Has technology lost its ability to boost living standards?

The tech economy: growing or slowing?

Has technology lost its ability to boost our living standards? Economist Robert Gordon thinks so. His colleague Joel Mokyr believes the benefits will show up soon.

It’s becoming one of the great global economic puzzles of this decade: if all our new technology is transforming the business landscape of advanced economies, why aren’t we getting more growth in jobs and incomes?

The question applies universally, and the answer revolves around two quite contradictory issues. A constant stream of new technology and technology-driven services, from Twitter to Uber, is disrupting industries from media to logistics.

At the same time, economies the world over are growing more slowly than they used to, for reasons ranging from the commodity price collapse to manufacturing’s migration to China and – in much of the US and Europe – the overhang of the global financial crisis.

Every day heralds some smart new health treatment or nifty app, but they seem to be making little difference where it counts – in growth, employment, productivity and pay.

When countries in Europe and Asia were struggling to get back on their feet after the devastation of World War II, advances in fields like electronics, plastics, aerospace and finance helped to supercharge growth through the 1950s and 1960s.

Why not this time?

An era of “weaker” innovation?

Economists see the same puzzle as everyone else. All the disruption of industries should be boosting productivity, yet output gains seem tepid.

The harshest view of this problem is championed by Robert J. Gordon, a professor at Northwestern University in Illinois and one of the world’s leading economic thinkers on productivity. In 2012, Gordon dramatically raised the stakes on the issue: he questioned the whole idea that economic growth can be expected to continue indefinitely year after year.

He has since expanded on those thoughts, arguing that the technologies emerging today are nowhere near as economically potent as those of 50 or even 100 years ago.

The profound boost to growth and productivity from inventions like the electric light bulb, the internal combustion engine, computers and antibiotics were one-offs, he contends, and are unlikely to be repeated. Today’s innovations are much less important – and far too weak to drive strong growth, says Gordon.

“Since 2002 … most computer-related inventions have resulted not in fundamental transformation but in miniaturisation, as with hand-held devices like the iPhone, which combines the pre-2002 functions of laptops and early cell phones,” Gordon has written.

He also believes that pharmaceutical research is entering a phase in which increasingly expensive drugs deliver only marginal improvements to life expectancy.

The counter view

Gordon’s most vigorous intellectual opponent is a friend who works in the very same building just north of Chicago: the celebrated historian of technology, Professor Joel Mokyr. All this pessimism, says Mokyr, is hogwash. The paradox of breakneck technological change and sluggish output growth?

“There is no paradox,” he says dismissively.

Mokyr has written a string of books examining the role of technology in driving growth over more than two millennia, and he believes the pace and depth of transforming technological change have never been greater. All we lack, he states, are the statistical tools to capture what is going on: our “wheat-and-steel” measures of economic activity, such as gross domestic product and national income, simply aren’t up to the job.

According to Mokyr, the very novelty of inventions like the smartphone makes them invisible to traditional measures of output, while technologies like email, Facebook and Twitter, because they are free to users, don’t show up in national income statistics.

“Many new goods and services are expensive to design, but once they work, they can be copied at very low or zero cost,’’ he says, “[which] means they tend to contribute little to measured output, even if their impact on consumer welfare is very large.”

Taking this point further, Mokyr says innovations such as mobile technology, telecommuting and even driverless cars will, or at least may, improve quality of life and economic welfare – but they lie outside the ken of statisticians. He believes that, eventually, the effect of these and other changes will show up in numerous ways that can be measured and evaluated.

For example, email has redefined the way information is exchanged, but the actual economic impact will be seen in peripheral areas such as fewer postal and telecommunications jobs, reduced transport costs and potentially greater worker output.

It’s also the case that businesses can take not just years but decades to fully exploit new technology. Economist Paul David noted in the 1980s that electric power only exerted its full influence on growth rates some 40 years after it first became available. Containerised shipping first appeared in the 1950s, but its full impact on global trade was not realised until late last century. According to Mokyr, we are simply being too impatient in looking for evidence of the economic impact of digital technology and other recent advances.

Turbocharged future

In rejecting Gordon’s claims, Mokyr has positioned himself as one of the great optimists about the global economy. He believes that in many fields of innovation, we are only at the beginning. He sees a “virtuous circle” between advances in knowledge about the world around us and improvements in the tools and techniques used in acquiring this understanding.

Mokyr says the tools available to researchers now, particularly from advances in computing power, will turbocharge the rate of innovation in future. Supercomputers, for instance, are being used to help devise new materials like graphene, an ultra-thin sheet of carbon that can conduct heat and electricity better than any other known substance, while 3D printing could usher in an era of “mass customisation”.

Joel Mokyr says modern technology will deliver the goods

Mokyr fears that what can hold progress back is not, as Gordon and his ilk believe, that technology has reached a point of diminishing returns, but that governments and institutions are not keeping pace and are increasingly applying the handbrake.

When progress meets politics

Productivity-enhancing change wrought by technology can be socially, politically and economically painful.

As Reserve Bank of Australia Governor Glenn Stevens noted in a November 2015 speech, gains in productivity do not come only from improving the way we currently do things; they also come from ceasing to do some of the things we are not so good at. Put another way, we will lose jobs – sometimes many at once.

