Is the Stationary State Coming?

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 21^st 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?

Comments

[JKH]

The idea of a 0 profit economy seems very odd in a monetary/capitalist economy, obviously.

But I see nothing in logic that necessitates that the complete evaporation of capital investment requires the evaporation of profit. Profit can be entirely distributed for consumption, and/or it can even be “invested” in the financing of consumption, by depositing it with the banking system essentially.

You could have a steady state with a fixed level of outstanding capital stock (still financed by depreciation) or even a declining level of outstanding capital stock (with limit zero), with overall output increasing at some pace due to technology.

The idea of convergence to zero profit seems odd though. Where would the allowance for risk be in such an economy? Profit and financial capital are intended to absorb risk. Obviously that sort of assumption implies the death of risk capitalism. What replaces it?

As far as growth goes, nobody knows the future.

But I would think that potential global consumption appetite for existing types of output is far from satisfied. Surely distribution will play an increasingly important role in per capita trends.

[Trevor]

Two Words: Technological Singularity.... growth may even accelerate

[Sandwichman]

Robert Gordon needs to pay more attention to the interaction between his tailwind #1, demographics, and tailwind #5, energy and the environment and in the process become acquainted with the vital dynamic interchange between the industrial metropolitan economies, such as the United States and the "peripheral" economies from which a great bulk of raw materials and fuel for the industrial economy originates. Nicholas Kaldor noted the disparities between the industrial and extractive economies back in 1985. Actually Marx discussed the "metabolic rift" way back in Volume 3 of Capital, but let's stick with Kaldor's argument since he's more contemporary: "The basic requirement of continued economic growth is that the various complementary sectors [by which he was referring to industrial and agricultural/extractive] expand in due relationship with each other."

Now, by "due relationship with each other" Kaldor did not mean fixed proportion. In fact, he meant almost the opposite: growth requires a continuing evolution of the terms of trade between the industrial and agricultural/extractive sectors, according to a formula he presented in 1974, which in prose translates as economic growth depends on either a relative reduction in the income of agriculture or increased demand from agriculture for industrial products (or some combination of the two).

Scylla and Charybdis. Obviously there is a lower bound to the relative reduction of the income of the agriculture/extractive sector. On the other hand, increased demand for industrial products from the agriculture/extractive sector depends only on an increased economic throughput of raw materials. Growth is only constrained by our ability to extract ever-increasing quantities of raw materials from the earth -- particularly from the global South. As Slim Pickens exclaimed in Doctor Stranglove, "Yeehaw!"

[Simon van Norden]

I would be very content if Gordon's opinions about future economic and productivity growth showed signs of settling down to a stationary state. At times hyper-optimistic, at times very pessimistic, at times like "Goldilocks" (his term, by which he means not too fast, not too slow) his opinions and forecasts have fluctuated wildly over the past 15 years.

In reading his conclusions, it is useful to keep in mind the confidence intervals associated with his data series and his statistical methods.

[Ian Lippert]

Countries around the world have far too much to gain from a modernizing their inefficient institutions. If we do reach a stationary state it's by choice and not circumstance.

[Steve]

Any comments on a dissenting voice to Gordons analysis?
http://rogerpielkejr.blogspot.ca/2012/10/nullius-in-verba-works-for-economics-too.html
http://rogerpielkejr.blogspot.ca/2012/10/gordon-vs-gordon-on-growth.html

Makes sense to me but I know I could be missing something.

[Bob Smith]

"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"

In fairness, there's something of an inherent bias in favour of the steady state world, as a result of our inherent inability to predict the future. If we knew what the future technologies were, we'd already have them. You see this in science fiction, where representations of the near-future end up looking far more like the present (i.e., when they were written or filmed) than they do the actual future. Classical economists suffered from the same defect as science fiction writers - humanity.

The really creepy thought is what if Gordon is an optimist? What are the risks of a negative growth world? I was thinking about this recently as a result of coincidentally starting to watch "Walking Dead" and reading Tom Holland's book on the rise of Islam - which vividly describes the plague of Justinian (which wiped out something like a third of the population of Europe) and the subsequent collapse of the Roman Empire in the Eastern Mediteranean (as an aside, the book is a fascinating read for anyone interested in the rise of Islam). I'd like to tell myself that the collapse of civilization portrayed in "Walking Dead" is just dark entertainment, but I can't get over the fact that it has happened before (zombies vs. plague carriers, what's the difference?). In that light, maybe history should have been called the "dismal science". It's almost enough to get me to stock up on on small arms and canned goods.

[Determinant]

What about inequality? The industrial revolution largely passed Africa by, with the exception of mining, and even then its spotty in terms of technology.

India and China were barely industrialized in 1950, China through being at the tail end of 500 years of stagnation where they lost their position in the world to Europe. India was just shaking off the British Raj, which gave India railways but precious little else.

How long can we go on ignoring the profit potential of investing in and industrializing the rest of Plant Earth where the gains still are.

