Recessionary Thinking

Several things happen in a severe economic downturn: unemployment goes up. Wages stagnate. Governments face budget crises. And doom-mongering theorists come forward to say that economic growth is over.

This happens every time economic growth goes negative. I am not sure if theorists actually make more predictions about the end of growth during recessions, or if the press only pays attention during recessions. But if you graphed the number of news stories about such gloomy predictions, it would track the current growth rate with uncanny precision. Today's example is the work of Robert Gordon, which has gotten a lot of attention on the web and now makes the Washington Post:

The paper is deliberately provocative and suggests not just that economic growth was a one-time thing centred on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns.

Gordon has graphs showing that the economic growth rate is now falling, after rising through the nineteenth century. Alas, his graphs are for total economic output, not output per person, which makes them all but useless; of course a country with a 1% population growth has less economic growth than one with 8% population growth. I believe that even with this correction, it is true that economic growth per person has slowed in Europe and the US. So? One reason for this is that we have decided to invest some of our profits into things that don't show up in the GDP statistics but are nevertheless very valuable, like cleaner air and better treatment of accused criminals.

Economic growth is driven almost entirely by technological change. It is new technologies that created the rapid economic growth that defines the modern world. To think that economic growth will end, you have to imagine that technological change will end. Is that really feasible? The world has a gigantic infrastructure devoted to creating and developing new technologies, and I see no sign that we plan to demolish it.

I expect rapid technological change to continue for the foreseeable future. Digital technology will continue to improve, with all of its ramifications. Even more I expect huge benefits from biotechnology, which is improving so quickly that it is almost impossible to keep up. I expect that within a generation we will be able to engineer bacteria to produce any chemical we want in huge quantities, cheaply. This will include natural gas, which means that we will never run out of what we now call "fossil fuels."

Maybe we really are in for a great slowdown in technological change. On the other hand, maybe we are just having a recession.