No. 139

Want another productivity revolution? Trust the Democracies

Stone the crows! Is everything worthwhile already invented and are we set for a return to medieval economic growth rates of no per cent per millennium?

Economist Robert Gordon certainly suggests so in a gloomster’s guide, which suggests economic growth is not the norm, that the growth of the three industrial revolutions over the last 250 years, “could well turn out to be a unique episode in human history”.[i]

This is excellent economics, a big-picture paper that uses concepts not calculus to explore ideas rather than test tiny hypotheses. But while well worth reading it is also nonsense on stilts, a product of the fears that always afflict democracies during downturns.

Gordon’s most intriguing argument is that the second industrial revolution, which gave the world electricity and everything flowing from it, from running water, through internal combustion engines to the telephone, transformed the world incredibly quickly and far more for the better than anything in the last 20 years. What would you rather have, Gordon asks, indoor plumbing or an Ipod? By such standards “today’s information age is full of sound and fury signifying little”, Martin Wolf approvingly adds. [ii]

As for the Internet, it’s all about entertainment, rather than productivity. It’s a point for advocates of the National Broadband Network to consider given that people streaming Netflix video makes up 25 per cent of all Internet data transfers in North America.[iii]

Part of the problem is that all the important stuff is already invented. “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,” Gordon suggests.

And, although he acknowledges the possibility of marvels to come, there are enormous obstacles against technology delivering another economy-expanding, life-improving transformation.

At which the Crows caw.

For a start, Gordon underestimates the potential of the wired world – which is only beginning. To suggest where technology is now is where it will stay is the equivalent of arguing in 1829 that Stephenson’s Rocket was where railways would remain. Some 40 years later the Americans had built a transcontinental line.

And what railways were in the nineteenth century, IT is now. Quantum computing could change the world by allowing us to analyse the way everything from the weather to the economy and on to our bodies work, at speeds that are now impossible and in ways we cannot grasp.

David Wineland, co-winner of this year’s Nobel Prize for Physics, says quantum computing with practical applications will occur, but it is more than a decade off.[iv] It isn’t all that long on the Stephenson scale.

Gordon’s pessimism springs less from the state of science than the state of the union. He argues economic growth in the United States will stay slow due to six headwinds – the ageing population, the decline in education, increasing income inequality, inability to compete with equally educated but lower cost workforces overseas, the uncompetitive cost of carbon emissions and the size of private debt and public deficits.

Perils all. But you don’t need to understand quantum computing to recognise that these are all problems within the capacity of democracies to address. They only appear impossible when nations lose self-confidence and assume they can’t compete with nations which don’t bother with all those democratic inefficiencies, free elections, the rule of law and the like. According to the Pew Centre, the American public fears China for all sorts of reasons, not least because they think the Chinese work harder.[v]

The response to the pessimism Gordon channels is in his own argument. It’s a question he does not think to ask – what caused the first industrial revolution which kick-started productivity in European economies static for millennia?

Deirdre McCloskey knows. The Chicago economist and economic historian argues that, at the turn of the eighteenth century, Dutch and English respect for the bourgeois virtues of discipline and hard work, innovation and investment, transformed their economies and unleashed the creative forces of capitalism.[vi]

But the reason the dignity of the bourgeoisie unleashed endless growth in some cultures more than others (eg the UK) against anywhere in Europe, is because it was matched by the other half of the innovation equation, free markets, equality of opportunity and the rule of law. Alan Greenspan made the case for two of the three in a famous argument that economic growth depends on protecting intellectual property.[vii]

Which leaves the Yanks way out in front, in two of the three preconditions for innovation. Sure, equality of opportunity as measured by family income and access to education is declining in the US – the Crows are still convinced this is the issue that will re-elect Barack Obama. But, where would you rather be as a young graduate with no powerful friends and an idea to patent – Shanghai or Seattle?

If IT is to deliver another productivity revolution it is the democracies with the strongest market economies that will create it.


[i] Robert J Gordon, “Is US economic growth over? Faltering innovation confronts the six headwinds,” National Bureau of Economic Research, Working Paper 18315, 2012 @ recovered on October 13

[ii] Martin Wolf, “Is unlimited growth a thing of the past,” Financial Times, October 2

[iii] Nicole Carter, “Netflix makes up 25 per cent of all internet data transfers in North America,” Inc. August 31 2012 @ recovered on October 13

[iv] AFP, “Nobel winner David Wineland eyes dawn of super-fast computing,” The Australian, October 10

[v] Pew Global Attitudes Project, “US public, experts differ on China policies,” September 18 @ recovered on October 13

[vi] Dierdre N McCloskey, Bourgeois Dignity: why economics can’t explain the modern world, (Chicago 2010)

[vii] Alan Greenspan, “Market economies and rule of law,” April 4 2003 @ recovered on October 13