Are America’s Best Years of Innovation Over?

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Rise and Fall coverAccording to economist Robert Gordon, today’s innovations might dazzle, but they don’t transform everyday lives in the way that the internal combustion engine, the refrigerator, air conditioning and the elevator transformed the fabric of America from 1870 to 1970. This article reviews Gordon’s new book The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, which explores a time period that he says included unprecedented advances in productivity and quality of life that are unlikely to be repeated.

In 1970 Alvin Toffler published Future Shock, a book about a “fire storm of change” sweeping Western industrialized society with “waves of ever accelerating speed and unprecedented impact.” In this and subsequent books, he writes breathlessly about the “quantum leaps” of innovation and transformation we should all brace ourselves for; and a substantial cottage industry of futurist writers continues that tradition. Prominent among them is the MIT-trained author and scientist Ray Kurzweil, who posits a “law of accelerating returns” in information-related technology and has most recently written about a union of human and machine he calls The Singularity.

Economist Robert Gordon proposes we view 1970 as a time when change in fact began to slow down, to decelerate. He has for years expressed skepticism at the speculations of those he calls “techno-optimists.” It’s not that he dismisses today’s technological innovations as unimpressive or unimportant. But however much they might dazzle, they don’t transform everyday lives in the way that, say, the internal combustion engine, the refrigerator, and the elevator transformed the fabric of post-Civil War America. His new book, The Rise and Fall of American Growth, is a deep dive into the past with an eye to the future. His central questions are: How and when did American productivity and standard of life experience such profound gains in the last century and a half? And what does that tell us about prospects for the future?

The Bad Old Days: Daily Life in 1870

Gordon’s central thesis is that the hundred-year period from 1870 to 1970 is a “special century” that is unprecedented and unlikely to be repeated in its breadth and depth of change. To make that case, he devotes the book’s opening chapters to a close examination of his baseline: not just the numbers cataloguing the production and consumption of American society in the wake of the Civil War, but “the small details of everyday life and work.”

One of the things that inspired him to try to capture the tedium, drudgery and danger of nineteenth century life in the United States was a book he stumbled on called The Bad Old Days: They Really Were Terrible. In 1869, a ceremonial golden spike was driven in Utah to create the first transcontinental railroad, symbolically ushering in a new era of modernity. Many of the inventions and innovations that would transform daily life were only a decade or two away. Yet that was no comfort to the men, women and children who endured a standard of living primitive by contemporary standards.

“Gordon’s central thesis is that the hundred-year period from 1870 to 1970 is a ‘special century’ that is unprecedented and unlikely to be repeated in its breadth and depth of change.”

Louis Pasteur was only just beginning to develop his germ theory of disease, and a staggering number of children died during their first year. Industrial accidents were common, life expectancy was a mere 45 years, and (for reasons not entirely understood) the average height of native-born American males actually declined almost two inches from 1830 to 1890. Edison didn’t demonstrate his first electric light bulb until 1879, so homes were lit with candles and kerosene lamps, creating indoor pollution and considerable hazard — thousands died every year from lamp accidents. In the absence of plumbing, toting water for washing and cooking was a time-consuming and laborious task.

The Great Leap Forward

The closing decades of the nineteenth century produced a series of innovations that would completely transform American life. Foremost amongst these was electricity, and the refinement of the internal combustion engine. It took a while for both to become economically viable and widespread, and Gordon points to the years from 1910 to 1940 as the most intensive period of change.

Cities experienced the most rapid and striking change, propelled by a very particular synergy of electricity and the automobile. “In the seven decades between 1870 and 1940, the urban dwelling was utterly transformed from a primitive state hard to imagine to a level, in 1940, surprisingly similar to the way we live today.”

Some might wax nostalgic about the horse and buggy days, but the use of horses for urban transportation created serious health problems — generating five to ten tons of manure per square mile. Cars and electric street cars changed all that, and allowed for a different type of urban development. Electricity remade the urban household, powered industry, and, through the elevator, enabled buildings to extend vertically, changing the very nature of land use and creating the urban density we take for granted today.

