Economics / History

It’s Not All Roses… (Or is it Something Else?)

My previous post focused on a theory that military necessity has been the driving force in the development of remarkable technologies that powered Robert J Gordon’s three phases of the industrial revolution:

  • IR #1 (steam, railroads) from 1750 to 1830;
  • IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
  • IR #3 (computers, the web, mobile phones) from 1960 to present.

Gordon’s implication is that IR #3 and innovations since have not delivered anywhere near to the degree that the earlier innovations (and IR #1 and #2 might have been one shot deals):

Figure 1 takes the history of economic growth back to the year 1300. Clearly there was almost no growth through 1700, then a gradually accelerating rate of growth. The blue line in Figure 1 represents growth in the frontier country – the US after 1906 and Britain before because 1906 seems to be the consensus of modern growth data for the cutover.

The key point is the big peak in US growth between 1928 and 1950, the years that span the Great Depression and WWII. Leaving aside the debate about what could have caused a concentration of economic growth in a period dislocated by depression and war, the remaining conclusion of Figure 1 is that growth has steadily declined in each interval plotted since 1950.

Figure 1. Growth in real GDP per capita, 1300-2100

The paper is deliberately provocative and suggests not just that economic growth was a one-time thing centred on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns. Indeed, this is already evident in much of the innovation sector.

This is definitely hard to argue against, though the real question should be is economic growth declining because of this factor?  I have significant doubts about this proposition, but for now I will answer yes so I can analyze Gordon’s assumptions about innovation.

Gordon gets more specific in a Wall Street Journal editorial regarding the future of innovation:

The first response from skeptics always involves health care. They believe that medical research, especially on the genome, promises to achieve enormous advances in the treatment of diseases. But the new techniques often fail to deliver. One recent study, for instance, demonstrated that high-cost proton-beam treatment for prostate cancer yields no better results than old-fashioned radiation therapy.

Pharmaceutical research appears to be entering a phase of diminishing returns. Developing new drugs is increasingly expensive, and the potential pool of beneficiaries is ever smaller, mainly people with esoteric types of cancer. Few of the medical optimists acknowledge a stark historical fact: The rate of improvement in U.S. life expectancy was three times higher in the first half of the 20th century than in the second.

Again, hard to argue against.  But here the story gets muddled.  Pharmaceutical research is at the nadir of a decade-long slide.  Brian Vastag’s July 7, 2012 Washington Post piece is awe-(and anger) inducing:

The pharmaceutical industry once was a haven for biologists and chemists who did not go into academia. Well-paying, stable research jobs were plentiful in the Northeast, the San Francisco Bay area and other hubs. But a decade of slash-and-burn mergers; stagnating profit; exporting of jobs to India, China and Europe; and declining investment in research and development have dramatically shrunk the U.S. drug industry, with research positions taking heavy hits.

Since 2000, U.S. drug firms have slashed 300,000 jobs, according to an analysis by consulting firm Challenger, Gray & Christmas. In the latest closure, Roche last month announced it is shuttering its storied Nutley, N.J., campus — where Valium was invented — and shedding another 1,000 research jobs.

“It’s been a bloodbath, it’s been awful,” said Kim Haas, who spent 20 years designing pharmaceuticals for drug giants Wyeth and Sanofi-Aventis and is in her early 50s. Haas lost her six-figure job at Sanofi-Aventis in New Jersey last year. She now works one or two days a week on contract at a Philadelphia university. She dips into savings to make ends meet.

“Scads and scads and scads of people” have been cut, Haas said. “Very good chemists with PhDs from Stanford can’t find jobs.”

Largely because of drug industry cuts, the unemployment rate among chemists now stands at its highest mark in 40 years, at 4.6 percent, according to the American Chemical Society, which has 164,000 members. For young chemists, the picture is much worse. Just 38 percent of new PhD chemists were employed in 2011, according to a recent ACS survey.

So–is pharmaceutical research expensive because of diminishing returns or because investment in R & D has fallen off a cliff?  Or are pharmaceutical companies too busy beating insurance companies at their own game to care anymore?  Anyway, back to Gordon:

The fracking revolution and soaring oil and gas production have also excited optimists. But this isn’t a source of future economic growth; it merely holds off future economic decline. Over the past decade, the economy has been burdened by oil prices between $50 and $150 per barrel, which have sapped purchasing power available for nonenergy consumption. Holding these prices at bay is progress, to be sure, but it can’t compare to the 1960s, when “See the U.S.A. in your Chevrolet” became ever more possible along an expanding interstate highway system when gasoline cost 25 cents a gallon

“Can’t compare to the 1960s?”  The decade before every nation on Earth decided to stop building new oil refineries?  My very first post concerned the massive market failure that has allowed the costs of a raw input to rise precipitously without allowing any sort of market signal to open the first new oil refinery since 1976.  But I digress…back to Gordon:

Another claim by the growth optimists is that 3-D printing and micro-robots will revolutionize manufacturing. This is an old story, told in one form or another since the first industrial robot was introduced by General Motors in 1961. Manufacturing productivity, driven by robots and other machines has been healthy throughout the postwar era, even in the past half-decade. But manufacturing’s share of the economic pie has inexorably shrunk, from 28% in 1953 to 11% in 2010. That sector of the economy is performing a marvelous ballet, on a shrinking stage.

What is this, revisit everything I’ve ever written about?  Manufacturing has been seized with a decades-long hysteria that focused on lowering labor costs and damn the consequencesThe consequences are starting to be felt.  What else, Mr. Gordon?

Can economic growth be saved by Google’s driverless car? This is bizarre ground for optimism, but it is promoted not just by Google’s Eric Schmidt but by the Massachusetts Institute of Technology’s Erik Brynjolfsson. People are in cars to go somewhere, whether from home to work or from home to shop. Once they are inside the car, there is relatively little difference between driving the car on their own or having it drive itself. Greater safety? Auto fatalities per million miles traveled have already declined by a factor of 10 since 1950.

Finally, a question about the actual usefulness of an innovation.  Where exactly would the inspiration for how to develop a driverless car come from?  Maybe…a pilot-less airplane?  These exist, of course.  Often referred to as drones or unmanned aerial vehicles (UAVs).  Used predominately by the U.S. Air Force, U.S. Army and U.S. Navy.  Designed and developed by these armed services.  Contrary to the overwhelmingly positive impacts of past military innovations, this is a massive boondoggle just waiting to happen.  Deserves its own post.

But before I conclude, let me answer my earlier my earlier question: is economic growth declining because of diminishing returns on innovations?  The honest simple answer is no.  Something else is in play.


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