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The New Growth Pessimists

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24 January 2014

This article from the January 2014 edition of the IPA Review is by Research Fellow at the IPA, Dr Julie Novak.

Despite the unambiguous gains in living standards among developed countries over the last three decades, several economists have recently speculated that our future economic outlook may decidedly be less rosy.

In a paper written last year with the ominous title ‘Is US Economic Growth Over?’, economist Robert Gordon argues the modern era of growth of prosperity—brought on by past waves of innovation that delivered the likes of steam engines, electricity and air conditioning—may be coming to an end.

Although the stream of innovations has continued, particularly in the form of computers and telecommunication technologies, Gordon argues that these have not delivered productivity gains of the same magnitude as previous innovations during the first two industrial revolution waves.

Gordon is particularly scathing about the productivity potential of recent technologies, such as the iPhone and iPad:

invention since 2000 has centred on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labour productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.

Another economist, Tyler Cowen, has also been characterised, perhaps unfairly, as a future growth pessimist of sorts, by virtue of his lengthily titled 2011 Kindle single The Great Stagnation: How America Ate All the Low Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.

Observing stagnant median incomes in the United States since 1973, Cowen attributes this trend to the exhaustion of easily gained opportunities for growth and development: the scarcity of free and unused lands, the dissipation of the gains from innovation waves from 1880 to 1940, and fewer opportunities to find smart, motivated children to educate.

Both economists point to distracting features of the likes of Facebook and Twitter, but this tends to undersell the profound pro-productivity gains secured by computing and the internet more generally.

Never before have production and consumption processes been interlinked by such a pervasive, general purpose technology in which economic exchanges proceed with the swift click of a mouse.

If there is one view upon which Gordon and Cowen share, it is the danger of larger government, which inhibits growth in the long run.

In the end, new growth opportunities spurred on by market entrepreneurship and innovation, both foreseen and unforeseen, should ensure that our children and grandchildren enjoy the benefits of higher living standards in the years and decades to come.

But to ensure that this aspiration for our future becomes the reality of tomorrow, we have no option but to hold the leviathan of government at bay.

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