Tag Archives: The Great Stagnation

The Third Industrial Revolution Has Only Just Begun

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Bob Gordon released a provocative working paper (ungated) back in August that made quite a splash on the blogs. It is an extreme, more pessimistic version of Tyler Cowen’s The Great Stagnation. Gordon argues—rightly, in my opinion—that economic growth is not automatic. There is no a priori reason to believe that real per capita GDP will grow at 2 percent in the future when it has grown at a rate closer to 0 for most of human history. Maybe the current period is unique—and coming to an end.

The question is worth considering, but in the details of his analysis, there is much that Gordon gets wrong. For example, Gordon looks at growth in the “frontier” economy, the economy that is most advanced in each period. This means the UK from 1300 to 1906 and the US from 1906 to 2007 (where he stops his story to abstract from the financial crisis). When looking at a single wealthy economy, global factor-price equalization that results in lower middle-class wages seems like a bad thing. But of course, these lower wages are the result of higher wages elsewhere—they are wages for poor people who can increasingly contribute to the frontier of innovation as they get wealthier. Limiting the analysis to a frontier national economy seems inappropriate when one of the major global trends is a reduction in the discreteness of national economies.

I have a lot of other complaints—for instance, I wanted to refer Gordon to Noah Smith on global warming—but for the rest of this post, I am going to focus only on one particular issue. Gordon divides our progress over the past 250 years into not one, but three Industrial Revolutions. IR #1 was from 1750 to 1830 and gave us steam power and railroads. IR #2 ran from 1870 to 1900 and yielded electricity, internal combustion, running water, indoor toilets, communications, entertainment, chemicals, and petroleum. IR #3 started in 1960 and gave us computers, the Internet, and mobile phones.

Gordon takes the view—entirely defensible—that IR #2 is the one that is the most important, and that it took about 100 years for its “full effects to percolate through the economy.” But both in his definition and discussion, he gives short shrift to IR #3.

The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor by computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.

Later in the paper, he writes,

Attention in the past decade has focused not on labor-saving innovation, but rather on a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines.

I can see how if you’re comparing the advancements of the past few decades to the benefits of indoor plumbing you might come away a little disappointed, and I’m not trying to play IRs 2 and 3 against each other. But I think that Gordon unfairly or unwittingly understates the magnitude of IR #3, because IR #3 has only just begun.

What is IR #3 and where is it going?

Again, Gordon defines IR #3 as the arrival of computers, the Internet, mobile phones, etc. But rather than focusing on the products, let’s focus on the processes and innovations that got us here—computation, miniaturization, packet switching, and so on. These ideas feature prominently in the products that Gordon uses to define IR #3, but they also have much wider conceivable applicability than just those products.

I think we are on the cusp of an important transition within IR #3. So far, we have used these innovations to make ever faster, smaller, and more useful computers, including mobile phones. We have created, as Gordon notes, a whole lot of dot-coms and online services. But we’re already starting to see engineers and companies dabble with new kinds of products. Rather than merely accepting, transforming, relaying, and displaying information, some new computer-based products have more of a physical—really, a kinetic—effect on the world.

The most obvious example of this new kind of kinetic computing is the autonomous car. Rather than simply gathering information and displaying it to the driver, like a GPS mapping system, we are empowering an onboard computer to make decisions about driving. These decisions have consequences, and it is difficult to program a computer to get them right—much harder than, say, inventing Facebook. But despite the difficulty of the problem, we have made a lot of progress in the last decade, and most of us can look forward to one day owning a robotic car or ordering a robotic taxi to come pick us up.

The point is that computing innovation is going to shift, and is already starting to shift, from the virtual to the physical world. The products that IR #3 has brought us so far are great fun, but because they only really display information to us, they leave a lot for us to do. The main benefit of iR #3 is going to arrive when new innovations make and do things for us.

Ambient computing

Golden Krishna wrote an excellent blog post recently entitled “The best interface is no interface.” Read the whole thing. The point of the post is that we have not yet done a good job of replacing early computer interface paradigms like WIMP—window, icon, menu, pointer—with natural, unobtrusive, adaptive paradigms. Instead we slap a display on everything and call it progress.

Read tweets on your speedometer!

