of soil, drained of moisture and acidified by the detritus of industrialisation.

In an oped for the New York Times last week, economist Richard Easterlin described China’s belief it could purchase social stability through rapid economic growth as a “Faustian bargain”; a phrase also used recently by Bundesbank chief Jen Wideman’s in criticising the European Central Bank’s outright monetary transactions.

In a survey of opinions on life satisfaction scored between 1990 and 2011, Easterlin and his colleagues found that the average Chinese is no more satisfied today than they were in the aftermath of Tiananmen Square.  Moreover, scores on satisfaction for urbanites actually declined for most of the period, as old social safety nets – China’s so-called ‘iron rice bowl’ – were removed in the name of productivity, efficiency and, ultimately, economic liberalisation, and as the competitive urges of capitalism overtook the cooperation, forced as it was or not, of socialism.

Yet unlike other post-Enlightenment political philosophies – both the capitalism of Adam Smith or the communism of Karl Marx – Mill saw growth as more than material. Borrowing from its classical antecedent – the Ancient Greeks spoke of humanity’s goal aseudaimonia, or flourishing – modern society is built on the ideal of improvement, development, growth and expansion, but it needn’t be so mono-dimensional. Indeed, Aristotle considered an essential pillar of eudaimonia, or one of the four cardinal virtues, to be moderation.

The problem is that in many ways we may have already reached the limits of growth. Politicians like to talk about half-glass full and half-glass empty, yet ultimately we’re still drinking from the same poisoned chalice. By relooking at John Stuart Mill there may be a more refreshing alternative.

* * *

The one thing that neither writer focuses on—and a very big thing it is—is the implications of the limits to growth on our debt-bound economies. Adjustment to the end of growth would be far easier in the absence of the debt overhang. Growth as usual threatens the environment, it may be ventured, but the end of growth threatens to crash the entire financial architecture.

* * *

Martin Wolf, “Is unlimited growth a thing of the past,” Financial Times, October 2, 2012

Michael Feller, “What if the GFC [Global Financial Crisis] is permament,” macrobusiness.com.au

Robert J. Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” National Bureau of Economic Research Working Paper No 18315 (August 2012).