Can the Rich Economies Continue to Grow?

Everyone alive today has grown up in an era of economic growth and increasing productivity per work, which translates into higher standards of living. It has been periodically interrupted, to be sure, but the long-term trend in our lives has been up. Can that continue? That's the question asked in a new National Bureau of Economic Research (NBER) report by Robert Gordon, Professor of Economics at Northwestern University, and discussed by Martin Wolf, a columnist for the Financial Times. Professor Gordon's answer is generally in the negative. Not surprisingly, there are important demographic threads to the story.

Prof Gordon argues, to my mind persuasively, that in its impact on the economy and society, the second industrial revolution [the "general purpose" revolution] was far more profound than the first or the third. Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared. Prof Gordon notes that “little known is the fact that the annual rate of improvement in life expectancy in the first half of the 20th century was three times as fast as in the last half.” The second industrial revolution transformed far more than productivity. The lives of Americans, Europeans and, later on, Japanese, were changed utterly.

Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so. Similar developments are occurring in other high-income countries.

As you might expect, this column has generated a lot of comments on the FT website, many of which point out the obvious fact that many people in the past have incorrectly predicted that we had "reached the end of history." Prediction is always difficult, especially about the future, as the old saw goes. But it is compelling that the graph of productivity looks amazingly like the graph of the growth of the human population. Of course, we know that correlation does not imply causation...