Category: History

Many MR readers have asked for commentary on this very interesting piece by Scott Winship.  Scott makes a number of points but here is one in particular:

As nations become wealthier, it is harder for them to sustain high rates of growth. That doesn’t mean that the United States is in decline, or even stagnating. When a nation is as rich as ours, it can realize larger absolute gains than it did in the past and larger gains than other nations even if it has lower growth rates. That’s because a growth rate of, say, 2.5 percent represents a larger increase in absolute wealth the richer an economy becomes. In 1900, a 2.5 percent increase in gross domestic product (GDP) per capita would have translated into about $150 in today’s dollars for every man, woman, and child in the United States. In 2010, it would have been roughly $1,200, reflecting the fact that in the aggregate, we are about eight times wealthier than we were 110 years ago.3 By focusing too much on growth rates and too little on absolute increases in wealth, we have failed to appreciate the magnitude of economic gains in recent decades.

A few remarks in response:

1. First, this is not so far from my own view, for instance Scott cites me as writing: “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.”

2. I still think this — to the extent it is true — is tragic.  Just imagine the future potential loss that would result from the disappearance of compound growth.  People one hundred years out would be much worse off, relative to exponential growth, and their ability to fix the environment or elevate poor countries to wealth, also will be much lower.  In essence economics would be surrendering the gain it won from the victory over Malthus.  “Hey, Reverend, you were right, growth will be only an arithmetical progression, not geometric as we had thought from 18?? through to 19??.  But you were wrong about one other thing: the populations of many of the best countries in the world are shrinking!”  I find that response horrible and depressing, not heartening.

3. Many features of our budgeting, especially from the public sector, rely on exponential rates of economic growth.  For better or worse, we are not about to back our way out of those.  We also may need exponential growth to pay off the growing power of special interest groups.

4. Most importantly, I think high rates of economic growth will resume, at some (unknown) date in the future.  Note that in a very broad data sample, stretching across centuries, rates of growth for the technological leaders are on average rising, as shown by Paul Romer.  It was a big deal in the 17th century when England started to manage an average of about one percent growth a year, but today we would call that a kind of stagnation.  The Great Stagnation is a temporary slowdown in growth, not the permanent end of new ideas.

We live in a diverse world:

Reborn culture started around 1990, with people stripping the paint and hair off store-bought vinyl dolls and painstakingly reworking them to be more lifelike. Now some people use kits with doll parts that when assembled are weighted to feel like a real infant when held.

After discovering this movement, Ms. Martinez bought her own doll for research and started exploring the burgeoning subculture, attending conventions, photographing baby-beauty contests, baby showers, owners and artisans.

“In general, most of the women are Anglo, conservative, Christian and right-to-lifers,” Ms. Martinez said. “All of the things that I’m not.”

When Ms. Martinez travels, she will sometimes bring one of her own five reborn dolls to photograph people’s reactions. She prefers to carry them in open bags because she feels uneasy putting them into closed containers, and her suitcases are always searched by airport security if a doll shows up in a scan. This leads to unusual encounters — like when other people in line get upset thinking that a real baby is about to be harmed by X-rays as they pass through security.

The full story, interesting throughout, is here.

Armen Alchian has died. Alchian was both clever and wise, an unusual combination. His 1950 paper Uncertainty, Evolution and Economic Theory applied basic insights from evolutionary theory to suggest new approaches to economic ideas.  Alchian, particularly with Demsetz, began the analysis of property rights not only what property rights do but how they evolve with changing circumstances (the link goes to Alchian’s entry on this topic in the CEE). Alchian’s textbook with Allen, University Economics which became Exchange and Production, is a classic; never a bestseller among students but avidly read by masters. The Alchian-Allen theorem, sometimes called the third law of demand, continues to bedevil theorists despite its simplicity. I am a fan of his paper Costs and Outputs which generalized some ideas about production and time and inspired Fisher Black.  I never met Alchian but have always profited from reading his papers and I was truly grateful and also thrilled when he blurbed my book Entrepreneurial Economics. Fred McChesney has a good appreciation including Alchian’s pioneering event study which was suppressed for national security reasons; Bob Higgs remembers Alchian’s legendary class at UCLA and here is Larry White interviewing William Allen about A Life Among the Econ his memoir of UCLA economics during its glory years.

You can find all of these works and more in Alchian’s Collected Works.

Two things are absent in this debate, however.

First, much evidence shows that what determines technological innovations isn’t some sort of “exogenous innovation capacity,” but incentives…

Schmookler illustrated these ideas vividly with the example of the horseshoe. He documented that there was a very high rate of innovation leading to improvements in the horseshoe throughout the late 19th and early 20th centuries because the increased demand for transport meant increased demand for better and cheaper horseshoes. It didn’t look like there was any sort of limit to the improvements or any evidence of an “exogenous innovation capacity” in this ancient technology, which had been around since 2nd century BC. Then suddenly, innovations came to an end, but this had nothing to do with running out of low hanging fruit. Instead, as Schmookler put it (p. 93), it was because the incentives to innovate in this technology disappeared because “the steam traction engine and, later, internal combustion engine began to displace the horse… “

Their full post is here.

I have changed my mind on this issue quite a bit over the last four to five years.  Yes incentives matter, but outside of extreme environments are changes in incentives explaining the changes in what we observe?  I now think it is of critical importance where a sector or economy is on “the innovation curve.”  It was easier to innovate in game theory in the 1980s than it is today, even though the salaries of top economists have risen significantly.  The pharmaceuticals market is larger than ever before, and yet the pipeline is largely dry.  We are simply at a point where further breakthroughs are hard (and it is not obvious that FDA innovation taxes are getting worse over this period of change.)  Weren’t so many inventors of the 19th century largely “yahoos,” with no fancy degrees, relatively low pay, little or no peer review, not at the peak of the Flynn effect, and so on, and yet they were on a fruitful part of the innovation curve and performed wonders.

I think in terms of general purpose technologies and platform-like breakthroughs.  Once you get them, innovation runs wild, otherwise it is tough sledding, with incentives still accounting for some of the variation within a particular place on the innovation curve.