Krishna provides some great examples of the alternative vision, what he calls “No UI,” which include the Auto Tab feature of Pay with Square and Nest. What these products and services have in common is that users empower them to make decisions without direct supervision. They require a little human interaction to set up, but from then on, unless something goes wrong, there is no need to do anything to use the product. The product adapts to you, it gets out of the way, and it feels natural.

We are only just now getting to the point where products like these are becoming possible. So far in IR #3, we have mainly trusted computers with information, not with decisions about the physical world. But as computing improves, we are going to automate more.

In What Technology Wants, Kevin Kelly writes about the “home motors” you could buy a century ago. The idea was that buy a single motor for interchangeable use in a sewing machine, a mixer, a fan, or an egg beater.

One hundred years later, the electric motor has seeped into ubiquity and invisibility. There is no longer one home motor in a household; there are dozens of them, and each is nearly invisible. No longer stand-alone devices, motors are now integral parts of many appliances. They actuate our gadgets, acting as the muscles for our artificial selves. They are everywhere. I made an informal census of all the embedded motors I could find in the room I am sitting in while I write:

[...]

That’s 20 home motors in one room of my home. A modern factory or office building has thousands. We don’t think about motors. We are unconscious of them, even though we depend on their work. They rarely fail, but they have changed our lives. We aren’t aware of roads and electricity either because they are ubiquitous and usually work. We don’t think of paper and cotton clothing as technology because their reliable presences are everywhere.

Once computer chips become as ubiquitous and invisible as motors, and we get competent enough at using them to empower them to make decisions for us without direct supervision, the result will be something like ambient intelligence. It’s hard to predict what people will use AmI for, but it certainly feels to me like a much bigger advance than Angry Birds and Facebook. We’re probably a decade or two away from high-quality ambient intelligence, but given its reliance on the innovations generated on IR #3, AmI should be counted as an IR #3 innovation when it arrives.

Transport efficiency

The audacious idea that economic growth was a one-time-only event has no better illustration than transport speed. Until 1830 the speed of passenger and freight traffic was limited by that of “the hoof and the sail” and increased steadily until the introduction of the Boeing 707 in 1958. Since then there has been no change in speed at all and in fact airplanes fly slower now than in 1958 because of the need to conserve fuel.

Gordon is right that travel speeds have not increased much in recent decades. If you had told me in that 1980s that by 2012 I would still never have traveled faster than sound (relative to the Earth), I would have been very disappointed. And while some interesting technologies are in the pipeline—scramjets, spaceplanes, and so on—it will be a while before these are commercialized.

But in the meantime, the efficiency of transporting people and goods could explode in the near future. Gordon is well aware of autonomous cars, so I won’t belabor the point, but it seems obvious to me that a morning commute during which I am able to productively get started on my day is almost like no commute at all. An evening commute during which I am able to relax and unwind is almost like no commute at all. If we calculate effective speed by dividing travel distance by wasted time, then technologies like autonomous vehicles and to a lesser extent in-flight Wi-Fi are starting to make up for some of the stagnation in proper transport speed.

I have already written about how revolutionary commercial drones are likely to be. Local deliveries will be made robotic quadrocopters instead of by humans, and FedEx will switch to blended-wing unmanned cargo freighters that will reduce the cost of long-range goods transport by a factor of five, making air transport competitive with (only about twice as expensive as) ocean transport. A key point about the quadrocopter revolution is that it needed the iPhone market to get started:

As Dan Shapiro notes, “A single high-quality gyro used to go for a thousand bucks.  Now, you can get 3 gyros, 3 accelerometers, and a nice CPU to manage the whole thing for under a sawbuck.”

Commercial drones face some regulatory hurdles, but assuming these can be overcome, they will be an important contribution of IR #3.

Matter compilers

Traditional printers have a kinetic effect on the world—they put ink to paper—but not really. We value them for the informational quality of the printed product, not for the physical structure of the object that comes out of the printer. 3D printing is not that different from traditional printing, but its impact is likely to be much larger. It is another element of IR #3 that is still in development.

When I got a chance to see a 3D printer in person earlier this year, I was underwhelmed. There is still very little that consumer 3D printers can produce that I would actually want. But future generations of printers will almost certainly be much more useful as they become able to print in a wider array of materials.

