The Technological Stagnation Hypothesis

2/21/2013 07:25:00 PM
Back in September Robert Gordon wrote a piece arguing that US economic growth is over, and the idea has been floating around the econosphere ever since. (see Krugman here)

On of the arguments I keep seeing is that in recent decades we just haven't had the kind of life-changing innovations we had during the first and second industrial revolutions. Krugman comments that kitchen appliances today aren't so different from what our parents had.

That's quite true, no doubt. But I'm not sure what it has to do with growth. Their argument is a normative one--recent innovations haven't represented as large welfare gains over previous inventions like indoor plumming and electric lights. But that's not to say that today's innovations don't add as much to economic growth, which is a positive measure. The conventional oven may be the same basic technology our grandmothers had, but I can guarantee you that almost everyone has a newer oven than their grandmother had back in the day. That is, because of innovations in production technology, we've increased our consumption of ovens, replacing them a lot more often than we used to. The modern-day oven itself may not represent a huge leap forward in the productivity of mankind, but strictly speaking, the productivity gains from the original electric ovens didn't show up in GDP either: home production has always been excluded from our calculations of economic growth.

So, I think Krugman's and others' attempts to humanize the topic by discussing how innovation affects "real" people's everyday lives completely misses the mark when it comes to measurable economic growth: the apparent lack of new ideas for kitchen appliances is in no way a threat to future growth. We are still constantly comming up with new ways to produce more and better of the same old appliances--and that is what economic growth is all about.

Think about it this way. We've basically maxed out (for now) the potential for computers. Even relatively low-end computer processors are capable of doing an adequate job for just about any software I could possibly desire to use. I have no earthly idea how I could possibly use up the tera bite of hard drive space I already have. A better video card than what my laptop has might be nice, but that's certainly not hard to find in today's marketplace. Ipads are cool little gadgets, but don't come anywhere close to being as useful and life-changing as a laptop. Does this mean we've maxed out growth in the computer industry? Absolutely not! New computer technologies won't fundamentally affect how I spend my days. But, if the price continues to fall, I will eventually want to buy a second computer--one for, say, the office, and the other for home. And if it falls further I might just buy a third. Maybe keep that one stowed in my car, you know, just in case. Also, of course the cheaper computers get, the more quickly I will want to replace them.

My point is this: what matters is not whether intel or toshiba comes up with a new invention that will change my life. All that matters is that they continue to come up with small tweaks to the manufacturing process that produces more computers with fewer resources. As that happens, we will all buy more computers. And that, ladies and gentlemen, is what economic growth is all about.