The lives of our grandchildren

A provocative recent NBER Working Paper by Robert Gordon concludes that US economic growth will slow considerably over the next century to the extent that the lives of our grandchildren will not be very different from ours. The reason for this, according to Gordon, is that many of the inventions over the last 150 years have been “one-time-only inventions, which “limits the potential for a continuing stream of equally basic inventions”. Says Gordon: “Such essential improvements of human life as the conversion from rural to urban life, the speed of travel, the temperature of rooms, and the near-elimination of brute-force manual labour, have already been achieved.” While these innovations have considerably improved our productivity, he argues that more recent innovation, like Google and Twitter and the iPad, has focused less on labour-saving technology and more on “a succession of entertainment and communication devices that do the same things as we could before, but now in smaller and more convenient packages.”

Pundits have, of course, predicted the end of innovation before (and the decline of the United States). Gordon himself notes four classic examples where pessimism turned out to be unfounded, including the president of IBM in 1943 who said “I think there is a world market for maybe five computers”, or Bill Gates’s quip that “640 kilobytes ought to be enough for anyone”. But while mentioning these errors, Gordon fails to heed their lessons.

It wasn’t that these individuals were unnecessarily pessimistic about the future; they, and almost everyone else, could simply not imagine the possibilities that these new technologies would create. There is no reason to expect that we have a greater capacity today to envisage what the future might be like any better than intellectuals and business leaders of the mid-twentieth century, or even late-nineteenth century. There is also no reason to suggest that all “one-time” inventions have been discovered: a recent cover of The Economist noted the dramatic change in production and distribution that 3D printing might entail. Mobile technology may fundamentally alter our mode of exchange. Are existing roads and vehicles really the most optimal way of transport (if we include speed, safety, and cost)? And power lines to distribute electricity? There are still countless ways to make humans more productive, especially if all costs (like the impact on the environment) are priced into the market.

Gordon’s contention that many technologies developed in the early twentieth century (the automobile and flight, for example) reached their peak in mid-century is questionable. Gordon uses the example of aircraft: “air travel by 1970 had been completely converted to jets with no further increase in speed”. Speed is, of course, not the only criterion that should be used to judge efficiency: planes are much safer today than in the 1960s and 1970s and, most importantly, also cheaper, more frequently used by the median citizen. Moreover, these days we also have Skype for that meeting with someone on the other side of the world, lowering transaction costs dramatically. A more personal example may be more apt: even though a modern dentist looks very much like his 1960s counterpart, the diversity of dental services offered is much greater today (and the experience is much more pleasant).

Gordon also only focuses on the United States. Surprisingly, globalisation is perceived to be negative for US growth, causing greater inequality. But globalisation also broadens the scope for adopting ideas and innovations discovered elsewhere, today much faster than in the past. Apple has created excellent products, but is also in competition with Samsung, a South Korean conglomerate. Samsung may have used ideas from Apple, but would Apple have built a mini if it wasn’t for Samsung’s Note? In telecommunications and computer services where network economies are increasingly important, global competition may be the only antidote to local monopolies. Moreover, the vast majority of the world can still benefit from the twentieth century discoveries. Such productivity increases elsewhere will create larger markets for US producers, driving further innovation (and more “homesourcing”).

But Gordon also neglects the two most important reasons to be optimistic about the future. While noting the six “headwinds” of an ageing population, a lower level of education, greater inequality, outsourcing, climate change and household and government debt, the innovations of the last two decades (notably in information and telecommunications technology) have caused what Daron Acemoglu calls a “rights revolution”: in ‘The World Our Grandchildren Will Inherit’, he argues that greater political freedom is the ultimate cause of long-run increases in living standards, and the expansion of political rights will make the world a better place for our grandchildren. Perhaps its not only political freedom though. Perhaps its social freedom. A more integrated world, results in a more peaceful and – most importantly – cooperative world. A world of greater trust. And, as Stan du Plessis argues in this TEDx Stellenbosch video, human prosperity is founded on our ability to cooperate.

There is no reason to suspect that we will cooperate less in future. As social media and telecommunications expand, humanity will continue to move closer together, even though there will always be resistance to change. Ideas will spread faster across a greater number of people than in the past. The reward for innovation is greater, the pool of beneficiaries larger.

For Gordon, the heyday of productivity growth was the period 1928 to 1950, but not everyone at the time thought that it was. Here’s John Maynard Keynes in 1930 on Economic Possibilities for our Grandchildren: “We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down – at any rate in Great Britain, that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.” He continues: “I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase in technical efficiency has been taking place faster than we can deal with the problem of labour absorption, the improvement in the standard of life has been a little too quick.”

Gordon makes the same mistake as Keynes’s contemporaries. As Stan says in his TEDx talk, once you’ve swallowed the blue pill of economic progress, there is no way of going back.  Our only constant is change, and it will also be true for our grandchildren.