In particular, I am excited to see chemical printers. People will be able to make their own drugs—both medical and recreational. This may sound dangerous, and perhaps it will be. But with the adoption of quantum computing we will be able to simulate chemical reactions in advance, something that we still cannot do efficiently with classical computers. Such simulation will greatly improve the feasibility of moving quickly to human trials on new drugs, including self-experimentation. The combination of quantum simulation and chemical printing could lead to a golden age of pharmaceutical discovery.

Synthetic biology

Relatedly, synthetic biology is another area where we seem to be observing rapid progress. I am woefully ignorant about synthetic biology—I am ashamed of this and will remedy it soon—so I should probably not be making very strong claims. But it seems important to mention that few if any of the advances in this field would have been possible without computers or prior research that has made heavy use of computers. Consequently, these advances are attributable to IR #3.

Online education

Total educational spending in the United States is something like 7 percent of GDP (5.5% of GDP is public expenditure, I believe around 1.5% or so is private expenditure). And the quality of education for anybody but the best or richest students is not especially good—the US routinely posts middling scores in international comparisons for primary and secondary education. Even at the college level, where the US excels, a lot of students are being underserved, often because they need remedial help.

We are still using a medieval technology, the lecture, to educate our students. But increasingly entrepreneurs—both for- and non-profit—are looking for better ways of teaching. Many of the new crop of online educational institutions, such as Khan Academy, Udacity, and Marginal Revolution University, are completely free.

People are still experimenting with educational models (and business models), but education that leverages new technologies has several advantages over the old classroom model. For example, in what is known as “flipping the classroom,” students can watch lectures for homework, and do problem sets in class, where they can get help from teachers. The quality of teaching can be higher because everybody can be taught by the very best teachers. And separating the teaching component of school from the coaching and supervision component of school means lower costs and greater specialization, including jobs for people who are not good at teaching but who are nevertheless good at working with kids. At least until the robots can do that too.

Gordon argues that we got a one-time economic boost from educating more people, but now educational achievement has plateaued and we can no longer rely on more education as a source of economic growth. But this seems like a narrow perspective to me. The quality of education certainly has a lot of room for improvement, as does the cost. If we let computers help us teach, we can improve on both of these margins.

While it remains to be seen what the ultimately successful models of online education will be, it would be surprising to me if there is not a major change in the educational industry in the next couple decades. And when that change comes, I bet it will be due to IR #3.

A new phase of IR #3

I’ve tried to review a number of emerging technologies that are likely to transform our daily lives, how we transport people and goods, how we make stuff, our health, and our educational system. Obviously this is an incomplete list; see Wikipedia for more.

There is still a lot of oomph in IR #3. All of the technologies that I have described are in development, and all of them owe their existence to digital computing. Some of them may founder, and some different technologies may turn out to be more important. But it is a big mistake to think that the world of computing can remain separate from the rest of the world for long. Computing started out set apart because it is safer that way—if your browser crashed or your web server goes down, there are not very large external consequences.

Experience and practice in the safe virtual world are leading to a greater desire and capability to extend these technologies to the physical world. It has taken 50 years, but we are now on the cusp of these changes. The remaining question is whether we will welcome them or try to smother them with regulations and arguments over the transitional gains. The best way out of the Great Stagnation is to eagerly embrace and support the new technologies. But they may be coming whether we want them or not, and that is why I am a long-run growth optimist.

A Straussian Reading of *Launching the Innovation Renaissance*

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This is a post that I promised to write several months ago; I hope that in spite of its tardiness, you will find that it contributes much to the issues of the day.

You may recall that Tyler Cowen included hidden meanings in his short ebook, The Great Stagnation. It turns out that he is not alone. Tyler’s Marginal Revolution co-blogger, Alex Tabarrok, also has an esoteric style. Whereas Cowen points us to the future by looking at the recent past, in Launching the Innovation Renaissance, Tabarrok points us to the more distant past by ostensibly talking about innovation in the future. Underneath all the sensible-sounding evidence-based arguments for reform is a hidden, retrograde manifesto that establishes Alex as one of today’s leading reactionary thinkers.

