Sunday, October 7, 2012

The End of Growth?

Growth of business is an assumed reality of our time.  All companies are expected to grow without limit.  But how realistic is this assumption?  Has it always been this way?

During the recent unpleasantness brought on by Governor Scott Walker's unprovoked attack on labor rights, my friend Heather asked me, in the course of a long discussion on economics, why do companies have to grow?  The question caught me by surprise and I did not, as I recall, have a good answer at the time beyond "Uhhh, because they can?"

Well, it turns out that Heather's question was quite prescient.  A new paper, Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert J. Gordon asks and answers this question from a macroeconomic perspective.
The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.
Are we now at the end of the Third Industrial Revolution?  Have we expanded to the maximum efficiency limits of the existing technology?

If you look at global GDP growth since 1700, the last 100 years certainly appear aberrant.

So how do we know that we're approaching some kind of plateau?  Well, that's the core of Gordon's paper.  IR#2 was a one-off and #3 has had limited impact on the real growth of global GDP.  And now what?

Economist Michael Feller puts it another way.

Who, for instance, would trade Facebook or an iPhone for indoor heating or a flushing toilet? What economic gains could broadband have over the original subsea telegraph? Could the benefits of green energy really compare to the discovery of alternating current or the invention of the turbine? 
These are questions others have asked as well, ranging from the longue durée historians of the Sorbonne, who are attempting to pinpoint capitalism’s demise by 2100 (economic systems, like those of feudal Europe or the Roman Empire, apparently last 600 years), to UBS strategist Andy Lees, who last year provocatively claimed the world had hit its innovation peak in the 1840s.
As an archaeologist, the work on the longue durée has always fascinated me since one of the key methods to discover these patters in the historical record is archaeology.  But when you look at the economic history of capitalism in the west, it does seem that we are approaching a tipping point.

Financial Times economics editor Martin Wolf also wrote a piece about Gordon's research in which he sees the end of growth as an historic inevitability.
[U]nlimited growth is a heroic assumption. For most of history, next to no measurable growth in output per person occurred. What growth did occur came from rising population....
What we are now living through is an intense, but narrow, set of innovations in one important area of technology. Does it matter? Yes. We can, after all, see that a decade or two from now every human being will have access to all of the world’s information. But the view that overall innovation is now slower than a century ago is compelling.
So the days of wine and roses for capitalism may be drawing to a close.  Perhaps not for us, but for our children and our children's children, they will need to learn from our mistakes and find a better way to organize the global economy.  I don't know, but if I had to guess, they're going to need to turn to the works of a long-dead political philosopher for some of those answers.

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