Goodbye, Golden Age of growth
CAN future innovations match the great inventions of the past? Will artificial intelligence, robots, 3D printing and other offspring of the digital revolution do for economic growth what the second industrial revolution did between 1920 and 1970? The techno-optimist school of economics says yes. I disagree.
The rise in the U.S. standard of living from 1870 to 1970 was a special century -and won't likely be repeated. Growth over the next quarter century will resemble the slow pace of 2004-2015, not the faster growth rate of 1994-2004, much less the rapid rate achieved between 1920 and 1970. The good news is that the economy will be able to maintain relatively full employment as the fruits of computerization cause work to evolve slowly, rather than in a great rush. I'm optimistic that job growth will continue and that new jobs will appear as rapidly as technology destroys old ones. The Internet of Things The 1920-70 expansion grew out of the second industrial revolution, when fossil fuels, the internalcombustion engine, advanced metals and factory automation came together to produce electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, television and much longer life expectancy. (The first industrial revolution, mostly in Britain in the late 18th century, product, output per person and output per hour. Total factor productivity -- how quickly output is growing relative to the capital and labor being used, and therefore a measure of innovation's contribution to growth -- grew more rapidly from 1920 to 1970 than before or since.
Households also benefited from the second industrial revolution in ways that escaped measurement, including the convenience, safety and brightness of electric light compared with oil lamps, and freedom from the drudgery of carrying water that clean, piped water made possible. The slower rate of productivity growth since 1970 is important evidence that the third industrial revolution -- the one resulting from computers and digitalization -- has been less important than the second industrial revolution. Not only has the growth rate been slower since 1970, unmeasured improvements in the quality of everyday life created by computing are less significant than those of the previous industrial revolution.
True, innovation continues. Almost weekly, the stock market rewards new companies with initial public offering valuations of a billion dollars or more. But it's important to distinguish between the pace of innovation and the impact of innovation on productivity. Growth in total factor productivity (the metric that captures innovation) was much faster between 1920 and 1970 than either before 1920 or since 1970. From 1970-1994, it was only 0.57 percent a year, less than a third the 1.89 percent rate of 1920-1970. Total factor productivity growth, or TFP, was notably faster from 1994-2004 than in other post1970 intervals, but that brief revival was an aberration: It was much shorter lived and smaller in magnitude.
Why did TFP growth accelerate rapidly after 1920? The roaring 1920s, followed by the dislocations of the Great Depression and World War II, disguised the rapid pace of innovation that began in the 1920s and took flight (both figuratively and literally) in the 1930s and 1940s. The digital revolution also showed its main effects after a long delay. Even though the mainframe computer transformed many business practices starting in the 1960s, and the personal computer largely replaced the typewriter and calculator by the 1980s, the main effect was delayed until the 1994-2004 decade, when the invention of the Internet, web browsing, search engines and e-commerce changed almost every aspect of business practice. Growth in output per person, our best measure of the rate of improvement in the standard of living, can proceed no faster than growth in output per hour, unless hours worked per person exhibit an increase.