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Stagnation or exponential growth — considering two economic futures

REUTERS/Regis Duvignau
Can continued technological progress sustain high rates of worldwide growth?

Last week, I attended a talk by William Hoffman entitled, “The Biologist’s Imagination: Innovation in the Biosciences.” Hoffman’s presentation inspired me to think about a debate that is raging in economics: whether economic growth will continue at the rapid pace of the last hundred or so years, or whether growth is set to stagnate as new innovations yield only small marginal increases in prosperity. Let me take you through it.

Whenever the economy goes through a deep recession, economists ask, is this a new normal? For instance, consider this picture:

The red line shows US economy’s potential output, i.e. the amount the economy would have produced each year had employment, capital utilization, and productivity grown at their usual rates. By contrast, the blue line displays what the US economy actually produced each year (i.e. its real GDP) from 1981 through mid-2014.

Economists are asking, are we going to remain stuck below the red line? One answer is that the Great Recession damaged potential output and it will grow more slowly for the foreseeable future. Lawrence Summers reached back into the debate that took place in the 1930s and resurrected the term “secular stagnation” to describe this situation of chronically slowing growth. (An e-book that debates this topic is available here.) In Summers’ view, we need much more aggressive monetary and fiscal efforts to get the economy back on track.

It turns out there is an even bigger dispute swirling around this question. In particular, this debate steps away from the distinction between actual and potential output and focuses on the future course of potential output growth, in particular, and living standards more generally.

An end to rapid growth

On the pessimistic side, economist Robert J. Gordon argues that the period from 1870 to 2000 was “one big wave” of productivity growth, and that the pace of technological progress driving potential output growth is slowing down. When you add in what he terms “headwinds” such as high government debt and an aging population, Gordon predicts that instead of potential GDP per person growing at about 2 percent per year (as it did during the big wave) growth will fall to about 1 percent per year.

This may not sound like much of a difference, but it means that instead of income per person doubling every 35 years (with 2 percent growth) it will take 70 years to double. At 2 percent, you’ll see your children achieve a material standard of living twice of your own, while at 1 percent it will take until your grandchildren are alive to see doubled incomes.

Gordon does not think that the current recession caused this slowdown. Rather, like the tide going out, it revealed trends that have been building for ten or twenty years. And there’s not much that public policy can do to change this forecast.

No end in sight

Erik Brynjolfsson and Andrew McAfee set out the optimistic case in The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. They write that “the outstanding features of the second machine age” are “sustained exponential improvements in most aspects of computing, extraordinarily large amounts of digital information, and recombinant innovation.” (Italics mine.) They go on to say that “these three forces are yielding breakthroughs that convert science fiction into everyday reality, outstripping even our recent expectations and theories. What’s more, there’s no end in sight.”

How can we reconcile these two perspectives? Here’s a picture that can help us think about them:

This graph summarizes our best guess about average income per person over the past 2000 years. The acceleration after 1500, and especially the rapid acceleration after 1800, is what Nobel laureate Simon Kuznets referred to as Modern Economic Growth and what we colloquially call the Industrial Revolution.

Gordon thinks that the great upward sweep in per person income that started 500 years ago is going to slow down significantly. Economic growth won’t disappear and in parts of the world such as Africa, Asia, and Latin America it will be rapid as these areas assimilate the technologies developed in North American and Europe.

The average rate of growth will, however, slow down over time throughout the world. Steam power, electricity, running water, internal combustion engines, and the other technologies of the Industrial Revolution dwarf gene sequencing, iPods, the Internet, and other modern innovations.

Brynjolfsson and McAfee take the opposite stance. They say the exponential, digital, and combinatorial nature of technological progress that is already taking place and that is on the horizon will both sustain high rates of worldwide growth and will accelerate growth in countries such as the U.S.

A parallel to biology

This is where Hoffman’s talk, and the book he co-authored with Leo T. Furcht, comes into play. Hoffman contends that innovation in the biosciences looks much more like the exponential, digital, and combinatorial examples that Brynjolfsson and McAfee cite. A slide from Hoffman’s presentation makes this point:

Courtesy of William Hoffman

This should look familiar; it has the same shape as the earlier picture of income per person, but this one shows world population. They tell the same story: that growth in income per person and population accelerated after 1500.

This graph also shows the pace of innovation and demonstrates nicely that innovation accelerated as well and shows no signs of slowing down. Perhaps gene therapies and other biomedical breakthroughs won’t bend the curve like the steam engine, but they’ll keep progress going by allowing us to combat greenhouse gasses and feed a planet of 9 billion people.

Who benefits?

Gordon and Brynjolfsson/McAfee do agree on one point: no matter what happens to the average rate of growth, there is a strong chance that growth will primarily benefit those at the top of the income distribution. This applies both across countries (that is, high income countries will benefit more than lower income countries) and within countries (the top 1% of income earners will do better than the remaining 99%). Brynjolfsson and McAfee call this the Bounty (higher income growth rates) and the Spread (great disparities in income and wealth driven by the Bounty).

I think that Hoffman, and more broadly Brynjolfsson and McAfee, are right about the Bounty, but I’m most concerned about the Spread. And, I worry that policy makers will pay far more attention to the former and not to the latter. We have to make sure they deal with both.

Hoffman’s talk was part of Technically Speaking: Leadership in Action, a lecture series sponsored by the Technological Leadership Institute at the University of Minnesota and designed “to share ideas, inspire, and teach.”

