The Rest of The Great Stagnation
By Arnold Kling
I was planning to review Tyler Cowen’s e-book while I read it, but then we lost power, and my Kindle was working while my Internet connection was not, so my comments on the entire rest of the book are below the fold…In chapter two, he says that health care, education, and government have slow productivity growth, and those are becoming larger sectors. This may be true, but one way to look at it (and in fact, what his arguments often amount to) is that what those sectors have in common is that there is a lot of mis-allocation of resources, because of government action. Mis-allocating resources is not the same thing as low productivity growth. But overall, the points in this chapter are well taken.
Chapter three talks about the Internet. Cowen sees is at as a boon to certain types of consumption, but he constantly says that it does not generate revenue. The picture he paints is of a technology that is complementary with leisure but not with, say, capital and manual labor. This is the sort of thing that in my view cries out for a general equilibrium model, using international trade theory. Remember my partial equilibrium story of technological unemployment?
Cowen writes as if the economic gains from the Internet are mostly behind us, and they were not very much to begin with. I think it is more likely that most of the gains are in front of us. Cultural and institutional adaptation takes a long time. Automobiles had penetrated to a tremendous extent by the late 1920s, but it was not until the 1950’s that we could see the realignments that the automobile produced. Meanwhile, we had the Great Depression.
Similarly, I would say that although the Internet had achieved a lot of penetration by 2000 or shortly thereafter, it could be another ten years or more before we see the realignment that it might produce. Meanwhile, we are in the midst of a deep recession.
Chapter four talks about government. Cowen argues that some technologies, including motorized transportation and centralized data storage, facilitate large corporations and larger government.
I like his technological story for the growth of government. However, I have a very different view of the arc of technology than he does. In Cowen’s view, we had “a lot” of innovation a hundred years ago, but now innovation requires more difficult scientific work, and so it has slowed down. Innovation created economic growth, which helped spur the demand for government services and to make it possible for government to exercise greater control. But now that innovation is slowing, the surplus available to go to government is diminishing.
My view of the arc of technology is that from 1800-1950, the technologies promoted mass society. Mass workers, mass consumers, mass media, large-scale factories, etc. However, since then, the most important technologies have favored decentralization. The computer and the Internet enhance the power of individuals and make it more difficult for large corporate congomerates and centralized governments to work effectively. Economies of scale still exist, but do niche markets. Most important, the diseconomies of scope are now severe.
Cowen attributes political dissatisfaction and turmoil to the phenomenon that our expectations have gotten out of hand relative to what the economy can provide. I attribute political dissatisfaction and turmoil to what I call the discrepancy between knowledge and power. Power became more concentrated in the era of mass technologies and it has continued to become more concentrated.. However, knowledge has become more dispersed. This dispersal of knowledge eventually will lead to the dispersal of power, but the incumbent political powers will resist that dispersal.
Cowen wants to explain the financial crisis as a result of people not perceiving the slowdown in economic growth. They borrowed too much against future income that could not be realized. I want to explain the crisis in part as a result of the knowledge-power discrepancy. The largest banks and their regulators had too much power and too little knowledge.
Cowen’s prescription is for all of us to lower our expectations until the economy proves that it can grow again. He suggests that we raise the status of scientists in order to encourage more talented people to go into science.
Again, I disagree with his view of innovation as driven by scientific “aha” moments. In my view, culture and institutions are more important.
About twenty years ago, William Gibson remarked that “The future is here. It’s just not very evenly distributed.” I think that this process of adapting to technology is more important than the “aha” moments. The distribution of the technological innovations of the past twenty years has much further to go, in my view.
I think that our biggest problem with adapting to the latest technology is that the scale of our institutions is too large. I would feel better if the United States were an aggregation of dozens of Denmarks or Hong Kongs.
Cowen’s thesis is interesting. I recommend the e-book. Contrary to what one of my commenters suggests, this is not because I got a free copy to review. I paid the same exorbitant $4 (that is four dollars, not four hundred) that you would have to pay.