PS. In Theory: Economic Growth

Economic growth is a central concern for all societies. On one hand, unbridled growth poses serious environmental risks. On the other hand, rising incomes are a foundation of social and political stability. According to Harvard University economist Benjamin Friedman, rising incomes foster democratic institutions, public trust, and tolerance for minority groups, while stagnant or falling incomes tend to do the opposite. And this is true for rich and poor countries alike. In the United States, for example, the post-war economic boom led to such achievements as the 1964 Civil Rights Act; but today, after decades of income stagnation for a large majority of households, the Ku Klux Klan and other white supremacists are on the rise. Because people and resources are finite, income growth depends largely on improvements in productivity. Productivity growth is what makes the same hour of work or dollar invested today yield more tomorrow. It is that kind of increased efficiency that we’ll need either to boost living standards, or to keep them constant while consuming less. But despite seemingly radical advances in digital and other technologies, average productivity growth has been almost stagnant across most economies and sectors for a decade. And with only a few exceptions, productivity growth in advanced economies has been consistently weak since 1973. There are several theories about why this is happening. Robert Gordon of Northwestern University contends that all of the big productivity-enhancing inventions are already behind us. Today’s innovations just don’t compare to the steam engine, running water, electricity, and computer chips. Others counter that the gains implied by today’s cutting-edge technologies simply haven’t been realized yet. In the future, advances like artificial intelligence and 3D printing will usher in a new age of productivity. Still others point to declining global trade and increasing monopolization, and worry that established firms aren’t innovating because they lack competition. And still others attribute part of the problem to falling government investment in basic research, or to the lingering effects of the 2008 financial crisis. Then again, maybe our standard measures of growth and productivity are outmoded, and nominally free tools such as search engines and social media have drastically improved living standards, even if statistics don’t show it. But don’t tell it to the average worker. If there is one place where productivity growth definitely hasn’t shown up, it’s in wages. Between 1973 and 2013, US labor productivity grew by 74%, while average wages grew by just 9. That means almost all of the benefits went to the very top of the income scale. So, even if the productivity puzzle can be solved, we’ll still have an inequality problem. Unless it’s addressed, our politics will get a lot nastier.

2 thoughts on “PS. In Theory: Economic Growth

  1. A great summary of Economic Development.

    I don't think the 2008 Economic Crisis has much to do with productivity other than a signal of stagnation.

    Energy type would be an important part of productivity. We haven't had a new major energy type in a long time.

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