Is it time to give up on growth?
Authors: Andrew Sissons
03 October 2012
In an era of seemingly un-ending economic crisis, it has become fashionable to suggest that the West’s stagnation is not just a blip but a permanent phenomenon. The idea, captured most prominently in Tyler Cowen’s “Great Stagnation”, is that we’ve run out of useful new ideas and technologies, and so have nothing left with which to make the economy grow.
And this view is starting to attract some heavyweight followers – yesterday Martin Wolf, one of Britain’s foremost economic commentators and a leading advocate of demand stimulus to jolt the UK economy out of its slumber, argued that two centuries of continuous growth may have come to an end.
All of this pessimism can sound very persuasive, but it is extremely dangerous. First, Britain’s current bout of stagnation is already reducing incomes and has left 2.6 million people unemployed. If our current plight is to continue indefinitely, the pain will only multiply. Second, both government and households are facing enormous debt burdens. Without growth, it will be almost impossible to manage, let alone pay off, those debts. Third, and most significantly, we are facing a long-term demographic shift that requires far more resources to be directed towards the elderly. Without growth, that burden will weigh down on our living standards, and leave painful decisions about how we spend our national income. In short, we need growth just to help us stand still; if the age of growth is over, we are facing a calamity.
So what are the arguments that have caused Martin Wolf, among others, to worry that growth in advanced economies may have slowed forever? Simply put, the claim is that we’ve run out of good innovations – all of the useful ideas, from flushing toilets to jet engines, have been done already.
Wolf draws on a widely read study by Robert Gordon, which runs through the series of technological breakthroughs – steam, electricity, oil and so on – that have underpinned growth in the 200 years since the birth of the industrial revolution. The problem, according to Gordon, is that the latest set of technologies (computers, the internet, mobile phones) is nowhere near as useful as previous ones. Most of the productivity gains from them were realised two decades ago, and there is not much value left to wring from them. At root, Gordon thinks that being able to access masses of information is nowhere near as useful as, say, being able to travel around the world quickly, and that there is little scope for future technologies to significantly improve our lives. Thus, Gordon thinks there are few opportunities for growth in the future.
Is he right? It’s a very important question, and my instinct is a firm no. I think Gordon has vastly underestimated the power of information, and the things we can do with it. Sure, Facebook may not do much for productivity, but the internet stretches far beyond the world of entertainment. In today’s economy, companies are built on information and knowledge; most people’s jobs involve getting the right information to the right places and acting on it. Technologies that help us process that information faster can (if used correctly) make us vastly more productive.
Part of Gordon’s mistake, I think, is to cast the internet as one big, homogenous technology, which has already matured and bestowed all of its benefits. There are many related but distinct technologies that are only just being explored.
What about algorithms? Algorithms can (when used sensibly) help machines take smart decisions far more quickly than a human. Google has utterly transformed the ability to process search information using algorithms, but that is only a fraction of their potential application.
What about data? The ability to process vast reams of consumer data, and to link together machines into one big system, could bring untold productivity gains to the service sector. In some industries, data could enable companies to mass produce services, in parallel to what Henry Ford did to manufacturing.
And what about 3D printing? The technology may seem far out at present, but it is maturing rapidly. It could shatter the barrier between the digital and physical worlds. The laws of physics may put limits on how fast you can move objects through space, but what if you can transmit files instantaneously through a wire, and then turn them into objects exactly where they are needed?
This list could go on. These technologies are far from mature, and some of them might turn out to be red herrings. Innovation and technological progress are, by their nature, unpredictable, but that is exactly the point. Just because we can’t see exactly what the sources of growth will be in the future, it doesn’t mean they can be written off.
Turning these technological opportunities into actual economic growth will be challenging; it is to confront precisely this challenge that the Big Innovation Centre exists. Gordon is right to argue that there is no guarantee that growth will continue indefinitely; it might not. But that is not the same as saying it will not. With the right approach, and a sufficiently open mind, there are plenty of opportunities to bring back economic growth, and it is on those opportunities that we should be focusing.
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