Cue the 10000 stereotypes about investing in China. Yeesh, talk to Chamber of Commerce types and you'll be in a conversation about the Yellow Peril. :help:

[Sandwichman]

"How long can we go on ignoring the profit potential of investing in and industrializing the rest of Plant Earth..."

Go figure. If the rest of "Plant Earth" is industrialized to OECD levels where does that "relative reduction in the income of agriculture or increased demand from agriculture for [OECD] industrial products (or some combination of the two)" come from?

There are two facts about capitalism that folks seem unable to think about. One is that the employment of labor is not optional; it's mandatory. Forget about the "labor theory of value" and all its critics. Has anyone ever developed a convincing "laborless theory of value"? I didn't think so.

The other is that extraction from the earth, nature, land or whatever you want to call it is also mandatory. You can't feed those mandatory laborers dividends. They eat food. It doesn't matter how good a cook you are or how spiffy your kitchen gadgets are, no food means no meal. No, you can't substitute technology for resources. They are complements. You can only substitute technology for the inefficient consumption of resources -- and only up to a point.

[Too Much Fed]

So are you telling us the most common definition of economics, unlimited wants/needs and limited resources, is wrong?

[Patrick]

I think there's probably diminishing returns to technology out there somewhere. Certainly there's diminishing returns to complexity. If, at some point, each subsequent productivity enhancing technological innovation is more costly in brain power, resources, whatever, to invent and implement then in the limit aren't we heading towards something like classical steady state?

[Major_Freedom]

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.

This is not Ricardo, this is Marx. But anyway...I will critique it (not, of course, because you believe it, but merely to explain why it is wrong, even apart from technology):

Saving is not a function of profit. Saving is actually significant at the gross revenues level. Saving only appears to be a function of profit because we live in an inflationary economy, which increases nominal net incomes, and in order to maintain a given share of accumulated capital to consumption, people have to continually increase their saving out of nominal net income. If not, then the ratio of capital to consumption would continually fall, until there was virtually no accumulated capital at all (as the same nominal saving would constitute a smaller and smaller ratio to consumption). If however we assume for the sake of argument that aggregate money and spending are fixed, then saving out of net income would eventually come to an end, and the only saving that would exist would be saving out of gross sales revenues. After that, capital accumulation would take place on the basis of falling prices of capital goods.

Profit is the original form of income. Before capitalists, there was nobody who paid wages and hence no wage income. The only income that existed at first was product sales revenues. People made (very basic) goods, and sold them. The income earned on selling goods is not wages, but sales revenues. As nobody made productive expenditures at first, there were no money costs to deduct from their sales revenues, and so the entire sales revenues was all profit. The real value of the profit was extremely low however, so don't let the 100% nominal profit mislead you into thinking they were better off.

Here are some numbers to see how profit is the original income: If I paid $50 in wages, and sold goods for $100, I would make a profit of $50. If I paid wages of $40, and sold goods for $100, I would make a profit of $60. If I paid wages of $20, and sold goods for $100, I would make a profit of $80. If I paid wages of $10, and sold goods for $100, I would earn a profit of $90. Finally, if I paid no wages, and sold goods for $100, I would earn a profit of $100. I would have no money costs to deduct from my sales revenues. Note that the $100 doesn't have to be fixed. It was only assumed fixed to show the principle.

Most importantly, capital accumulation does not imply falling profits. Belief otherwise is based on the fallacious assumption that capital goods prices cannot fall. Capital can accumulate on the basis of falling prices of capital goods, as more capital goods are able to be physically produced at a higher rate as more capital goods come into existence, apart from the nominal expenditures for them, which could in theory be fixed. For example, the same 60% of all spending could be for capital goods and labor, and capital accumulation can take place by the same expenditures being able to buy more and more capital goods as the prices fall. This won't reduce profits, because it would be like spending the same amount of money on more and more capital goods, and then selling more and more the output at lower and lower prices.

Capital accumulation is like force to acceleration, not force to linear motion. A greater supply of capital goods can increase the rate of producing more capital goods, even if the nominal expenditures for all capital goods remains fixed. People can earn continuous positive nominal profits alongside a growing supply of capital goods.

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?

Technology is maximized in free markets. We had a burst of technological progress because of a burst of freedom. That level of freedom started to rapidly decline in the early 20th century, and has all but disappeared. We are a generation of welfarists, because of an increase in irrational philosophy. The age of reason is dead.

[Patrick]

I guess I should amend my earlier comment. I should have said we'd run into trouble only if the returns on the next innovation don't keep up with the costs of producing it.

I also wonder what happens when it gets so hard and complex to actually invent and build and ultimatle profit from productivity improving technology that it pushes the time horizon out so far that people decide it's just not worth it.

[Bob Smith]

"This is not Ricardo, this is Marx."

A distinction without a difference. Ignore the labels, Marx was very much a classical economist (no doubt that'll provoke a flurry of posts to the effect that, no, Marx was not an economist because he didn't believe in unrestricted free markets). One of my old economic history professors used to joke that while Marx didn't know much about communism (Marxism not having worked out so well), he was a brilliant economist.

