Analysis

Winnipeg Free Press - PRINT EDITION

Is economic growth returning to an 18th-century norm?

By: Livio Di Matteo

Posted: 02/16/2013 1:00 AM | Comments: 0

The recent spate of bad economic news for Canada has dampened short-term economic prospects. But what if it is evidence we've reached the end of growth, as economist Robert J. Gordon argues in a National Bureau of Economic Research paper titled Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds?

Gordon questions the conventional wisdom laid out in the 1950s that modern economic growth is a continuous process that will persist forever. Indeed, Gordon suggests the past 250 years could be a very unique period in human history and we will be returning to an era of low economic growth -- a state that has characterized human history prior to the 1750s.

For example, the U.K.'s real per capita GDP grew at an annual rate of 0.2 per cent in the four centuries leading up to 1700. In contrast, the modern era has often seen per capita income growth at nearly two per cent.

Modern economic growth was sparked by the Industrial Revolution. As Gordon notes, the first industrial revolution from 1750 to 1830 harnessed steam power and started lowering transportation costs with railways and steamships.

The second revolution, from 1830 to 1900, provided the innovations of electricity, running water, the internal combustion engine, communications, airplanes, air conditioning, communications and chemicals.

The period from 1900 to 1960 saw their spread into everyday use. Since 1960, economic growth rates have declined and, looking ahead, Gordon suggests the historic rate of 0.2 per cent will be reached by the end of the 21st century.

Is the end really nigh? Despite the appearance of progress, the case can be made that current developments in communication, computers and information are but extensions of the electronic age, and true innovation has faltered.

Indeed, one can argue economic growth since the mid-20th century has largely been driven by diffusion of technological innovations made before 1960 -- automobiles, television, jet engines, nuclear power, computers -- and the presence of cheap oil as the economic lubricant.

Yet, predicting the future is difficult.

The 19-century classical school of economists maintained economic growth sprang from capital accumulation fuelled by savings out of business profits. Because of diminishing returns to capital, profits would eventually tend to zero and growth would end -- a concept they called the stationary state. They missed, however, the one feature that became the overpowering economic driver -- technological change. It is remarkable that despite the industrial age springing up around Adam Smith or John Stuart Mill, they seemed to have missed the powerful impact of technological change on economic growth. As well, the growth effects of spreading technology take time to percolate through the economy.

For example, the implementation of accumulated electrical knowledge into the modern light bulb did not occur until 1879, and widespread electrification took another 50 years.

The spread of new technology was also disruptive changing age-old economic and social relationships. It is no coincidence the period from 1870 to 1945 saw several economic depressions and two world wars.

Similarly, today there is research underway in biotechnology, computing and robotics, artificial intelligence, nanotechnology, energy and transportation that will create the innovations that will drive 21st-century economic growth.

Cheap oil was the lubricant of 20th-century growth while cheap computing power will be the lubricant of the 21st century.

This is not pie in the sky. It has been in process since the 1980s and is around us as we speak. It can be expected to continue its diffusion over the next half-century, generating a new long-term wave of economic growth.

If there is one variable that has been ignored in forecasting future growth, it is the capacity of the human mind to generate innovation. Based on the history of the early 20th century, our main concern should be if society will be any better at managing the economic and social disruption this change will bring.

Livio Di Matteo is a professor of

economics at Lakehead University.

Republished from the Winnipeg Free Press print edition February 16, 2013 J13

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