May 9, 2018 / 2:16 PM / 18 days ago

Breakingviews - Hadas: Technology is still working pretty well

By Edward Hadas

A visitor shakes hands with a humanoid robot at the booth of IBG at Hannover Messe, the trade fair in Hanover, Germany, April 23, 2018. REUTERS/Fabian Bimmer - RC19FE153DE0

LONDON (Reuters Breakingviews) - Productivity growth has declined. The technological sky is falling. The great age of innovation is over. Alas. These few sentences paraphrase the most recent work of the distinguished economist Robert Gordon.

The Northwestern University professor’s most recent paper, “Why Has Economic Growth Slowed When Innovation Appears to be Accelerating?” was published in April by the U.S. National Bureau of Economic Research. His answer is that appearances are deceptive. The recent “frenetic pace of innovation” has relatively little “impact on productivity growth”.

There is a big problem with the conclusion. While the data shows a clear productivity slowdown, the data is probably wrong. Gordon discusses the issue, but misses the central weakness of the standard measure of productivity.

Productivity is the ratio of output to input, calculated as the ratio of real GDP to hours of labour. Real GDP is a fine number in many ways, but it relies heavily on so-called hedonic adjustments – estimates of how much more satisfaction new products give than the old ones they replace.

The idea is sensible. A dollar’s worth of electric light is obviously better than a dollar’s worth of candle-light. A smartphone provides more value than an identically priced landline. Real GDP should reflect the fact that consumers are getting greater benefits for the same money.

However, while the improvements are genuine, they cannot be quantified, because human satisfaction cannot be measured. Statisticians compiling real GDP just have to do their best to guess in a consistent way.

They try, but they struggle to take into account entirely new products and little improvements which reshape lifestyles for the better. Specifically, the internet revolution has received little statistical appreciation. That omission probably explains much of the reported slowdown in productivity growth.

Gordon’s other argument for a productivity slowdown is qualitative. He thinks the third industrial revolution, of data processing, is a pale shadow of its steam and electricity powered predecessors. That is right, but confused.

Human beings have only a finite capacity to enjoy their material lives. After the first two revolutions, there is not as much room for life-transforming technological breakthroughs as before. Prosperous people already enjoy long, healthy, comfortable, well-informed and well-entertained lives.

There are still gaps to be filled and improvements to be made, but nothing in comparison with the opportunities of 100 years ago. However, this inevitable waning of progress does not discredit recent developments.

For example, writing broke the biggest barrier for long-distance communication three millennia ago. In comparison, printing looks like a minor change and telephones a mere nudge. Techno-pessimists like Gordon can rightly say that mobile phones hardly register on that scale. Still, by the standards of the telephones of the 1950s, the latest Samsung is a tremendous improvement.

The smartphone is not the only massive technological innovation of the last two decades. The list also includes the internet, cost-effective solar power and the techniques which have provided a 30 to 40 percent reduction in the rate of infant mortality in many developed countries. Mass use of electric-powered cars is on the horizon.

True, there are signs that spending on basic research is declining globally. That may eventually bring a slowdown in dramatic developments. For now, though, technological improvements seem to be continuing about as well as ever.

Much of Gordon’s latest paper is dedicated to issues that have little to do with the purported productivity slowdown. He is particularly struck by social strains in the United States, as exemplified by the rise of “deaths of despair”, which have been chronicled by Princeton University professors Angus Deaton and Anne Case.

Gordon argues that such social failures are bad for productivity. He is persuasive, but his perspective seems backwards. If American policymakers worried less about doubtful productivity statistics, they would have more time to work on a fairer division of the nation’s already great prosperity, not to mention addressing the many non-economic sources of social anger.

Of course, undiscovered technologies can still help improve the world, if they are used well. That potential has been around since fire was tamed 600,000 years ago and will presumably remain until artificial intelligence and robots have destroyed every single boring job.

For now, though, a lack of better technology is not high on the list of the world’s economic problems. It cannot substitute for the goodwill and imagination needed to improve stuttering global trade relations and financial systems. A shortage of technical innovation is not a major obstacle to development in poor countries or to improving vocational training in rich ones.  

The sparring between pessimists and optimists about technological development may be entertaining, but it is not very useful. Perhaps they could declare a truce, and worry about more important things.

Breakingviews

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