Economic growth isn’t everything

When you say that the golden days of growth are over, expect to get lots of attention, especially if you’re a prestigious economist. Robert Gordon, a professor at Northwestern University, has been going around for several years making exactly this case. He now has a book, “The Rise and Fall of American Growth,” summarizing his argument in magisterial detail.

Gordon’s main thesis is that the low-hanging fruit of technology has, essentially, been picked. He argues that a small handful of Great Inventions - electricity, the internal combustion engine and a few others - propelled growth to dizzying speeds from about 1870 through 1970. But there are only so many big important ideas like this to be discovered.

This may be the case. With technology, you never really know what’s out there to discover until you find it. Perhaps we will soon invent self-improving artificial intelligences that will rapidly uncover deep truths and invent magical technologies of which we can now only dream. Or maybe the technology party really is drawing to a close. But regardless of its validity, I think that Gordon’s idea has a little more popular appeal than it ought to, for two reasons.

The first reason we are too eager to believe Gordon is that when we consider the impact of technology, we think in terms of how much it changes our lives. But utility - the satisfaction we derive from goods and services - isn’t the same thing as growth.

The inventions of the 19th and 20th centuries altered the very shape of human life in rich countries. Material scarcity was effectively vanquished. Starvation was eliminated, and almost all people now have shelter. Grueling manual labor, which defined human life for millennia, is now rare. This has all been possible thanks to the Great Inventions that Gordon names. And these improvements can’t be repeated - food, shelter and security are basic human needs, and once you fill them, other life improvements will probably seem incremental by comparison.

But growth isn’t the same thing as life satisfaction. Economists generally believe that humans have a decreasing marginal utility of wealth, meaning that each successive increase in material abundance matters less than the last. Buying your first car is a lot more life-changing than buying your 10th car, even though both add the same amount to gross domestic product.

The same principle applies to technological progress - inventions that take us from the brink of starvation to prosperity and security will seem more important than what comes after, even if both add the same to GDP. That can create the illusion of stagnation.

The second reason I think we’re too willing to believe Gordon is that technology isn’t the only thing that makes society better. The quality of government matters, too. Some governments rob from their citizens. Others try to control the economy. But the best ones run efficient public services, provide public goods like infrastructure and research funding and minimize the harmful effects of regulation. The difference between a good government and a bad one can be enormous - just look at South Korea versus North Korea. In economics models, the quality of government is included in measurements of productivity, but it’s not the same thing as invention and scientific discovery.

There’s a good argument that quality of government in North America, Europe and Japan improved dramatically in the 19th and early 20th centuries. Government became steadily more participatory and less predatory. Bureaucracies became more professional. Spending on infrastructure dramatically increased, funded by taxes. Public services such as urban sanitation - which Gordon counts among the Great Inventions, but which is dependent on government efficiency - curbed disease and improved health dramatically. Health and safety regulations helped as well. Public education greatly increased the skills of the workforce.

Libertarians often portray the state as a parasite, but there is a good argument that big government - and, more importantly, good government - was responsible for a significant amount of the growth in developed nations between 1870 and 1970.

That kind of improvement was probably a one-off. Unlike science and technology, government probably has an upper limit of effectiveness. You can only transition from being North Korea to South Korea once. That means that some of the productivity slowdown we have observed may be due to our success in improving how we govern ourselves.

So when we evaluate Gordon’s thesis of technological slowdown - which might not prove correct - we should be careful of making these two errors. We should remember that growth isn’t the same thing as improvement in life satisfaction; the former is actually a lot easier than the latter. And we should consider the possibility that government quality, as much as technology, is what has stopped improving. Both of these caveats should make us a little less pessimistic. Good government and the end of brutal manual labor and starvation are good things to have under our belt.

*The author is an assistant professor of finance at Stony Brook University.

by Noah Smith