The American economic recovery carries on apace, with a net rise in employment of almost half a million over the past three months. The Office for National Statistics has decided that the UK never had a double dip recession, and the texture of the economic news has turned positive.
But economics is not called the dismal science for nothing. What of the longer-term? Here, there is no shortage of doom and gloom. Stephen King, chief economist at HSBC, has just published an interesting and well-written book ‘When the Money Runs Out’. Pessimism infects the high command of the American academic economics establishment.
The source of these melancholy views is an influential paper by Robert Gordon published by the National Bureau of Economic Research in August 2012. The title poses a stark question: ‘Is US Economic Growth Over?’ Gordon’s answer is basically ‘yes’. There are a few nuances to this in his paper, but he takes a bleak view of the prospects for the American economy during the rest of the 21st century.
For Gordon, the basic problem is that all the major technological innovations are behind us. The period 1750-1850 saw the steam engine and the railways. In the closing decades of the 19th century, the foundations of our modern way of life were laid down with the internal combustion engine and electricity. He argues that in 1960 we entered the information age, and although this has brought benefits, the boost to growth which it provided is now fading.
A key question is whether this is true. Predicting how new technologies will be used is fraught with difficulty, and their full potential can take many decades to realise. The statement made by Thomas Watson, chairman of IBM, in 1943 is notorious: ‘I think there is a world market for five computers’.
Even after the event, their impact can be difficult to identify. There is still a powerful school of thought amongst economic historians that the railway made little difference to the growth of the American economy in the 19th century, a proposition which strikes the layperson as absurd but which is nevertheless believed.
But it is not just in the information technology and communications sector where dramatic advances are already taking place. Major breakthroughs in energy use and extractions have been made, with 300 mpg cars, shale gas, and the huge potential of both renewable energy and energy storage. Biotechnology is even more exciting. Humans may soon have the ability to live healthy lives to the age of 200 and beyond. Sociobiology may give us deep new insights into how to deal with major social issues such as drug addiction and crime.
Capitalism has been incredibly inventive during the 250 years of its history, and there is no reason to believe that this will not continue. The crucial requirement is not technological but political. The basic institutional structures of the rule of law and private property must be maintained, so that innovators can reap the fruits of their labours.
As published in City AM on Wednesday 3rd July 2013