In 1900, 35% of the population still lived on farms, and the transformation of rural America was slower in some ways, but no less fundamental. Life in the farmhouse may not have been radically altered, but the nature of work was. Over a period of just 15 years, U.S. farms were equipped with 370,000 trucks, 450,000 tractors, and over 4 million automobiles. In Iowa, 93% of farmers owned cars by 1926, a higher rate than in cities.

Home life in America was “revolutionized” and productivity in the workplace “exploded.” Yet the most profound progress made during this period may have been in the form of reduced mortality rates, especially among infants. In the first half of the twentieth century, life expectancy improved at an annual rate twice as high as in the last half. Although medical care did witness important improvements, this startling progress was due more to environmental changes brought about by electricity, indoor plumbing and running water.

“No other era in human history, either before or since,” Gordon sums up, “combined so many elements in which the standard of living increased as quickly and in which the human condition was transformed so completely.”

Measuring Progress

One of the book’s ongoing projects is the challenge of quantifying the progress of The Great Leap Forward in fresh ways, and of capturing that which can’t be quantified. A key measure in Gordon’s argument is Total Factor Productivity (TFP) — a tricky one in that it is not so much measured as inferred. It is the X-factor or residual that remains when total economic output is divided by a weighted combination of labor and capital inputs. (It is credited to economist Robert Solow, and thus sometimes referred to as “Solow’s residual.”) It is in essence a kind of catch-all for intangibles driving economic growth — including technology, innovation and knowledge. Because TFP comprises factors that cannot be quantified individually, it has been the subject of some criticism and debate.

“The closing decades of the nineteenth century produced a series of innovations that would completely transform American life. Foremost amongst these was electricity, and the refinement of the internal combustion engine.”

By this measure and others, the second half of the “special century” (the years from 1920 to 1970) is when American productivity really took off. In the decades before 1920, output per hour increased at a mere 1.5%, then nearly doubled over the course of the next half-century — only to fall back to 1.62% in the years after 1970. This surge is almost entirely due to a growth in TFP is almost triple that of the decades preceding or following this pivotal 50-year interval.

Some dimensions of progress are even more difficult to quantify. The growth to which the title refers is really two separate things: increases in productivity and in the standard of living. GDP per capita is the standard measure of progress in the latter, and tripled in the years from 1870 to 1940—but Gordon contends it fails to capture the full scope of gains in people’s everyday lives. Here, he draws on the insights of Gary Becker and others in the school of New Home Economics, which seeks to complement objective measures of consumption with other more subjective measures in order to paint a more complete picture of overall household welfare. Becker pays particular attention to time allocated to non-work activity, an area in which women’s lives were radically transformed during this period. “The life of a working-class housewife in the last nineteenth century was little different than that of a hired domestic servant,” Gordon writes. The time saved and burden eased by running water alone was substantial. Electric sewing machines and the availability of ready-made clothing at affordable prices freed women from another time-consuming task.

Other quality of life gains during this period include a decline in the unpleasantness of work (what economists call work “disutility”), the freedom of youth to go to school and recreate instead of working, and the modern invention of the notion of retirement. Last, but certainly not least, are the individual and societal benefits of improved life expectancy, in the first half of the twentieth century due largely to a steep drop in infant mortality rates. The rate in 1880 (215 per 1000 births) had held steady for hundreds of years—but then fell to 27 by 1950. This “historic decline,” Gordon asserts, “is one of the most important single facts in the history of American economic growth.” Because this progress is not reflected in GDP per capita, the economist William Nordhaus calculated a modified GDP growth rate incorporating this additional “health capital.” His “health-augmented” growth rate for the first half of the twentieth century is 4.2%, more than double the conventional measure of 2.05%.