In case you think I am making this up, let me start by noting that the book literally begins over 700 years ago, in 1296. “From father to son, to son again, the architects, stonemasons and artists of Florence labored with love and devotion to produce the greatest cathedral the world had ever known” (26). Since that time, things have gone mostly downhill, as the institutions that made medieval Florence great have foundered. The questions that Tabarrok wants you to ask yourself are these: “When I go to work, do I labor with love and devotion? Am I producing something of transcendent value, like a cathedral, or am I just doing a mundane job? How can we go back to a simpler time of less turbulent change and greater personal meaning?”

Of course, Tabarrok cannot dwell on the medieval period throughout the book without giving away his occult hypothesis to even his slower readers. Consequently, he discusses several different eras of the past and how they are superior to the present. For instance, lamenting the modern patent system, he writes, “As early as 2,500 years ago the Chinese were breeding new roses, and Confucius tells us that the emperor had hundreds of books about roses and rose breeding in his library. The world did not appear to lack new roses even though, until 1930, no roses were ever patented” (83). This is a telling metaphor. The “old roses,” the old books, the old ways—they are just as good as, if not better than, the new roses.

Not only was the past a simpler and more satisfying time, the excesses of the modern world are deeply disturbing. One can almost feel Tabarrok recoil in horror as he relays the story of the OncoMouse, a genetically engineered monster. To the modern mind, this is a great advance; but a careful reader can discern Tabarrok’s deep reservations about this kind of coarsening of the value of life. He notes that mice “share 95 percent of their genes with humans” (205). It is bad enough that people might conduct experiments on creatures that are 95 percent human; must we also play God with these close cousins of ours by modifying their genes? And must we, of all things, patent them?!

Tabarrok is perhaps at his most persuasive when he points out that the deterioration in American education is caused by ill-advised “advances” in the rights of women:

One of the reasons for the poor performance of U.S. education is that teacher quality has declined significantly over the past four to five decades.

In the 1970s smart women became teachers. In fact, in 1970 about half of all college-educated women were teachers…Many smart women have exited teaching and entered the professions because of declining discrimination in the professions… (454)

It seems obvious—is it even worth pointing out?—that the simplest way to improve teacher quality is to bar women from entering professions like law, medicine, and business. This bit of subtext, needless to say, is completely lost on Alex’s less attentive readers.

Another problem with the modern world, according to the esoteric Tabarrok, is that people no longer have respect for the station in life in which Nature has put them. In a word, people are uppity. This causes countless problems, not least of which is higher education. “College has been oversold, and in the process the amount of education actually going on in college has declined as colleges have dumbed down classes and inflated grades to accommodate students who would be better off in apprentice and on-the-job training programs” (525). If only we could return, says Tabarrok, to a time when people knew their place.

Launching the Innovation Renaissance represents Alex Tabarrok standing athwart history, yelling “Back up 700 years!” You may think that these ideas are unlikely to gain much traction. Nevertheless, I think they have great relevance in today’s political debate. In fact, although Alex has not yet publicly endorsed a presidential candidate, I bet I can predict who he will be supporting.

Technologies of Control and Resistance: Making Sense of our Stagnant Dynamism

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I’ve just read Race Against The Machine, a new Kindle Single by Erik Brynjolfsson and Andrew McAfee, which argues contra Tyler Cowen’s The Great Stagnation that we are witnessing not a slowdown, but a positive acceleration of technological change. Brynjolfsson and McAfee argue that the fast pace of innovation is creating mismatches between humans and new technology, which has resulted in a lot of technological unemployment. The jargon is skill-biased technical change (SBTC). All recessions bring unemployment, but recent recessions have resulted in “jobless recoveries” that are the result not of cyclical forces but of deep structural change in the economy.

Brynjolfsson and McAfee are not wrong, but I think a better picture emerges if we attempt to reconcile their argument with Cowen’s rather than viewing them as contradictory. As Tyler argues, we have not had the kind of growth we might have expected 40 years ago if we had extrapolated based on the prior 40 years. See this chart on total factor productivity by David Beckworth. I think McJolfsson’s view and Cowen’s view are complementary if viewed from a sufficiently “big picture” perspective; the slowdown in TFP and the speedup in SBTC are, after all, decades-long trends.