"That level of freedom started to rapidly decline in the early 20th century, and has all but disappeared"

Well, apart from the hyperbole, this theory is somewhat inconsistent with Livio's empirical observation that the observed growth rate of the US economy soared after the mid-20th century and still remains above the GDP growht rate in the early 20th century.

[Livio Di Matteo]

Marx was a "classical economist" in terms of the model and approach he used. He simply took the classical framework and derived a result that said capitalism would collapse rather than end in a stationary state. Economics moved away from the classical framework and into the marginalist framework at about the time Capital was published.

[K]

In a no growth world where people are free to decide how many kids to have, it strikes me as reasonable to assume that the supply of humans (labour) is totally elastic in the long run (a few generations). Also, the assumption that the supply of land is totally inelastic is a superb first order approximation. Under those circumstances I don't see how we escape the subsistence wage end game, with the caveat that we define "subsistence" as the bare minimum wage required for each generation to be willing to bring a replacement quantity of children into the world. Presumably more than the bare minimum wage required for survival, but still probably not very much. The remainder is land rents. The difference between this equilibrium and the Malthusian Catastrophe, is that Malthus' contemporaries didn't "decide" how many children to have, so at static equilibrium supply of humans was limited only by the cost of food and shelter. The equilibrium under reproductive choice is undoubtedly better, but "just enough income to morally justify bringing 2.2 kids into the world" doesn't sound fantastic. I'll take land ownership.

How else do you divide returns between two factors, one of which is long run totally elastic, and one of which is totally inelastic? In what relevant way does the marginalist equilibrium differ from the Classical analysis? What is the exact flaw in the Classical perspective, and how is it corrected by marginalism?

[Shangwen]

@Major Freedom: I love the fact that one can protest the complete destruction of personal freedom and reason by noting it in an anonymous post on a privately-managed blog. Do share with us in the comments what the secret police did after they toss you back on your front lawn tonight.

[Jacques René GIguère]

As a slight tangent (for which this blog is justly famous): a stationnary state would put the end to the modern "system" of retirement pension founded on yield on capital (ultimately growth of the economy), instead of allotting a share of the product to the old.
Before the 20th century, nobody ever thought that GranPa should be fed on the increased yield of hunting instead of the hunt itself...You'd have been laughed out of the jungle...

[Bob Smith]

Shangwen: If MF doesn't respond, maybe they didn't toss him back.

[The Keystone Garter]

New technologies should fill the void. Health care longevity improvements seem dragged by human testing but also should be steady growing stream of new products. For example, infrastructure monitoring will improve and equipment should eventually be battery powered enough to take over the Earth.
Aluminum is tough to forecast. Is microfluidics die-molds but also losing share to thermoplastic wind turbine parts.
I figure I'll tackle infrastructure next. Our reports always seem big and things don't look crumbling. Part of why English is so followed and living is it is a meld of a few languages. Quebec has its own French version but needs to merge with Esperanto or something. Best CHL league now.
I'll try to get ROI estimates and that might help with Bond issue. I'll weigh extreme bad events higher and give bonus pts to futures that have stable competant gov and quality-of-life high enough to get there along the way. So less coal. Happy to have intellgent GOP leaders M.R and P.R., but wind is better. That aerospace technology, and making it recyclable low footprint, could be the recipient of Romney's wind tax credit cancellation. Instead it is subtracted from debt. But wind saves oil imports in the ensuing 25 yrs. Oil prices and USA debt interest rates will rise more than inflation and GDP.

[The Keystone Garter]

Maybe the few cdn econo blogs should pool together until they get more comments? If good gvmt and responsive population; typical post-modern nations and even some dictators seem fine, there will be a premium for stable spenders like gov as future gets growing but bumpier. Until the machines target us. I have a plan for myself and 20 blondes.

[istanbul escort]

Inside a no growth world where people can decide the number of kids to possess, it strikes me as reasonable to visualize the way to obtain humans (work) is completely elastic over time (a couple of decades). Also, the belief the way to obtain land is completely inelastic is a good first order approximation. Under individuals conditions I do not observe how we escape the subsistence wage finish game, using the caveat that people define "subsistence" because the minimum wage needed for every generation to become prepared to bring a alternative volume of children in to the world. Most probably a lot more than the minimum wage needed for survival, but nonetheless most likely not so much. The rest is land rents. The main difference between this equilibrium and also the Malthusian Catastrophe, is the fact that Malthus' contemporaries did not "decide" the number of children to possess, so at static equilibrium way to obtain humans was limited only by the price of food and shelter. The equilibrium under reproductive option is unquestionably better, but "sufficient earnings to morally justify getting 2.2 kids in to the world" does not seem fantastic. I'll take land possession.

How else would you divide returns between two factors, such as long term totally elastic, and such as totally inelastic? With what relevant way will the marginalist equilibrium vary from the Classical analysis? What's the exact flaw within the Classical perspective, and just how could it be remedied by marginalism?