A feature in the Financial Times (FT) on 30 June asked whether it was any longer possible for the US economy to increase productivity and, consequently, long-term economic growth per capita.
“For the past 120 years, …output per head of population increased by about 2 per cent a year,” FT writer Robin Harding said. “That is, until now.”
Harding presented two conflicting arguments about what’s happening.
Robert Gordon of Northwestern University of the US was cited as an economist who believes that the big growth wave is at an end and that annual per capita growth could fall to 1 per cent in the future. Gordon believes all feasible transformative technologies that radically increased the productivity of labour in farming and manufacturing have been deployed.
In contrast, Erik Brynjolfsson and Andrew McAfee of MIT argue that many new inventions are coming that will lead to an acceleration in growth.
Gordon’s conclusion is based on an examination of data. Brynjolfsson and McAfee’s results from an examination of technological changes that are yet to come, particularly in IT. The former, a bit like Robert Malthus, is a pessimist. The latter two, like the early neoclassical economists, are optimists.
Harding wrote that there is a third argument which suggests that growth in advanced economies mainly comes from more people working in research and development (R&D). Senior research adviser at the Federal Reserve of San Francisco John Fernald and Charles Jones of Stanford University say that the 2 per cent annual growth in the US economy in 1950-2007 can be explained as follows:
- None comes from increased capital per worker
- 0.4 percentage points are due to better education and human capital factors
- 1.6 percentage points come from R&D.
Economics2030 argues that the key factor for economics is not growth per capita but value-creation, an intangible in advanced economies where services are dominant. The more efficient use of an existing asset – as a result of energy-efficiency measures – might suggest that output has fallen. After all, higher energy efficiency means lower electricity production and revenue for people that supply electricity. But it can lead to improved well-being, even if the amount people pay for power is unchanged.
The removal of obstacles to constructive interaction, like Skype, doesn’t show up in any report on economic trends, but it’s doing a lot to increase human happiness by keeping people in touch.
As a growing proportion of output takes the form of intangibles, conventional ways of measuring economic trends – using output, consumption and expenditure data – are going to fail to track what really matters: intangible and incommensurable value.
Value creation is what matters. There’s no reliable way of measuring the most important element of any economy. We shall have to continue to depend upon guesswork.
But there’s little doubt the way we’ve been using calculations based on the assumption that all goods are tangibles needs to change.