Here’s my model. First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Now, postulate some background rate of innovation. How many resources will be devoted to technologies of control and how many to technologies or resistance? The answer is that it depends on how invasive the state (or other monopolies) are. When the state is invasive, at the margin the incentive is to find ways to circumvent the points of control; a greater proportion of resources will go into technologies of resistance. When the state is non-invasive, at the margin the incentive is a purer maximization of production; a greater proportion of resources will go into technologies of control, which results in higher growth.

What determines how invasive the state will be? Call me a cynic, but I think it correlates strongly with the availability of points of control. When factors of production are fixed, when demand for government supplied public goods is inelastic, when there are lots of points of control, the government will exercise more control. When the opposite is true, when there are few points of control, the government is unable to act invasively.

As you can see, there is a system of feedback. But the countervailing forces need not push outcomes to a stationary equilibrium. As we all know, time-to-build can result in cycles. Since technologies take time to change direction and develop, and since politics is slow to adapt, we should expect a non-stationary equilibrium. I think this is consistent with the broad facts. A hundred years ago, at least as it concerns white males living in the US, the government was relatively non-invasive. As a result, they developed centralized technologies that created a lot of growth, technologies of control. As new points of control were introduced, the government became more invasive. The modern state was born. At some point, innovation gradually increased toward technologies of resistance. The low-hanging fruit from the prior era eventually petered out, and sometime around 1974 we began to see lower TFP growth. As technologies of resistance improve relative to technologies of control, I can’t say exactly what will happen. A lot depends on whether government becomes gradually less invasive as points of control disappear or whether it continues to overreach; if the latter, we could observe some kind of interesting political turmoil.

So far, I’ve been pretty general about technologies of resistance, but I want to tie it back into McJolfsson’s story about rapid skill-biased technical change. The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.

On the other side of the labor market, I wonder if post-materialism is not also part of an attempt to evade control. A lot of talented people are scaling back their labor efforts, and while surely not all of this is due to taxes and regulations, some of it may be. And other innovations which seem truly new, such as the development of autonomous vehicles, are the result of control of which we may not even be aware; for instance, how profitable would it be to develop autonomous vehicles if Pareto-improving trade with immigrant drivers were not made impossible by immigration and labor restrictions?

The Internet has been somewhat insulated from the kind of political control that I am claiming leads to the cycle of control and resistance. As a consequence, I think we observe an epicycle there. Internet technologies can be centralized at the company level or standardized at the protocol level. Email is an example of a technology that is standardized at the protocol level, and it was developed in the early days of the Internet, when market power was a serious concern. Today, there are so many competitors in the online messaging field that market power is not a real problem. Consequently, we observe services like Facebook and Twitter, which are centralized and can provide “higher production” by reducing spam, for instance. If Facebook and Twitter ever abuse their market power too much, that is when distributed, protocol-based substitutes such as Diaspora and Status.net will take over. And when the government starts exerting more control over the Internet, we’ll observe the adoption of new technologies to circumvent that control, such as encryption and mesh networking.

In a strange way, this theory is a partial vindication of Ayn Rand; the only problem is that she was too literal. The productive people do not go on strike when they are over-controlled. Instead, they innovate around the points of control. They go on strike at the margin. And it doesn’t take a big, dramatic exit. A little bit cumulatively over decades is sufficient to both be noticeable in the data and to reduce the amount of control that can be exercised.

At the risk of being accused of now-more-than-everism, I’ll point out that the problems associated with a greater focus on technologies of resistance and with skill-biased technical change could be much ameliorated by a government that dramatically reduced its control over its citizens. Stick to supplying public goods and providing a small safety net. It won’t fix everything overnight—technology has momentum—but it will make things better than it otherwise would be. However, I think there is little chance of this happening. It requires out-of-equilibrium political play. Instead, if my theory is correct, we will find out what happens when large, invasive governments overextend and are forced to shrink.

CPI Bias and Stagnation

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Tyler has been defending his stagnation hypothesis with an intuitive argument about when the CPI is most skewed. I’m not 100% persuaded of Tyler’s intuition.

There is a severe conceptual problem that plagues any measure of inflation. It seems easy enough to measure the change in price of a basket of goods, but real-life consumers do not buy the same basket of goods from year to year. Entirely new goods get introduced, and even goods that seem nominally the same tend to improve in quality. These both introduce biases.