Slowing Growth: From Revolution to Evolution

The year 1940 is a somewhat arbitrary dividing point for Gordon as he moves on to Part II of the book. Growth in both productivity and standard of living continued apace until 1970. Yet there were early signs of a slowdown, of a shift from revolutionary to evolutionary change. Progress during these three decades was in large part a continuation and consolidation of earlier gains. For instance, in 1940, 79% of households had electric lights, 74% running water, and 44% an electric refrigerator. By 1970, the figure in all three categories was nearly 100%. (Gordon refers to these and other advances collectively as the modern “networked” house.)

Growth before 1940 was driven by the primary advances of the second industrial revolution, inventions that date back to the end of the nineteenth century. Growth after 1940 featured what Gordon calls the key “subsidiary spinoffs” of that revolution, including air conditioning, the interstate highway syste, and commercial air transport. (Air conditioning is an underappreciated contributor to economic growth. In the 1950s, according to one study, it resulted in 25% greater productivity among government typists.)

Another critical engine of progress during this period was the twin impact of the Great Depression (which set the economy back but also triggered essential reform) followed by the economic pressure cooker of World War II. Huge gains in educational attainment, with a big push from the GI Bill, improved the quality of labor. In part due to the growing strength of unions, that labor was rewarded with high wages and lower hours. In response, capital inputs increased not only in quantity, but in quality. Gordon cites the work of John Kendrick, a pioneer in the field of productivity measurement, who found that one measure of the productivity of capital, the ratio of output to capital input, nearly doubled between the 1920s and the 1950s.

“Other quality of life gains during this period include a decline in the unpleasantness of work…, the freedom of youth to go to school and recreate instead of working, and the modern invention of the notion of retirement.”

Despite this progress, the beginnings of a slowdown, of a shift from revolution to evolution, were in place. Again, progress in the post-War decades reflected a continuation of earlier gains. In a sense, the economy was in the final stages of extracting what it could from the second industrial revolution; the subsequent third industrial revolution would not be nearly so broad or deep in its impact. Gordon also notes a leveling off of inventions and patents in the 1920s, and a sharp drop in the 1940s and 1950s, as innovation moved from the individual entrepreneur/inventor to the corporate R&D office. Finally, progress in public health shifted from a focus on curing infectious diseases (and huge consequent reductions in infant mortality) to a focus on managing chronic disease (with more modest gains for older adults).

“Nothing that happened after 1940 for the adult male worker,” Gordon writes in summation, “compared to the reduction in the discomfort of physical labor made possible by shorter hours, more capable machinery and the shift from farm to city. Nothing that happened after 1940 for the adult female housewife compared to the replacement of hauling of water, wood and coal by the networked house…. Nothing that happened after 1940 … compared to the elimination of child labor and its replacement by universal high school education. And nothing that happened after 1940 was as important to the life of the older generation as the establishment in 1935 of Social Security.”

Reasons for Slower Growth after 1970

The drop-off in growth following the “special century” running from 1870 to 1970 is striking by any number of measures. TFP – which rose steadily in the 1920s, 1930s and 1940s, and peaked at nearly 3.5% in the 1950s – fell off in the 1960s and 1970s, and then plummeted in the 1980s. Overall, in the period after 1970, TFP has been a third its rate from 1920 to 1970. Two other measures – output per person and output per hour – also fell back to pre-1920 growth rates. Manufacturing capacity and net investment have also generally been down.

Finally, Kendrick’s measure of quality of capital, the ratio of output to capital input – which peaked in the late 1940s but still grew at an average annual rate of just under 1% between 1928 and 1972 – thereafter dipped down into negative territory. In short, Gordon writes, “the nation’s output grew much more quickly than its capital input between 1928 and 1972 and then much more slowly from 1972 to 2013.”

“‘No other era in human history, either before or since,’ Gordon sums up, ‘combined so many elements in which the standard of living increased as quickly and in which the human condition was transformed so completely.’”

