What Does Steam, Running Water, and the Computer Have in Common?

Northwestern University economist Robert J. Gordon seems to have as many admirers as those who consider his arguments highly flawed. A paper he recently published titled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” is an example.

Gordon’s argument is that there have been 3 major industrial revolutions: first, steam and railroads from 1700 to 1830; second, electricity, the internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, and petroleum from 1870 to the mid 20th century; and third computers, the web, and mobile phones from 1960 to now. He emphasizes that the uplift from these breakthroughs occur once for an economy. As he puts it, “A common feature of this innovative revolution was that many of the improvements could only happen once.” So, for example, “The U.S. was transformed from 75 percent rural to 80 percent urban, and that could not happen again.” An example of the effect of one of these revolutionary developments is running water. Writes Gordon:

But the biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.

Ian McGugan wrote in the Globe

Prof. Gordon thinks a more long-lasting trend is beginning to make itself felt. In a recent paper entitled “Is U.S. Economic Growth Over?” he argues that the pace of GDP expansion, at least in the United States, is slowing down permanently. The tepid growth of the past few years is not a blip, he argues, but a foretaste of what will lie ahead for most Americans for decades to come.

To most economists, this is a heretical notion. From 1860 to 2007, U.S. GDP per capita expanded 1.9 per cent a year and most forecasters assume a return to that trend. Prof. Gordon, however, thinks a combination of factors will cut the rate of expansion in half.

Plodding growth is actually the norm, he says. For most of history, there was no economic progress at all for the average person. Living standards began to accelerate only with an outburst of crucial inventions in the middle of the 18th century.

The U.S. economy now faces a headwind as it finds that many of the factors that drove productivity over the past generation cannot be duplicated. The enormous move of women into the work force? It was a great boost to output, but cannot be repeated. Similarly, the baby boom is unlikely to be duplicated. And you can only educate a population once; the U.S. now appears to have hit a plateau in terms of its schooling.

It’s easy to take issue with Prof. Gordon’s analysis. Maybe there’s an outburst of technological innovation just around the corner that we can’t foresee. Or maybe a surge of immigration – something Prof. Gordon urges – would help alleviate the demographic challenge.

But it’s not just Prof. Gordon who sees slower growth persisting. Fixed-income investors are now willing to buy U.S. bonds at rates that essentially guarantee no real return for the next 20 years. A lot of people, it seems, are betting against any rapid return to the old days of heady growth.

One of the unknowns going forward is how the third revolution — computers, the web and mobile devices — will play itself out. Massive data sets (big data), genetic engineering and many other innovations are made possible by increased computing power and the falling cost of data storage. Will these halt the slide in growth and usher in a new era of high growth or not?

It is probably not a surprise that in these gray times there is an audience for end-of-growth messages. Another example is Tyler Cowen’s book “The Great Stagnation.” In his review of the book, Andrew Coyne writes:

Cowen locates that decades-long slump in a still larger historical frame. Indeed, it may not be the era of stagnation that is the anomaly, but the long period of rapid growth that preceded it.

For the first three centuries or so of European settlement, he argues, America enjoyed the benefits of a number of “low-hanging fruit.” It had an abundance of arable land, for starters, which settlers could claim for free – and not only land, but resources. As the industrial revolution took hold, it had access to a similar abundance of labour, as millions left the farms for the cities; as, later, it could call upon seemingly endless reserves of skilled labour, as more and more of these new workers went on to get an education.

And, perhaps most critically, it profited from a truly astonishing series of inventions, from electricity to the light bulb to the automobile to the telephone. Much the same story could be told of other industrial countries, of course. But nowhere did land, labour and technological progress combine to produce such enormous wealth as in America.

But, one by one, the low hanging fruit were eaten up. The land was soon allocated, tilled and mined. The movement of population into the cities and schools was completed: from 6% in 1900, the high school graduation rate peaked at 80% in the late 1960s. And, somewhere around 1970, technological progress seemed to hit a plateau. Indeed, by some measures the pace of innovation stalled some decades before that.

This seems hard to believe, in this age of technological marvels. But set beside Cowen’s list of revolutionary advances from the early 20th century, from the airplane to the assembly line to indoor plumbing, the point is at least arguable. What’s inarguable is the abrupt decline in productivity growth since the early 1970s, not only in the U.S. but over much of the industrial world – including, needless to say, Canada.

The problem, Cowen argues, is that Americans carried on (as to some extent we all did) as if nothing had changed – as if they would continue to grow steadily richer, just as they had before. When actual earnings failed to keep track with projected, they borrowed the difference. The financial crisis was the end result.

Is that, then, the future to which we are condemned, at least until some new burst of innovation lifts us off our technological plateau? Or are there still some low-hanging fruit within reach?

I’d argue there are. Globalization is one. The migration into the cities and schools that Cowen describes is going on today across the Third World. Trade allows us to benefit from that enormous increase in productive resources, as much as they.

The Internet is a second. Two decades on, it is still very much in its infancy: We have not begun to realize its potential. The Gutenberg revolution made books widely available: Why, even an ordinary person could own one – several, if he could afford them. Today, a smartphone makes all of human knowledge available, to everyone, everywhere, all the time, instantaneously. If we have not yet figured out how to take full advantage of that, we will surely do so in time.

And last, there is policy. Of all the things that determine how different nations will perform at different times, the most important by far, more even than land, labour or technology, is the organization of economic life. Russia has tons of land, lots of labour, brilliant scientists. What it hasn’t had, historically, is good policy.

I’m not suggesting we should look to some dazzling policy breakthrough to save us. Quite the contrary: We need only to abandon some of our worst policy mistakes. Imagine if investment decisions were based on the real economic costs and benefits of each, undistorted by the present welter of tax preferences or business subsidies. Suppose we permitted competition to flourish within our moribund public education and health monopolies. Imagine if, rather than allow traffic to choke our cities, we put a price on road use. And so on.

It’s not quite the light bulb. But it’s a start.