Eco­nomic growth isn’t ev­ery­thing

The Pak Banker - - OPINION - Noah Smith

WHEN you say that the golden days of growth are over, ex­pect to get lots of at­ten­tion, es­pe­cially if you're a pres­ti­gious econ­o­mist. Robert Gor­don, a pro­fes­sor at North­west­ern Univer­sity, has been go­ing around for sev­eral years mak­ing ex­actly this case. He now has a book, "The Rise and Fall of Amer­i­can Growth," sum­ma­riz­ing his ar­gu­ment in mag­is­te­rial de­tail. Gor­don's main the­sis is that the low-hang­ing fruit of tech­nol­ogy has, es­sen­tially, been picked. He ar­gues that a small hand­ful of Great In­ven­tions -- elec­tric­ity, the in­ter­nal com­bus­tion en­gine and a few oth­ers -- pro­pelled growth to dizzy­ing speeds from about 1870 through 1970. But there are only so many big im­por­tant ideas like this to be dis­cov­ered.

This may be the case. With tech­nol­ogy, you never re­ally know what's out there to dis­cover un­til you find it. Per­haps we will soon in­vent self-im­prov­ing ar­ti­fi­cial in­tel­li­gences that will rapidly un­cover deep truths and in­vent mag­i­cal tech­nolo­gies of which we can now only dream. Or maybe the tech­nol­ogy party re­ally is draw­ing to a close. But re­gard­less of its va­lid­ity, I think that Gor­don's idea has a lit­tle more pop­u­lar ap­peal than it ought to, for two rea­sons. The first rea­son we are too ea­ger to be­lieve Gor­don is that when we con­sider the im­pact of tech­nol­ogy, we think in terms of how much it changes our lives. But util­ity -- the sat­is­fac­tion we de­rive from goods and ser­vices -- isn't the same thing as growth.

The in­ven­tions of the 19th and 20th cen­turies al­tered the very shape of hu­man life in rich coun­tries. Ma­te­rial scarcity was ef­fec­tively van­quished. Star­va­tion was elim­i­nated, and al­most all peo­ple now have shel­ter. Gru­el­ing man­ual la­bor, which de­fined hu­man life for mil­len­nia, is now rare. This has all been pos­si­ble thanks to the Great In­ven­tions Gor­don names. And th­ese im­prove­ments can't be re­peated -- food, shel­ter and se­cu­rity are ba­sic hu­man needs, and once you fill them, other life im­prove­ments will prob­a­bly seem in­cre­men­tal by com­par­i­son.

But growth isn't the same thing as life sat­is­fac­tion. Econ­o­mists gen­er­ally be­lieve that hu­mans have a de­creas­ing marginal util­ity of wealth, mean­ing that each suc­ces­sive in­crease in ma­te­rial abun­dance mat­ters less than the last. Buy­ing your first car is a lot more lifechang­ing than buy­ing your 10th car, even though both add the same amount to gross do­mes­tic prod­uct. The same prin­ci­ple ap­plies to tech­no­log­i­cal progress -- in­ven­tions that take us from the brink of star­va­tion to pros­per­ity and se­cu­rity will seem more im­por­tant than what comes af­ter, even if both add the same to GDP. That can cre­ate the il­lu­sion of stag­na­tion.

The se­cond rea­son I think we're too will­ing to be­lieve Gor­don is that tech­nol­ogy isn't the only thing that makes so­ci­ety bet­ter. The qual­ity of govern­ment mat­ters too. Some gov­ern­ments rob from their cit­i­zens. Oth­ers try to con­trol the econ­omy. But the best ones run ef­fi­cient pub­lic ser­vices, pro­vide pub­lic goods like in­fra­struc­ture and re­search fund­ing and min­i­mize the harm­ful ef­fects of regulation. The dif­fer­ence be­tween a good govern­ment and a bad one can be enor­mous -- just look at South Korea ver­sus North Korea. In eco­nom­ics mod­els, the qual­ity of govern­ment is in­cluded in mea­sure­ments of pro­duc­tiv­ity, but it's not the same thing as in­ven­tion and sci­en­tific dis­cov­ery.

There's a good ar­gu­ment that qual­ity of govern­ment in North Amer­ica, Europe and Ja­pan im­proved dra­mat­i­cally in the 19th and early 20th cen­turies. Govern­ment be­came steadily more par­tic­i­pa­tory and less preda­tory. Bu­reau­cra­cies be­came more pro­fes­sional. Spend­ing on in­fra­struc­ture dra­mat­i­cally in­creased, funded by taxes. Pub­lic ser­vices such as ur­ban san­i­ta­tion -- which Gor­don counts among the Great In­ven­tions, but which is de­pen­dent on govern­ment ef­fi­ciency -curbed dis­ease and im­proved health dra­mat­i­cally. Health and safety reg­u­la­tions helped as well. Pub­lic education greatly in­creased the skills of the work­force. Lib­er­tar­i­ans of­ten por­tray the state as a par­a­site, but there is a good ar­gu­ment that big govern­ment -- and, more im­por­tantly, good govern­ment -- was re­spon­si­ble for a sig­nif­i­cant amount of the growth in de­vel­oped na­tions be­tween 1870 and 1970.

That kind of im­prove­ment was prob­a­bly a one-off. Un­like sci­ence and tech­nol­ogy, govern­ment prob­a­bly has an up­per limit of ef­fec­tive­ness. You can only tran­si­tion from be­ing North Korea to South Korea once. That means that some of the pro­duc­tiv­ity slow­down we have ob­served may be due to our suc­cess in im­prov­ing how we gov­ern our­selves.

So when we eval­u­ate Gor­don's the­sis of tech­no­log­i­cal slow­down -- which might not prove cor­rect -- we should be care­ful of mak­ing th­ese two er­rors. We should re­mem­ber that growth isn't the same thing as im­prove­ment in life sat­is­fac­tion; the for­mer is ac­tu­ally a lot eas­ier than the lat­ter. And we should con­sider the pos­si­bil­ity that govern­ment qual­ity, as much as tech­nol­ogy, is what has stopped im­prov­ing. Both of th­ese caveats should make us a lit­tle less pes­simistic. Good govern­ment and the end of bru­tal man­ual la­bor and star­va­tion are good things to have un­der our belt.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.