Syndicate content

Is the declining pace of innovation lowering productivity & growth?

Vinaya Swaroop's picture

If you have been listening lately to Robert ‘Bob’ Gordon, an economics professor at Northwestern University, he will tell you that the days of great inventions are over. This in turn, has led to a significant slowdown in total factor productivity – a measure that economists use to measure innovation and technical progress. Falling productivity is one of the main reasons for growth shortfall in advanced economies like the United States.

Eager to know more about this seemingly worrisome and pessimistic thesis, which has attracted a lot of attention among economists and the media, we invited Gordon to give a talk at the World Bank.

Gordon’s basic idea is that “economic growth is not a steady process that creates economic advance at a regular pace, century after century.” According to his theory, the pace of total factor productivity (TFP) – which statistically measures total growth in output relative to the growth in labor and capital – has grown slower since 1970 (at a rate which is roughly a third of the rate achieved between 1920 and 1970). Recognizing that the digital revolution has made progress in the fields of entertainment, communications and information processing, he claims there has not been many meaningful advances in basic areas that are critical for most individuals, e.g., food, clothing, shelter and transportation. For example, Gordon argues that even when cars today are safer and more comfortable than 50 years ago, they still perform the role of transporting people as they did back in 1970. Regarding the much-hyped invention of driverless cars, he quips: Does it really matter whether one has to drive his own car or whether the car drives itself?

Fortunately Gordon indicates that it is not an end to innovation, but a decline in the usefulness of future inventions that is taking place. Documenting the impressive rise in standards of living between 1920 and 1970, with rising TFP, he claimed that it will be more difficult than before to replicate such improvements in advanced countries like the United States. In the earlier period, the American standard of living doubled every 35 years; in the future this doubling (for most people) may take a century or more. Moreover, the newer innovations do not seem to be benefitting all segments of society, which in turn reflects rising inequality in the advanced countries.

Gordon’s thesis raises many questions: Is he correct in saying that the era of rising labor productivity associated with innovation and technological change over? Will the digital economy imply a new rise in the standard of living? From a development perspective, what implications does his thesis have for middle- and low-income countries?

My sense is that many countries in the developing world still have a lot of catching-up to do – from providing the basics (e.g., access to water and sanitation through indoor plumbing, to electricity for all) to more advanced (e.g., central heating, cleaner environment) – as they are still far from the levels of living standards achieved in the advanced countries. For example, while India is rapidly developing, close to 50 percent of Indians still lack indoor plumbing. One could argue that in the process of attaining “catch-up” growth – by simply learning and adopting the newer technologies already adopted in the advanced countries – they will continue to raise the standard of living of their citizens.

In the Bank, we are not so pessimistic about the impact of the digital economy in promoting development and standards of living. In his remarks at Gordon’s seminar, Deepak Mishra, co-director of World Development Report 2016 “Digital Dividends” highlighted that the digital revolution has just started and still needs to be more inclusive in order to see the impact it will have. Globally 6 billion people don’t have access to broadband, 4 billion to the internet and 2 billion to mobile phones. Widespread benefits of digital technologies comes from their extensive adoption (such as e-commerce in China and business process outsourcing sector in India) and this process has not finished. Finally, he believes that rapid spread of digital technologies is important but not enough; it also requires strengthening the “analog complements”—better regulations, skilled labor force and accountable institutions to make it available for all.

Yet Gordon’s thesis raises an important question: Can productivity be increased forever? He believes it cannot. But other economists like Joel Mokyr -- another Northwestern economics professor and historian -- believe it can.

Curious to learn his counterpoints to Gordon’s slower and less useful innovation thesis, we invited Mokyr in the early part of the summer for a seminar. Speaking on “Is Technological Progress a Thing of the Past?” he noted that while the relatively “easy” inventions (running water, electricity, antibiotics etc.) that have substantially changed our lives have been picked, there has been major scientific progress in the past decades that are equally impactful– from astronomy to material science to molecular genetics and immunology. His view is that it is more important to look at what the digital revolution does indirectly for productivity through its effect on science. According to Mokyr, technological progress still has a long way to go.

Only time will tell whether innovation will continue to be impactful in raising productivity and standards of living in the future. I tend to be in the Mokyr-Mishra camp and believe that technological progress will continue and it will stimulate new discoveries. Currently there are over 2 billion smartphone users worldwide. While it is difficult to measure the collective increase in their welfare from using smartphones, suffice to say that it has been huge. At least in my household, members are so enamored with the digital revolution that if forced to pick between their smart phones and indoor plumbing – a question that Bob Gordon asks -- they might not have an easy choice and I suspect, it could go either way.

 

Comments

Submitted by Renee Desclaux on

Agree with you, Vinaya! Mr. Gordon's views seem very pessimistic ...Thank you for sharing your thoughts!

While I agree that Bob Gordon’s views are pessimistic, his arguments are supported by evidence. What he says makes sense, the issue is whether his predictions for the future will be right; and that only time will tell.

Submitted by Anand on

Great blog that summarizes the state of knowledge on a key debate. Gordon can't be right - the scope for innovation is unlimited, even in developed countries. Why would 1920-1970 be such a unique period for innovation? On a lighter note, if true, it would make Mr. Trump's hopes of Making America Great Again a little difficult, wouldn't it?

The scope for innovation is certainly unlimited, but the evidence on that is not that great. For example, the digital revolution does not seem to have produced anything like a light bulb or antibiotics. That is the thrust of Gordon’s argument.

Submitted by J Gauthaman on

I think its all about perception. It may SEEM like we may have slowed the progress of civilization but in reality, we are challenging ourselves more than ever to push our productivity boundaries.

Take a swimmer who has won his first medal, it is a huge leap in achievement. When he continues to get medals, it starts to seem less exciting. What is important to note is the energy it takes to break barriers for the second, third, even tenth medal.

Just because we leaped from living in forests to towns to moving on bridges between towns, it does not mean that the effort we put into maintaining that foundation/infrastructure is less productive. It just doesn't produce new shiny outputs.

Agree with you – at the margin, the value of that extra medal goes down. And it is also important to note that finishing that race in less and less time becomes increasingly difficult. Maintaining what we have is good, but in the absence of newer things it would be hard to imagine that standards of living would continue to rise. After all we are talking about growth and betterment of living standards.

Submitted by Jim Kindley on

110 years ago, the "experts" said that every meaningful thing had already been invented.

Agree with you – but the argument is not that we can never ever discover meaningful things. The evidence lately shows that we have not discovered impactful things (like a light bulb) that would help increase the standard of living for millions.

Add new comment