Desmond Lachman: Have The Limits to Economic Growth Really Been Reached?
Robert Gordon has painted a dark picture of the world’s long-run economic growth prospects. But if the past is any guide, he will likely prove to be far too pessimistic about the human capacity to innovate.
Dennis Robertson, the renowned Cambridge economist and a contemporary of John Maynard Keynes, famously remarked that economic fashion was like going to the greyhound races. If one stood still long enough, the dogs would come around one more time. This certainly seems to be the case with fashions in economic pessimism about the long-term economic growth prospects of the world’s advanced industrial economies.
Each time these economies stumble, there is no shortage of economists who come out of the woodwork to advance plausible reasons as to why the limits of economic growth might have been reached. Yet each time, events seem to have proved these pessimists wrong — it has turned out that they consistently have tended to underestimate the ability of the human mind to come up with new ideas that might underpin renewed long-term economic growth.
Long-run economic pessimists have a notable lineage, yet a poor forecasting track record. Among the more notorious of these was Robert Malthus, the 19th-century English economist, who wrongly predicted that famines would be the order of the day even in advanced economies. He did so by buying into the plausible yet mistaken notion that populations tend to grow at geometric rates, while agricultural production tends to grow only at an arithmetic rate. He also failed to anticipate the tremendous benefits from advanced agricultural production techniques that would allow increases in farm production that more than kept pace with population growth.
More recent cases of long-run economic pessimists have included Alvin Hansen, who, after World War II, like Larry Summers today, mistakenly predicted that advanced economies would suffer from a secular shortage of aggregate demand. He was only to find that his prediction coincided with the very start of the golden world economic expansion of the next two decades, which was largely powered by an increasingly globalized economy.
And then more recently there were the “peak oil” economists, who not too long ago predicted that the world would suffer from ever rising oil prices as traditional oil fields were depleted. These latter economists eventually found that they too totally underestimated the power of technical advances like hydraulic fracturing, horizontal and deep-water drilling, and three-dimensional imaging of oil fields to substantially push out the energy production frontier. It was beyond their imagination to consider that the United States, the world’s largest energy consumer, would be set to become a net energy exporter by as early as 2020.
The new high priest of long-term economic pessimism seems to be Robert Gordon, a renowned U.S. economics professor at Northwestern University. In a recent influential paper, he has forcefully argued that the rapid economic progress made over the past 250 years could very well be a unique episode in human history rather than a guarantee of endless future advance at the same rate. This thought, together with his assessment of the major structural headwinds presently confronting the U.S. economy in the form of bad demographics, declining education standards, and high debt levels, leads him to the most dismal of conclusions. He gloomily predicts that for the bottom 99 percent of the U.S. population, living standards will barely increase over the next 100 years.
At the core of Gordon’s prognosis is the idea that since 1750 there have been three fundamental technology waves that have powered the world’s industrialized economies. The first was associated with the English industrial revolution between 1750 and 1830, which produced the steam engine, cotton spinning machines, and the railroads. The second and most important wave was between 1870 and 1900, with its three central inventions of electricity, the combustion engine, and running water with indoor plumbing. And the third wave, which began around 1960, involves the invention of computers and the internet.
Central to Gordon’s pessimism is his fear that the latest wave of technological progress might already be running out of steam. Unlike the first two waves of technological progress, which took around 100 years for their effects to fully percolate their way through the industrialized economies, Gordon argues that there are clear signs that we are already entering the phase of diminishing returns with respect to the latest technology wave.