Apologies for a an absence of blogging for around two months. My father passed away in March, and for some time I couldn’t summon the concentration that blogging requires. The world, however, moves on and we do certainly appear to be living in ‘interesting times’ (the Chinese curse of living in ‘interesting times’ again appears to be something of a myth, but Wikipedia suggests here that it may actually come from the rather wonderful proverb ”It’s better to be a dog in a peaceful time than be a man in a chaotic period”).
The ‘interesting time’ that we are witnessing in Europe is the unstitching of postwar political and economic institutions in the face of austerity. And actually it is not ‘austerity’ per se that is the problem in Europe, but rather a structural lack of growth. A libertarian would argue that this death of growth in Europe is the result of the continent’s over-regulation, excessive taxation and sclerotic labour markets. Unfortunately, this argument appears lacking since the downward trajectory in economic growth seems an OECD phenomenon; for example, while the US is no Italy, it currently appears incapable of growing enough to absorb the natural rate of increase in its labour force, and its GDP is expanding at a far slower rate than in previous decades.
True, global growth as measured by the IMF is still humming along at a handsome pace. If we ignore the 2009 credit crisis aberration, then GDP expansion has recently been above the post-War long term average and is projected to push up above 4% over the next few years (here). However, just as OECD growth appeared to be have been artificially propped by the accumulation of debt in the 2000s, it is an open question as to whether the developing market behemoths of China, India and Brazil have also been binging on mal-investment post the credit crisis to keep their economic miracles on track. As countries as diverse as the Soviet Union and Japan show, this particular type of industrial policy has a tendency to suddenly come up against a brick wall with the passage of time (read Michael Pettis on China for this sort of critique).
For me, however, the far more fascinating question is whether the critical key to growth—technology—is becoming impaired. There are a number of mechanisms through which this could be taking place. At its most extreme, we could be witnessing declining returns to technology. I touched upon this issue in my blog post here, but will repeat the relevant section as it appears to me so important for our century’s prospects:
Joseph Tainter looks at the empirical literature on investment returns to technology (including studies of his own) and shows that the the idea of an ever accelerating progress in technology is nothing more than a myth (see a presentation he gave here). His conclusions are:
- The productivity of of our system of innovation is declining, and has been for some time. (First noted in 1879.)
- To maintain an acceptable rate of innovation, we will need to allocate more and more resources (money, people) to research and development.
- Within a few years, we will be able to innovate at an acceptable rate only by taking resources from other major sectors—e.g., health care, defense, transportation, infrastructure. This cannot continue forever.
For economists, technology is the manna from heaven that supposedly never stops giving, and is the principal driver of productivity growth. If you take out productivity growth, then society as a whole suddenly loses its most powerful weapon to tackle such modern economic afflictions as an ageing society and debt (not to mention climate change).
To this, I will add a further two channels that could destroy our worship of the cargo cult of technology. First, the degree to which technology is just embodied energy. Access to cheap energy enables a range of technologies. If, for some reason, we hadn’t been blessed with a fossil fuel endowment laid down millions of years ago, it is questionable as to whether the industrial revolution would ever have taken off. Ayres and Warr have set out this argument in far more sophisticated terms: a brief introduction is given here. The corollary of this argument is that if cheap energy becomes unavailable then, in effect, you start to disinvent a range of technologies (for which the growth implications are horrendous).
Now it is possible that technology could provide a solution to this particular conundrum. For instance, the efficiency of solar is following a somewhat slow motion Moore’s Law, but an exponential growth curve nonetheless. And many advocates suggest that solar will reach energy generation parity with an increasing number of fossil fuels in the not too distant future. There are a lot of moving parts in this particular argument, since both solar panels themselves, and battery technology for storing energy, could both in turn face natural resource constraints. But technology could then provide more abundant substitutes to those elements in short supply—but then again it may not. No unequivocal answer to this particular question exists, but I remain skeptical of a Matt Ridley or Ray Kurzweil’s type of religious response that technology is a deity that we should have absolute faith in. The human experience of turbo-charged technological development is brief indeed—a mere two hundred or so years. Statisticians always warn about extrapolating trends outside of the data set that generates a relationship. Therefore, to this argument, all I can say is ‘we shall see’.
A further source of worry is the ability of technology to undermine the very same conditions that allows it to flourish in the first place. My starting point here could be Martin Ford’s book ‘The Lights in the Tunnel’ (the web page is here). Ford argues that technology, or rather automation, if making an ever-greater part of the workforce redundant. And this assault on jobs is by no means limited to blue collar workers, since huge swathes of knowledge workers from lawyers to radiologists are also ripe for replacement. The argument brings to mind Marxist predictions of the inevitable decline of capitalism as machinery replaces workers, thus wiping out sufficient demand to keep the system intact. Editorials in The Economist magazine would at this point immediately shout ‘Luddite Fallacy’—the efficiencies secured would spur demand for the replaced workers to be employed in alternative occupations (to be fair, The Economist actually published a very good piece on the perils of technology recently here). My response (quoting Deng Xiaoping) would be ‘Seek Truth from Facts’; in other words, technology isn’t generating replacement employment regardless of the political system. Don’t believe me? Just look at the numbers.
Overall, OECD countries are beset by unemployment at a time when technological development has never been higher. Information is effectively free through the internet and almost limitless computer power. Both personal and corporate tax rates are far lower than in the full employment 1960s. Union power in most countries is also at a historical low. I am sorry, but it is nonsense to argue that such red tape issues as health and safety regulations are preventing markets clearing, when the entrepreneurial environment is far more conducive to new company start-ups than 30 years ago. Britain did experience the Thatcher revolution, and now unemployment levels are flirting with those before her reforms took effect. Something is, therefore, going on around here.
In sum, we should remember that technology does not equal growth. Modern day Greeks have access to an unprecedented level of technological knowledge, yet the economy is in free fall. My fear here is that technological development requires a stable soft infrastructure but has the capacity to undermine that stability by funnelling its benefits to an ever narrower range of elites. If absolute income decline starts to encompass more than one quintile of the population in any one country then the post-War technology-supported free market capitalist consensus is in trouble. To this challenge, politicians from Barack Obama to Angela Merkel to Francois Hollande appear to have few answers (and in the sterile argument of austerity against spending they are looking in all the wrong places). Indeed, it won’t be pretty. Just look at Greece.