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Wednesday, 17 October 2012

Peak Growth - Causes and Future of Economic Growth

A recent working paper Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert Gordon at Northwestern University looks at the causes and future of growth in the developed world.

"This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. 

The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, 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. 

Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.

Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. 

A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades".

If growth is predicated on industrial revolutions it raises interesting implications for policy.

The paper is worth a look, Pdf is downloadable from the link: Is US Economic Growth Over?


alfmcm said...

Even before I had studied any economics of any kind, it was (or it seemed) blatantly obvious to me that growth couldn't go on forever. Perhaps if more economists had challenged the thinking of some of the discipline's early thought leaders more often, the developed world would have given up the growth expectation long ago. Or am I just a naive non-economist? Anyway, it's never too late to challenge the conventional wisdom.

alfmcm said...

Progress is synonymous with growth. Discuss.