Sunday, December 30, 2012

Will technological innovation continue? Will growth slow?

Paul Krugman wrote a piece in The New York Times recently noting that U.S. national economic forecasts usually are based on the assumptions that recent trends in productivity increases will continue and that recent trends in increasing inequality in the distribution of income will be ameliorated. "Yet this conventional wisdom is very likely to be wrong on one or both dimensions."

Recently, Robert Gordon of Northwestern University created a stir by arguing that economic growth is likely to slow sharply — indeed, that the age of growth that began in the 18th century may well be drawing to an end. 
Mr. Gordon points out that long-term economic growth hasn’t been a steady process; it has been driven by several discrete “industrial revolutions,” each based on a particular set of technologies. The first industrial revolution, based largely on the steam engine, drove growth in the late-18th and early-19th centuries. The second, made possible, in large part, by the application of science to technologies such as electrification, internal combustion and chemical engineering, began circa 1870 and drove growth into the 1960s. The third, centered around information technology, defines our current era. 
And, as Mr. Gordon correctly notes, the payoffs so far to the third industrial revolution, while real, have been far smaller than those to the second. Electrification, for example, was a much bigger deal than the Internet.
Gordon notes that his paper focuses on the United States. Clearly some regions of the world are a century or more behind the "technological curve", not having achieved electrification, indoor plumbing, nor even railroad or automobile transportation.  (Here is a link to the Robert Gordon paper.) 

It seems to me that the "industrial revolutions" have been driven by clusters of technological changes. 

  • The original industrial revolution from 1750 to 1830 included the steam engine, its application to transportation in railroads and steam ships (and thus an expansion of markets), and the development of the American System of Manufacturing (interchangable parts) the mechanization of textile manufacturing, as well as a change from wood to coal as a fuel and increases in the mining and manufacturing of metals.
  • The second industrial revolution from 1870 to 1930 saw electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals and petroleum technologies combining to drive the economy.
We now seem to be in a third industrial revolution, sometimes called the Information Revolution, and I think we are far from seeing it end. It has already seen widespread economic application of advanced in semiconductor, computer, satellite and laser-fiber optics technologies.

I suspect that if other technologies are added to the mix they will come from the sciences. Some possibilities are:
  • Biotechnology built around the application of modern genetics to agriculture, health and industry
  • Materials technologies, especially nanotechnology
  • Applications of neuro-science, in areas such as education and medicine
  • Applications of cognitive science both in humans and machines.
The final paragraph of the summary of Gordon's paper is disturbing:
Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.

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