Everything's amazing and nobody's happy

By R.A. | WASHINGTON

IS GROWTH over? That, amazingly, is the subject of an interesting online discussion prompted by a new Robert Gordon paper on the recent performance of American productivity growth (which my colleague has discussed here and here). Mr Gordon has produced work sceptical of the power of recent innovations for some time now; his research has influenced the work of Tyler Cowen, among others, who has postulated a "Great Stagnation" due to the exhaustion of low-hanging fruit, including big new technologies. In this latest paper, Mr Gordon characterises the era of modern economic growth as undergoing three industrial revolutions. The first, which began in the 18th century, included the development of steam power and railways. The second, which was focused in the period from 1870 to 1900, transformed the rich world in a generation, through innovations like electricity, sanitation, automobiles, and radio, the further development and exploitation of which powered growth in the first half of the 20th century. And then there is the third industrial revolution, which began in the 1960s and gave us the computer and the internet.

Mr Gordon isn't particularly impressed with this latest revolution. Most of its labour-saving impact occurred quite quickly, he says, through the replacement of middle-skill work previously done by phone operators and typists. But there was no mistaking a growth slowdown by the early 1970s which has continued (but for a brief burst of life between 1996 and 2004) until now. He offers a version of the "kitchen test" (the modern kitchen, with its refrigerators and dishwashers, had arrived by the late 1960s and has changed very little since): the toilet test. He writes:

A thought experiment helps to illustrate the fundamental importance of the inventions of IR #2 compared to the subset of IR #3 inventions that have occurred since 2002. You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?

I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for Option A is so obvious. The audience realizes that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent.

It seems plausible to me that Mssrs Gordon and Cowen are right to identify a productivity lull stretching from the 1970s into the early 1990s, a time during which an earlier era of innovation had run its course but when computing was still too little developed to much affect the economy. To argue that this slump has continued seems wildly off base to me, and I think the above comparison helps illustrate why. Try flipping it around, for example. Imagine that you could speak to someone living in 1870 and offer them a choice between two consumption packages. In the one, they could have their pick of an automobile, refrigerator, indoor toilet, or telegraph. In the other, they could have a magical device that allowed them to take photographs, record audio and video, videoconference instantly and at almost no cost with virtually anyone in the world, and have access to something very much like a database containing all of human knowledge, easily and freely searchable. In other words, an iPad hooked up to the internet. It's not at all obvious to me that the first option is the one they'd choose.

Speaking more broadly, while it's clear that the innovations of the 19th and early 20th century were extraordinarily powerful and important, it seems to me to take a staggering lack of imagination to undersell the potential of computing and networks as Mr Gordon does. As Eric Brynjolfsson and Andrew McAfee compellingly argue in their ebook "Race Against the Machine", rapid improvement of computer processing power and algorithmic efficiency has with surprising speed brought us to a new innovative threshold, in which things like autonomous vehicles, effective machine translation and voice recognition, and artificial intelligence are or soon will be deployable realities. Even the more mundane world of mobile devices and apps is manifesting some real disruptive potential. And keep in mind: that world is almost brand new; the iPhone is scarcely 5 years old.

Generalising still further, I think that Karl Smith is right to point out that progress is occurring both rapidly and deceptively. The earlier industrial revolutions were largely about huge productivity gains in the production of goods—something we're very good at measuring. The more recent revolution, by contrast, has largely been about expanding the scope in the market for services and raising cognitive productivity. We're not as good at measuring those things or understanding how they impact national accounts. Further, surges in the production of ideas predate realised productivity gains by decades or more, as application is the means through which such gains are achieved. Application is a bottleneck; it's going to take us a while to figure out what all these networks and thinking machines are capable of and how they can be profitably turned into functioning business models. It will take more time still for society to arrange itself and its institutions around them to maximise their potential.

Third, the application of many of these new ideas may well lead to less actual output (and perhaps much, much less) via increases in efficiency and quality. The earlier industrial revolutions brought an age of massive-throughput large-scale production. The American system of manufactures took piles of resources and energy, delivered them to a massive factory, and churned out piles of fairly standardised goods. The new revolution may be the age of personalised and customised everything: everything from the gadget you 3D-print at home to the treatment you receive for an illness may be precisely tailored to your tastes, if not your biomechanics and genetic makeup. That, too, complicates the computation of productivity and welfare gains.

I suspect there will eventually come a moment at which these gains do show up in an impressive fashion in traditional metrics and also make Americans feel as if big gains are occurring, and that moment may arrive sooner than we expect. In the meantime, we'll have to content ourselves with the new and amazing experience of watching world history unfold in enormous detail and in real time, all from the comfort of our living rooms.