Two conflicting stories of our economic future as we head into 2017: Don Pittis

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Perhaps it’s a persistent egocentric illusion to think of our current era as a turning point in history, but two books out this past year both say it’s so.

Robert Gordon’s dense volume got a lot of attention for its cynical realism. The key lesson of his book, The Rise and Fall of American Growth, was not the rise, but the fall.

American-led growth was a miracle, Gordon says. But the miracle is over.

The view of two Oxford scholars, Ian Goldin and Canadian Chris Kutarna, is far more uplifting. Called Age of Discovery, their book makes a direct comparison between our current era and the vibrancy of the Renaissance.

It insists that rather than being at the end of the good times as we head into 2017, we are on the verge of a kind of dynamism none of us has witnessed in our lifetime — a potential hair-raising ride.

The case for gloom

Gordon constructs a strong case using conventional economic principles and exacting data measurement.

Its socialist realism dust jacket makes a glamorous addition to any bookshelf, but the tome’s lugubrious style and microscopic examination of economic history means it may be more suited to academic readers.

Fortunately, Gordon is an excellent lecturer. His Ted Talk, which predates the book and summarizes many of its key points, is well worth viewing.

His essential argument is the wonderful innovations that became widely used in the 1900s, often first in the U.S., created a burst of economic growth that simply cannot be repeated.

Electricity, telephones, motorized transport and computers transformed people’s lives and made them richer in ways that have never been seen before and won’t be seen again. Future innovation will be slower and less rewarding.

Gordon says somewhere near the middle of the last century, radical innovation and its attendant spectacular economic growth began to slow. His estimates show it will return to a trend line close to zero.

800 years of growth - Robert Gordon Ted Talk

During the past 800 years, most of the world’s economic growth was due to a burst of innovation first in Britain (in grey) and then the U.S. (in red). The white line added by Gordon shows growth plunging back to historical levels. (Robert Gordon/Ted Talks)

And that’s important, he says, because such low growth rates won’t be enough to counteract current headwinds that include inequality, poor education levels and an aging workforce.

Even after this book-length examination that includes a prescription for making things better, he comes to a gloomy conclusion.

“There is no claim here that even were all the proposed policy initiatives implemented, median real disposable income per person would be boosted by more than a few tenths of a per cent.”

The Renaissance case

Except for agreeing that the world faces a radical transformation, the case made by Goldin and Kutarna could hardly be more different.

Their firm rejection of Gordon’s gloom is partly based on contrasting economic parameters.

For one, they say traditional economists’ careful measurements are failing to capture what has been traditionally called “spillover” benefits. These are ignored in conventional calculations of profit and loss because their dollar figure cannot be counted.

Similar to the founding observation of feminist economics, Goldin and Kutarna observe that in the internet age, spillover can’t be considered a mere ancillary benefit simply because GDP — a measure of economic benefit that may now be out of date — fails to capture it.

Woodcut of printing press

Authors Goldin and Kutarna liken the internet to the invention of the early printing press, shown in this 1568 woodcut obtained from Wikipedia in minutes for this article with no contribution to GDP.

For instance, as we spend more time entertaining or serving each other on the web, an innovation the authors liken in impact to the printing press of the Renaissance, both our work and our gains are no longer part of the conventionally measured economy, even though both the work and gains are real and growing.

They offer the concrete example of Encyclopedia Britannica. The sale of a million copies would add a billion dollars to GDP, whereas a million Wikipedia users add zero.

“If the user base swells from a million people to a billion, it’s still zero,” write Goldin and Kutarna, despite research they say shows Wikipedia offers those who use it $500 a year in time saved.

That leads to another difference in perspective.

Rather than limiting their view of economic growth to the United States, these authors see the boom spreading as more of the globe’s poor get a share of the innovations once limited to citizens of the world’s richest regions.

More brains better trained

They assert that as with the effect of the printing press, an explosion of wealth and education is not just a result of economic growth but an engine of future growth.

As the number of more and better trained brains increases by billions, seemingly impossible tasks from curing Alzheimer’s to inventing more useful economic paradigms suddenly become feasible.

Of course the Renaissance wasn’t a stroll through great works of art to the tune of recorder, lute and drum.

As well as being a time of genius, it was a time of violence and uncertainty, a time when brilliant new ideas created brand new problems, where radical change led to more than one populist backlash. To the adventurous, perhaps that only adds to the challenge.

Read together, The Rise and Fall of American Growth feels like the last gasps of a dying paradigm and Age of Discovery rings like a rallying cry for an aspirational future.

Follow Don on twitter @don_pittis

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Two conflicting stories of our economic future as we head into 2017: Don Pittis

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