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Is Growth Still Possible?

Paul Krugman has recently pointed out a very pessimistic, but very instigating paper by Robert Gordon, about the possibilities of long run growth. Gordon suggests, very boldly, that the: “rapid progress made over the past 250 years could well turn out to be a unique episode in human history.” In his view, long-term stagnation is a very possible outcome. The reasons are associated to the effects of technical progress on investment.

Gordon argues that, while the first (steam, cotton textiles, railroad) and particularly the second (automobile, chemicals, electricity, oil) Industrial Revolutions (IR) led to a significant increase in investment, the third IR (information technology) has been less prone to lead to significant increases in investment. Further, the advantages of the first and second IRs were incremented by demographic changes and the process of urbanization, which created the need for investment in infrastructure.

Read the rest here.

Comments

  1. And I, of course, argue that Gordon (understandably since I do not think he specializes in it) misreads the lessons of history.

    I look at the same data and fully expect another revolution to engulf our world. My priors say this will be yet another energy revolution, and that it could/should have effects on economic systems and their institutions at least as profound as past revolutions.

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  2. Just be careful in not falling in the same supply side trap. Only with enough demand to require an energetic revolution that would happen. If not there would be no reason. The extent of the market is what limits the division of labor. Smith dixit, Keynes explicatur.

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  3. Do we need more NGDP growth or just quality of life growth? What Gordon is saying is that the numbers associated with the IT revolutions ("the investment spending") were lower than those associated with previous revolutions. Who cares about the numbers though? We still consumed the fruits of the IT revolution, and if it was done with smaller increase in nominal GDP then who cares? Maybe in the early revolutions the supply bottlenecks were tighter and this drove inflation and increased spending, hence "more investment" (in nominal terms). Maybe smaller inflation this time is a good thing?

    What I am saying is that we should not care about NGDP growth but quality of life growth.

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    1. In all measures of quality of life, including the UNDP Human Development Index GDP is part of it (by the way, you want real GDP growth not nominal, which would count inflation). And if you think that income is not important, then check a country with income per capita at subsistence levels (around US$ 600 or so). If you care about quality of life one essential element is Real GDP. Unavoidable. And the notion that you had supply side bottlenecks in the English IR is bizarre, they didn't even have an external constraint (since they had demand from the Empire).

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    2. If you have questions about the environment, which poses serious problems for growth, then I suggest you read my entry here http://triplecrisis.com/a-farewell-to-growth/ Again, without real GDP growth there is no historical evidence of any increase in labor productivity, which is the basis of well being.

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  4. Demand during periods of economic revolution is an interesting, fundamental topic. One way I think about it is that production costs can shift radically down for a wide range of products and services. Which liberates incomes to be spent in other ways, which in turn can be an increase in effective demand.

    Another way I think about it is that the surplus increases if production costs are radically reduced, and again there is a mechanism which increases effective demand.

    The size of these effects are of course conditional on distribution.

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    Replies
    1. The reduction in costs (technological innovation) is the result of the increase in demand, not the cause. In the case of the British IR both external demand, and the increase of domestic demand associated with urbanization (the move of workers from the agricultural sector to the industrial one) and the surge in luxury consumption (china, calicos, etc), initially imported and then produced locally (import substitution) is the prime mover. Be careful with your tendency to emphasize the supply side and price changes (substitution principle).

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    2. On the consumption revolution Maxine Berg and Jan De Vries have done essential studies, even if they remain within the mainstream, and do not get the full demand implications of their work (idem for Landes classic Prometheus Unbound).

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    3. so never, ever positive supply shocks? what about negative supply shocks? from where does income materialize to support effective demand? again, I am thinking about the special cases where the caput rate of growth increases dramatically.

      and I do believe the De Vries story...I think that was an necessary prelude to the IR, and that the income support came from various sources including the European Marriage Pattern.

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    4. No not never, but not central. You now sound very anti-Keynesian. Just saying.

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  5. Most of the IT revolution came out of military research. This is the direction my pessimism would take. With the US on the wane as a global superpower and budgets being slashed daily, the likelihood of technology being invented that will spur another revolution grows sicker.

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    1. In modern times yes. The British IR was more the result of demand growth, i.e. the need to take coal from mines that forced the need for more efficient engines, that were useful as soon as demand for consumption goods increased and those machines could be adapted for textile (cotton first) production. Again, no demand there would have been no need for the inventions to be used.

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  6. NK,

    Although I believe this is related to your exchange with Bannister (and you have already warned against the supply side view), I am not sure why competition would not lead to greater investment?

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    Replies
    1. Why would you invest if there is no demand? Comptetition is the search for profits which only occur if demand expands. Kalecki shows that profits are determined by autonomous demand.

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    2. Thanks for the reply.

      I think we are talking about profits and investment from two different perspectives.

      Let's assume Kalecki's views. My understanding is that he speaks of aggregate investment and aggregate profits as macroeconomic magnitudes (and I take it, this is what you are speaking of).

      He doesn't have much to say, I believe, about how these profits and investment are distributed among individual capitalists. I don't know if this makes sense or not, but is it inconceivable that capitalists could compete over a fixed surplus (profit) pool?

      Additionally, following Baran and Sweezy, competition doesn't necessarily involve investment.

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