Why the sudden drop-off? Simply put, the very real innovations of the post-1970 period – driven by the third industrial revolution, and revolving around the information and communications technology (ICT) sector — were narrower and less transformative than those associated with the second industrial revolution. Part of that narrowness is that the ICT sector, for all its dazzling advances, constitutes only about 7% of GDP. And part of it is that, as Gordon puts it, “Some inventions are more important than others.”

The singular progress of The Great Leap forward was unprecedented and unrepeatable. Refinements on earlier innovations continued—but were incremental in nature. The heavy lifting was in the past. For example, the construction of the interstate highway system, a huge factor in economic growth in the post-War years, was largely concentrated in the years 1958-1972. By that time, the “great transition of America to a motorized society was essentially over.”

Progress in other areas plateaued. Advances in educational attainment slowed, and medicine witnessed “piecemeal improvements” as compared to the “quantum leaps” of earlier decades. In both education and health care, rising costs represented a drag on net gains in standard of living, and exacerbated a growing economic inequality that Gordon argues has emerged as a major threat to future growth.

A Temporary Surge

One of the puzzles of the post-1970 slowdown was why the remarkable innovations of the third industrial revolution – even granted their more narrow economic base in the ICT sector – failed to generate measurable gains in productivity. (As Robert Solow quipped, “You can see the computer age everywhere but in the productivity statistics.”) This so-called “modern productivity paradox” was the topic of a 1990 paper by Paul David in which he suggested that a certain gestation period frequently intervenes between an invention and its productivity payoff. There were several decades of lag time between Edison’s first light bulb in 1879 and the productivity growth of the 1920s due to electric manufacturing. The same lag, he argued, was likely happening with the recent quantum leaps in computing.

Indeed, just a few years after his article, productivity and other measures soared briefly from 1996 to 2004. Productivity doubled over its previous quarter-century slump, manufacturing capacity returned to 7% growth, and net investment enjoyed a brief three-year surge. But all these measures subsequently fell back to earlier levels. This short-lived period of growth, Gordon asserts, “was driven by an unprecedented and never-repeated rate of decline in the price of computer speed and memory and a never-since-matched surge in the share of GDP devoted to … ICT investment.”

Looking forward, Gordon sees a number of reasons for viewing this temporary lift as an exception that proves the rule. The decade that has followed, 2004–2014, has witnessed the slowest productivity growth of any decade in American history. The price to performance ratio in ICT, after a brief and sharp drop, has flattened out. After its brief surge, the ratio of net investment to capital stock has returned to negative territory. Especially troubling, he writes, is the decline of “business dynamism” as measured by rates of new firm entry vs. old firm exit.

“In short,” Gordon concludes, “the changes created by the Internet revolution were sweeping but were largely completed by 2005. Twitter  The major exception, the invention and dissemination of the smartphone, has thus far not had a visible effect on productivity.”

The Future: Techno-optimists and Techno-pessimists

The Rise and Fall of America Growth is part of a fascinating debate about future prospects for the American economy. Interestingly, a prominent voice on the other side of the debate is Joel Mokyr, Gordon’s colleague at Northwestern University, where the two are affectionately known as a kind of “economic odd couple” and are frequently paired in public speaking engagements.

Gordon bases his own somber predictions on the premise that coming decades are more likely to resemble 2004-2014 than 1994-2004. Whatever innovations are in store in ICT, the preponderance of the American economy is unlikely to be significantly affected. Those anticipating revolutionary change in the near future, he contends, confuse the pace of innovation with its impact.

“The wonders achieved by computers and, since the mid-1990s, by the Internet have misled many analysts into believing that the current rate of economy-wide progress is the fastest in human history and will become even more rapid in the future,” writes Gordon. “The basic flaw in this faith in an acceleration of technological change is that… the share of total GDP represented by computers is too small to overcome the great majority of economic activity where the pace of innovation is not accelerating and, indeed, in many aspects is slowing down.”

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