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Work and prosperity
5 October 2012

Heresy of the week: Right and left are both wrong about economic growth

Whether one prefers ‘Plan A’ or ‘Plan B’, we’re all agreed that the goal of economic policy is economic growth. Well, everyone except the crustier kind of environmentalist who sees it as a deadly threat to the planet. However, even they must see growth as the default state of industrialised economies, otherwise they wouldn’t be so worried about it.

But what if they’re wrong? What if we’re all wrong – conservatives, liberals, socialists, crusties, just about everyone?

In a fascinating post on the work of the economist Robert Gordon, Tim Harford reminds us that, historically, economic growth is the exception not the rule:

  • “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards. Many have seen this as an encouraging trend, but Gordon draws a different lesson: growth is a recent phenomenon, so why assume that it will last?”

The conventional response is that the industrial revolution ushered in an era in which one innovation leads to another, leading to ongoing improvements in economic productivity and, therefore, growth.

But what if the rate of innovation is now slowing down?

  • “Gordon has been arguing since the days of the dotcom mania that the information revolution looks rather puny compared with earlier waves of innovation, such as the internal combustion engine, indoor plumbing, electrification and the telephone – all of which took hold from about 1850 to 1900. This claim was plausible then and it’s plausible now. (Would you rather give up the smartphone, Facebook and broadband – or hot running water and your flush toilet?)”

In the short-term, economic growth isn’t only about innovation. Demand-side factors like the availability of credit and supply-side factors like regulation can speed things up or slow them down. But in the long-term, no innovation means no growth:

  • “If Gordon is right to claim that modern inventions are less impressive than those of the late 19th century, we would expect to see slow growth in US real GDP per capita. And, indeed, growth has been slowing since the 1960s, even setting the current recession to one side.”

The rapid growth seen in countries like China is basically down to the fact they’re still in the process of exploiting innovations whose potential has long been exhausted in the west.

In the conflict between left and right over economic policy, which broadly corresponds to the debate between Keynesians and ‘Austrians’ over economic theory, the potential for growth is rather taken for granted on both sides.

It’s a bit like two people arguing over a car that’s come to halt. One person says there’s no fuel in the tank, the other one that the brakes are on – but what they’ve both failed to notice is that the engine’s packed-up.


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