Suppose you’re starting with a basket of goods that contains x and y. Then new good z gets introduced. You don’t have the period-ago price of z, so you might continue for a period assuming that consumers are just buying x and y. You add z to the bundle in the following period when you can make a price comparison for z. This is going to cause CPI to overstate inflation, because in the period where z was available on the market but not included in the basket, consumers had greater choice with a given amount of money than the index suggests.

Now suppose you’re starting over, again with a basket of goods that contains x and y. Instead of adding a good z, assume that in some period x and y are replaced on the market by x’ and y’, which are improved versions of x and y. Consumers buy x’ and y’ in roughly the same quantities that they bought x and y, respectively. Since x and y are no longer on the market, there is no price comparison that can be made across periods. One way around this is to assume naïvely that x’ = x and y’ = y. Once again this is going to cause CPI to overstate inflation, because a given amount of money can buy more quality than the index suggests.

Tyler claims that the first problem is more severe in practice than the second. I am not so sure. One reason that we can never be sure is that statisticians at the BLS attempt to correct for both kinds of problems. This is a confounding factor that takes simple intuition out of the picture. How can we know whether net of statistical correction one problem is worse than the other?

But even assuming naïvely that the statistical corrections are equally effective or ineffective, it’s not obvious that the first problem is the most severe. In the periods when truly new goods first get introduced, they typically do not make up a large fraction of the real-world consumption bundle. This is an inherent limit on how much damage they can do to the index. In contrast, secular improvements in goods tend to affect the whole bundle. There is much bigger scope for damage to the index from quality improvements than from the introduction of new goods.

Tyler has been advancing the differential CPI bias argument to amplify, not make, his core argument, but if he has it backwards, that CPI bias has been worse in the post-1973 period than in the pre-1973 period, then his whole stagnation hypothesis crumbles. I’d like to see more discussion of his CPI intuition.

Update: Bryan has more.

Winning the Stagnant Future

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I’m tempted to do a serious review of Tyler’s book, but I’m happy to outsource most of my comments to Arnold Kling. Instead, I’ll just make one brief point about the validity of the various numbers used to justify claims of stagnation or non-stagnation.

All of the numbers in play are fundamentally non-economic. Whether we’re talking about growth in measured productivity or median family income, all of the numbers used are calculated by taking some P and multiplying it by some Q. These are modes of accounting, not of doing economic analysis.

What we really want is something that captures changes in total surplus (or utility) per capita: indifference analysis. A basic question that can start off the discussion is the one I asked on Twitter yesterday:

What multiple of your lifetime income would someone have to offer to get you to agree to have been born 20 years earlier?

If you take the 20th root of that multiple and subtract one, you have an estimate of the annual growth rate of your personal economy. If you don’t have a fancy calculator handy, Wolfram Alpha is your friend.

My sense is that Tyler’s multiple is embarrassingly high (it is, after all, the Age of the Infovore). Mine is high too.

If Tyler wants to defend the stagnation hypothesis against this line of reasoning, he has two choices. First, he can say that the multiple would be even higher for earlier 20-year periods. I doubt that he would say this for himself.

Second, he can claim (correctly) that he is not the typical person. The masses are not infovores. But granting that this is the case, it’s difficult to imagine what sort of improvements could be made, even in theory, that would elicit for them the kind of welfare explosion experienced by infovores in recent decades. What do non-infovores want?

The fact is that in wealthy Western countries we’ve hit pretty severe margins of diminishing utility in terms of what we can offer non-infovores, at least those who have not recently come upon some hardship. You can say bigger houses and more leisure, but all I hear, with only slight exaggeration, is “more Muzak and potatoes.”

Tyler makes many good points, but once you accept that for many people (infovores) welfare is surging and for most others (non-infovores) it has comparatively nowhere to go, then it’s hard to call that exactly stagnation. Indeed, you could argue that we have already won the future.

*The Great Stagnation*, a Straussian Reading

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Tyler Cowen’s new eBooklet, The Great Stagnation, is a sober, moderate take on our current economic troubles. Except that it’s not. Straight out of Persecution and the Art of Writing, it is a book designed to appeal to the “sane, honest middle” of American politics, but for the careful, enlightened reader, there is a hidden and radical message: the time is ripe for an anarchist revolution. Be ready.

