The Great Productivity Puzzle

The point, I think, is that GDP isn't capturing everything that matters in understanding this paradox, regardless of whether that is accidental or by design.

This is yet another review of Robert Gordon's The Rise and Fall of American Growth. Incidentally, William Nordhaus also just published one.[1]

Of the good: Gordon's book is a tour-de-force of the past 150 years (nearly) of economic progress in the US, and documents impacts on everyday life meticulously and engagingly. I and numerous reviewers, several of whom I strongly suspected to disagree, find the case he makes for a hump-shaped growth curve -- that is an increasing accelleration from 1870 - 1950, followed by a slowing accelleration, though continued growth, from 1950 to present -- compelling.

Gordon also makes a good case for several of the factors contributing to the exceptionally vibrant growth from 1920 - 1950, including especially the stimulus of World War II and the post-war recovery. But also the very fundamental nature of many of the innovations brought online at the time.

His treatments especially of transportation, communications, healthcare, and household life are spectacular. I recommend them highly.

There are some missing elements though.

Gordon never uses the phrase "Maslow's Hierarchy" -- the pyramid of needs that humans must have met, starting with food, clothing, and housing, and extending through safety and security, social engagement, and self-fulfillment. He does address many of these individually, and notes that early innovations tended strongly to address the base elements, and of the importance of security and predictability (a tremendously under-acknowledged failing of post-1970 economic experience) among individuals.

A possible defense of ongoing growth might be made by seeing the present period as one of a consolidation and development of technologies -- say, very large datacenters and broadband backplanes, as well as increasingly capable mobile devices and programming tools for developing them -- which may see some future breakout. Gordon seems in this, and several other areas, particularly incurious.

Gordon's life work is largely focused on GDP measurement, and he leans very heavily on this. His argument is that GDP underaccounts for true improvements in lifestyle, an argument with some merits, though others argue that it overaccounts by failing to take into consideration diseconomies. It's curious that Gordon doesn't explore alternative quality-of-life measures suggested by many contemporary critics of economic orthodoxy.

More fundamentally, in not addressing them, Gordon raises some very profound questions over the fundamental basis of economics. What is wealth? What is value? How is value associated with cost and price? How should costs of renewable vs. nonrenewable resources be considered? Is energy a fundamentally different economic input? What is the relationship of energy to economic growth? What is technology? What is the mechanism, or mechanisms, by which technology does, and doesn't, promote increased productivity? What are the market-mediated impacts of improved productity, particularly as expressed through the Jevons Paradox, Giffen, and Veblen goods? How does one measure quality? How does one measure the total capacity or capability of an economy?

These aren't easy questions. They are, I'm finding as I research economic theory and its history, less ridiculous, and rather more explored, than I'd have thought. There are some exceptionally notable departures and paths taken in economic theory over time, often poorly addressed in the current curriculum.

As with some of the infrastructure issues above, Gordon's marked disinclination to pick up stones, particularly ones on which sacred cows seem perched, strikes me as a singular weakness of his book.

There are other authors, mostly neglected, who've explored this space. Eric D. Beinhocker's 2006 book The Origin of Wealth, Nicholas Georgescu-Roegen's Entropy and the Economic Process, W. Brian Arthur's work on the economy as an evolving complex system, and others. I see the questions and explorations as deeply related.

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Notes:

1. http://www.nybooks.com/articles/2016/08/18/why-economic-grow... Nordhaus is cited in Gordon for his work on economics of both computers and lighting, and addresses advances of lighting (and underaccounting of these in GDP) in his review. It's an interesting exploration of limitations of economic measurement.

> We have all this office automation, but too many people in offices.

I can't speak to the general case, but to my experience with big corporations/enterprises.

Automation is rarely implemented, and when it is it's half-assed. And then a year or two later they try again, but the old system remains, and now your workers have to connect two systems manually. And then a year or two later...

Not my domain, I'm busy enough, but in one area of my org there are a ton of people whose job is, at its core, to manually synchronize about six databases. They also interface with customers, so that part can't or shouldn't go away. But they spend 80% of their time (estimate based on friends who worked there) doing that manual sync. Every time someone had the same thoughts as me but the power to do something tried to automate it, they ended up with an extra database that was only partially connected to the rest.

Too many stakeholders, not enough leadership.

Is that a "why is there so much office work" question, or "why are there so many people travelling to offices"?

On the former: perhaps the Jevons Paradox at work, or something alligned with it, Baumol's Cost Disease and Amdahl's Law both come to mind.

The Jevons Paradox notes that as a thing becomes cheaper, the total amount of it demanded can increase. A particularly noteable case of this is the cotton gin ("cotton-engine"), which roughly halved or more the cost of removing seeds and chaff from cotton, or alternately, doubled the labour productivity associated with it. A result was a tremendous increase in labour demand, which in Antebellum Dixie meant an increased demand for slaves. The US imported 80,000 slaves from 1790-1809, when imports were banned, then proceeded to increase the number through breeding through the Civil War.

In the case of office jobs -- decreased costs mean an increased demand.

Baumol's Cost Disease has a few elements to it, one is noting that some labour cannot be markedly improved in efficiency. Where physical production and manufacture becomes increasingly efficient, you'll relatively increase the amount of labour elsewhere within the economy, by definition in less-productive roles.

Amdahl's Law similarly notes that in any computer process, parallelisation will serve to increase the significance of the nonparallelisable portion of processing -- if a task is 90% parallelisable and 10% not (by time), then with a tenfold increase in parallelisation will result in roughly 50% of the task being nonparallelisable. The 10% of time is not fungible through parellelisation.

Another factor is being pushed to limits through competition. If other firms are extracting all possible value through increased office-and-administrative tasks -- marketing, HR, and other efficiencies, then companies which don't pursue these ends are at a disadvantage. It's not that there are more gains to be had, but there are the only gains to be had, and you'll lose by not pursuing them.

It's somewhat related (though I'm explaining it poorly) to the tendencies of those under extreme duress to take actions which seem otherwise irrational. Investors will buy high and sell low because they have an increased liquidity need when market prices are low. Dust bowl farmers would increase their farming intensity in the presence of both drought and low market prices because they had fixed debt obligations they had to meet to remain solvent.

(Gordon mentions the investor case in Rise and Fall.)

That argument has in fact been made for why, e.g., the Romans didn't exploit coal, which they had (from England) rather than human and muscle power.

Slaves were far too cheap.

A developing thought: the industrial revolution, writ large -- starting with the Medieval industrial revolution of increased use of wind and water power, was in many was a continuously ramping-up circumstance of living close to (but not immediately at) the thresholds of subsistence, having available opportunities for improvement, and having a gradually increasing degree of technical complexity in tapping into those opportunities, which developed as the challenges and opportunities increased.

If you're not testing your limits, you've got no incentive to improve.

If you've pursued some improvement, but are then contented with the results, you'll continue in a "fat and happy" existence. This has occurred in several places and times through human history.

If you're pushing at limits, and are aware of the concept of technological advance, but the resources aren't available, you'll tend to slide into decline. Arguably this happened to the UK following WWI. England had steamed into modernity on the basis of its coal reserves, but switching to oil, without (then-known) reserves, she stumbled and the United States picked up the slack.

(Why the Middle East didn't exploit its own oil reserves earlier is a tremendously interesting question -- whether for want of technology, industrial capacity, or other reasons. I'm planning on looking into this.)

Another possibility is that the technological leaps are simply too great. The Middle East question may have been a case of this, and the West (and world at large) may face that conundrum in switching to renewable or sustainable energy options.