Economic Progress

Innovation, productivity and growth: The end of an era?

Pedestrians cast shadows on the crosswalk near the headquarters of the Bank of Japan in Tokyo December 19, 2014. The Bank of Japan maintained its massive monetary stimulus on Friday and offered a brighter view of the economy, clinging to hope that joint efforts with Prime Minister Shinzo Abe to revitalise the economy will prod companies into boosting wages and investment.

“Economic growth is not a steady process that creates economic advance at a regular pace, century after century.” Image: REUTERS/Issei Kato

Vinaya Swaroop
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Economic Progress

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?

 Productivity growth is slowing
Image: The New York Times

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.

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