Robert Gordon has recently published an NBER paper titled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”. The paper questions the universal assumption that gained currency in the 1950s with Robert Solow's work that economic growth is a continuous process that will persist forever. Indeed, Gordon suggests that the past 250 years could be a very unique period in human history and we will be returning to an era of low economic growth – a state that has characterized human history prior to the 1750s. For example, the UK’s real per capita GDP grew at an annual rate of 0.2 percent in the four centuries leading up to 1700.
There were three phases to the industrial revolution that sparked the modern economic growth era. The first industrial revolution from 1750 to 1830 harnessed steam power and created the railways. The second revolution from 1830 to 1900 provided the innovations of electricity, running water, the internal combustion engine, communications, airplanes, air conditioning, communications and chemicals) and the period from 1900 to 1960 was a period of their diffusion. Finally, the post 1960 period to the present (computers, the web, mobile phones), which is marked with declining economic growth rates. He provides an interesting figure that is provided below (Source: Gordon p. 6) illustrating the actual and hypothetical growth paths of real per capita GDP, which suggests the historic rate of 0.2 percent will be reached by the end of the 21st century.
Gordon's paper got attention from the New York Times (there is a link to the Gordon paper here) in the context of its political implications for the US presidential election – that is, if we are indeed in an era of diminished economic growth, then policies to promote growth are simply window-dressing. This is an era of economic stagnation (Tyler Cowen has also written a book along these lines titled The Great Stagnation) and the reality will be action by the affluent to protect their share of the pie in a low growth economy.
This is a thought provoking paper that is fun to read and there is a lot more in it than I can deal with here in a blog post but I do want to make one point. I find the arguments in the Gordon paper reminding me of the Classical School of economic thought and the concept of the stationary state whose theoretical modeling was first advanced by David Ricardo. In a nutshell (with my apologies to serious scholars of Ricardian theory and the history of economic thought), I summarize Ricardo and the stationary state as follows.
Growth proceeds from the accumulation of capital and capital stock is accumulated via saving and saving is a function of profit with the profit level determined by wages paid. The higher that wages are, the less that is available for profit. The level of wages, in turn, is set by the price of agricultural produce (the price of corn), which determines the level of subsistence. Thus, the price of labour is what ultimately determines profits and economic growth. As the amount of capital applied to production increases, diminishing returns sets in and rents will grow at the expense of profit. As long as profits are positive, there will be saving and capital accumulation will proceed, but as accumulation proceeds, profits will decline until eventually, profits are zero and no more saving occurs. Once profits are zero, there can be no more saving or capital accumulation and the stationary state is reached and no more growth occurs. In the stationary state, profits are zero, labour earns a subsistence wage and the owners of land earn rent.
Classical economics argued that eventually a stationary state or the end of economic growth was going to be reached but they did not account for technological change. Indeed, it is remarkable that the Classical School in the midst of the industrial revolution never seemed to come to grips with a theory of how technological change would drive growth. My guess is that they simply saw the outcome of technology as increases in capital stock – new machines and equipment. Yet as the 19th century proceeded, technological progress continued in leaps and bounds and the stationary state was staved off. I guess the real question is if economic growth rates are declining, will there be a rescue by new technologies that we have yet to dream of or has everything that is possible of being invented been done consigning the human species to a stationary state?