The first hint that there is much more to Tyler’s meaning than shows up on the page comes before the book even begins, in the dedication. The book is dedicated to Peter Thiel, a known anarchist sympathizer. Thiel is well-known as the billionaire co-founder of PayPal and early Facebook investor. But he is also the chief patron of the Seasteading Institute, which aims to avoid government rule by colonizing the surface of the ocean. Thiel is someone who understands that getting out from under the boot of government is necessary for the continued flourishing of mankind. Perhaps this is what Cowen has in mind when he writes on location 447 that Thiel is “an acute observer of our modern economy.”

Cowen’s ostensible thesis is that “the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies” (63). That low-hanging fruit is now gone and we have to brace ourselves for lower growth for a time. But at the same time, he seems to be offering the reader an alternative. “Recent and current innovation is more geared to private goods than to public goods” (225). How can we change this? What is the new low-hanging fruit?

Cowen offers the answer in chapter 2, the occult thesis of which is that collectivism is a cancer on the modern economy. On multiple occasions, Tyler protests that he is not trying to make an anti-government point. “The proper role of government is beyond the scope of this discussion” (266). In all his denials, Cowen is trying to draw the intelligent reader’s attention to the fact that the government is the problem. He shows how valuing government contributions to GDP at cost is problematic. There is no market test faced by government expenditures. Similarly healthcare and educational expenses are shielded from the market test by government subsidies and regulations. This is the new low-hanging fruit. If we can eliminate the coercive sectors of the economy, those that are shielded from the market test, we can pave the way for growth for the next generation or more.

Chapter 3 is an invitation for us to join Tyler in Techno-Utopia, a place where consumer and producer surplus is massive. For the simple reader, the thesis of Chapter 3 is that the internet is great, but it cannot save us from our problems because we are overburdened with debt and need revenue-generation in order to make ends meet. The esoteric meaning, though, is clear: the parts of the economy—the internet and our interiority—that are most free from government intervention are awesome. We can expand these sectors, and indeed liberate others, but it will require repudiating the debt and the status quo.

Chapter 4 laments the broken political system. Both sides want to undertake policies that immediately increase real incomes at the expense of future growth. Republicans want tax cuts without spending cuts and Democrats want more redistribution. What about the “honest middle?” Cowen uses this phrase three times in the book. It’s a clear attempt to flatter the unenlightened reader, who likely identifies with this group. At one point, Tyler even calls it the “sane, honest middle.” The subtext, however, is that the middle is neither sane nor honest. The middle wants both tax cuts and more redistribution. It’s clear that Cowen despises this group. These are the ZMP workers he keeps talking about, and not the good kind, either. The point is that working within the system is futile. “It is hard to win elections in the United States by announcing that the low-hanging fruit is gone, that real incomes will grow only slowly for some time, and that we cannot keep borrowing at our current pace” (578). Translation: the current political system is useless. Smash it.

From chapter 5, we can glean that Cowen expects the coming anarchist revolution to be sudden. The plain meaning of the text talks about how we as a society were too optimistic, took too many risks, were too leveraged, and this caused a sudden financial crisis. In the same way, we won’t recognize the new order until it is upon us. The metaphor here is Bernie Madoff standing in for the government. “For years, Madoff had been a well-respected figure in the investment community. Madoff’s fraud was possible only because so many people trusted him. The more people trusted him, the easier it was for Madoff to gain the trust of yet others” (746). This process is inherently fragile. When people realize that the emperor has no clothes, it is already too late to save the current system.

In the conclusion, Cowen warns us to “be ready for when more low-hanging fruit arrives”  (860). “New technologies can upset old balances of power” (870). “There will be big and unexpected bumps along the way, and many people will look back to the current era with a gloss of nostalgia” (871). This is both a stirring call to revolution and a warning to the faithful that it won’t be easy. Be prepared both for the change ahead and to resist those who would attempt to stop it.

It’s clear that in this book Tyler Cowen has reverted to his roots as a radical anarchist theorist and agitator. This is the Tyler from before Cowen (1992) peeking out his head and letting the rest of us know that he’s still here. Waiting for the right time.