Comments (5)

  1. Submitted by Ray Schoch on 11/24/2014 - 09:56 am.

    My own magical thinking

    The correlation may not be especially strict, but I nonetheless think a broad economic model that posits or relies on growth as the foundation for equally broad prosperity is doomed to failure on a planet with demonstrably finite resources. I do think the models Professor Johnston writes about here provide some wiggle room, and the concern about “the bounty” and “the spread” seems fully justified, but may be, in itself, a case of ignoring that large, gray creature with the extremely long and flexible nose that’s in the room with us.

    It does seem plausible – I, for one, hope it turns out to be more than that, just for the sake of my grandchildren – that biology and technology may find ways to combine and interrelate in such a way that they’re able to replace many of the more mechanical devices and processes upon which we currently rely, but even there, my feeling – I’ve done zero research on this, lacking both resources and the knowledge base necessary – is that we’re in denial to some degree. The degree of that denial is likely of more than passing importance, but the denial still seems to me to be a real thing.

    The huge increase in wealth, health and general well-being of the past couple hundred years has been largely due to fossil-based fuels, coal and petroleum in particular. There may well be biological processes and procedures that, on society-wide bases, can serve as adequate – or even exemplary – substitutes or replacements for petroleum, but as Professor Johnston suggests in connection with both “bounty” and “spread,” my suspicion is that those replacements or substitutes would not be widely or equitably available to individuals or societies, particularly when they’re likely to be science-and-technology-based. Much of the planet’s population is still living on the proverbial $2 a day and housed in a thatched hut. I don’t think sophisticated biological tools and processes will be available to people whose means are at that level and people whose means are at the Lake Minnetonka level on an equal basis. I could be very, very wrong, of course, but capitalism, especially the industrial capitalism of the past century-and-a-half, has repeatedly exemplified a core value of selfishness, suggesting that sharing new technologies across neighborhood and national borders is unlikely to happen without specific policies being put into place to encourage it. I’ve seen no evidence of such policies being developed, or even thought about, in the public arena.

    I’ve also seen no viable alternative proposed for our current planetary environment. Many of today’s products and processes are quite toxic, and upping the ante in that context doesn’t seem to me to be rational.

    Perhaps a change of terminology would make a difference, as well. Rather than “stagnant” and “exponential,” we ought to be thinking in terms of “sustainable” and… well… “unsustainable.” Since the planet’s resources are not infinite to begin with, slow growth, or no growth, may turn out to be the only viable “sustainable” model, while the pedal-to-the-metal, quarterly-profit-statement-driven model provides only boom-and-bust, with the benefits of the booms going to the 1%, and the costs of the busts being spread among the 99%, as they tend to be now.

    The planet can’t sustain a worldwide rise to what we in the American Midwest think of as “normal” levels of prosperity and consumption. What Professor Johnston characterizes as “stagnation” may be the only rational choice.

  2. Submitted by Tom van der Linden on 11/24/2014 - 10:29 am.


    It’s hard to stay optimistic. But, look into Kiva, or one of the other micro-finance groups, to see what a difference a telephone solar-charger can make in a third-world village. Simply having a cellphone is allowing fishermen in Africa to avoid market manipulation. (Source: Recent Nature Conservancy magazine).
    However, I think you are right that our “normal” patterns of consumption will need to change. That is not going to be easy.

  3. Submitted by Neal Rovick on 11/24/2014 - 12:40 pm.

    The drop in production/consumption as shown in the GDP graph was the effect of removing the excessively easy borrowing that allowed the goosing of the economy.

    The real issue is that there are more people than are necessary to produce the goods needed and desired by that quantity of people. There is a far greater capacity for production than consumption. Artificially high levels of consumption can only be supported by easy money.

    So I’m not even sure that it is possible, let alone wise, to try to push consumption to the maximum possible.

    And, of course, the fewer people who are required to produce the goods, the greater the profits to those who produce or control the production of goods. Think about the trends in “lights out” factories–the machines require no bonuses or share of profits.

  4. Submitted by Paul Udstrand on 11/25/2014 - 08:59 am.

    Magic GDPs

    I don’t know, often times when I read stuff like this I’m struck by the dysfunctional and incoherent nature of “economics” as a field of study. When are you guys going to accept the fact that GDP as a measure of economic “success” is seriously flawed?

    Per person growth has NOT been doubling every 35 years. In fact for most American households growth has been stagnant or decreased over the last 35 years. The idea that you can take GDP and divide it by population numbers in order to get per capita growth numbers is statistical nonsense when distribution is so wildly uneven. You guys are just figuring that out now?

    The expectation of exponential growth instead of sustainable growth was always been incoherent given the fact that by and large we are confined to planet earth. Meanwhile, as long as economists equate sustainability with stagnation they will by and large be wasting our time. And if economists are going to borrow observations from other “real” sciences, especially biology, one could start with the observation that unlimited, uncontrolled, or perpetual growth are: a) non-existent in biology because everything dies, nothing grows forever. b) Things that grow exponentially or uncontrolled tend to be malignant, like cancer. and c) Even when looking at population growth, the unlimited growth of any population of animals or organisms is typically detrimental to the ecology in general and usually catastrophic for the organisms themselves. In other words, don’t blame Biology for your “growth” models.

    Obviously the question isn’t whether or not we can promote infinite economic growth, the question is whether or not we can promote economic well being. The linkage of the two is simply a flawed economic assumption amongst capitalist economist who measure capital instead of well being.

  5. Submitted by Rentz Hilyer on 11/25/2014 - 10:13 am.

    Conflict between growth and environmental protection

    What’s really simplistic is the notion that new technology can reconcile economic growth (increasing production and consumption of goods and services in the aggregate) with environmental protection. Technological progress is not manna from heaven. It comes along with a growing ecological footprint. This can’t be easily detected without some study of the nuances. Read Chapter 7 of Supply Shock, Brian Czech’s new book on limits to growth and the steady state economy.

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