Faced with this prospect, politicians can be tempted to call a halt. This is how Australia ended up with high tariff barriers by the early 1970s. But Mokyr warns that this often brutal process is unavoidable and is steadily eating into what remains of manufacturing jobs in  many parts of the world. Just as agriculture went from employing half of all Americans in the 1850s to little more than 2 per cent now, manufacturing, too, will become a minor source of work.

“For people who have trained to be factory workers, the game is up,” says Mokyr, predicting that the end of manufacturing as a mass employer will occur more quickly than the decline of agriculture, because “the process is moving faster now, simply because we have better tools”.

It might be cold comfort for those whose skills and competencies become obsolete, but as some jobs are destroyed, others are created.

“Gains will come from doing completely new things,” says Glenn Stevens.

“The answer to the question ‘where will the jobs come from?’ is usually: from lots of places we haven’t thought of yet.”

Mokyr is concerned that governments will not only be tempted to hamper the process in order to mitigate job losses, but will also distort the distribution of benefits. He points to Europe’s regulatory rejection of genetically modified crops, a decision he says was made “with zero evidence” against a technology that could reduce the need for pesticides and fertilisers and help ameliorate the effects of climate change.

Ultimately, though, history tells him that technological change cannot be resisted. For him, the biggest challenge is how to ensure that the benefits of progress are shared.

“I am really worried,” he says, “that we will create this fantastically productive and sophisticated economy but only the top 5 per cent of the population will enjoy it and the rest will be ready for the scrap heap. That’s the real issue, not what is happening with productivity.”

Joel Mokyr on the IT revolution:

“Knowledge has to flow from those who know things to those who make things. The much heralded ‘IT revolution’ of our own age is not just about the fact that we know more (and different) things, but that the flows of information in and out of agents’ minds are much more rapid.

"The continuous exchange of useful knowledge between the minds of agents, and between agents and storage devices, has become much faster and cheaper.”

Extract from Joel Mokyr’s 2002 book The Gifts of Athena: Historical Origins of The Knowledge Economy

Joel Mokyr's Next Big Idea

Joel Mokyr’s latest book, due to be released in early 2016, is A Culture of Growth: Origins of The Modern Economy.

In an August 2015 Stanford lecture, he set out the question it seeks to answer: why did Europe have an “industrial enlightenment” before other regions – particularly China, which in the centuries after 1000 AD seemed best poised for world economic dominance?

Mokyr’s answer is that you need a culture with a “market for ideas” where different ways of doing things battle it out, without too many ideas that punish innovators. To put it another way, A Culture of Growth aims to show that beliefs evolve in cultures much as species evolve in nature. If you want economic growth, you need a culture in which stronger ideas can spring up and take over from weaker ones.

In Europe between 1500 and 1700, Mokyr contends, a culture and a set of institutions developed that was “more suitable for intellectual innovation and the accumulation of useful knowledge”.

This system was not perfect, he says, but it was better than anything that had gone before – and good enough to kickstart modern economic growth. It’s a process Mokyr thinks will continue.

10 ideas shaking modern economies

Joel Mokyr suggests we are in an era when technological breakthroughs are setting up the global economy for striking change. Here are 10 of the most powerful advances – some already entrenched in daily life and others still developing.

  1. Big data: From tracking stolen cars to detecting individual spending habits, the ability to rapidly collect and analyse huge amounts of information is changing the way businesses and governments operate.
  2. Advanced logistics: Just-in-time manufacturing combined with efficient air, sea and land transport networks and advanced tracking systems mean a set of bike wheels ordered from a Taiwanese factory can be delivered to inland Australia three days later.
  3. Wi-fi: Increasingly ubiquitous technology that gives continuous wireless access to the internet.
  4. Gene therapy: Curing diseases by genetically modifying the cells of the affected person with a properly functioning gene. It holds much promise, but the technique is yet to be approved by regulators.
  5. Nanotechnology: More than 1800 consumer products, from sunscreens, toothbrushes and clothing to car parts, gardening equipment and food, already contain nanomaterials – most commonly nanosilver, used for its antibacterial properties.
  6. Graphene: Ultra-thin sheets of carbon that are more than 200 times stronger than steel by weight and conduct heat and electricity extremely efficiently. It is used in everything from superconductors and batteries to water filters.
  7. Lithium-ion batteries: Though not able to store as much energy as some other battery types, lithium-ion batteries have become a mainstay of modern life. They are extensively used in mobile phones and electric cars, in large part because they can be readily recharged.
  8. Cloud computing: This technology eases the tasks of setting up and maintaining computing facilities, letting users access them and transferring data to and between them. That lowers the long-term costs and complications for organisations creating internet-based services.
  9. Genetic modification: Tools and techniques from genetics and molecular biology can breed plants more resistant to disease, more tolerant of a wider array of growing conditions or better able to absorb carbon dioxide.
  10. Remote sensors: From self-opening doors to security lights and car parking aids, light- and motion-operated sensors have improved safety and convenience and are fundamental to the development of driverless vehicles.

This article is from the February issue of INTHEBLACK.

Read more

February 2016
February 2016

Read the February issue

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.