Economist Debate on Technological Progress

Lynne Kiesling

The Economist recently did one of their periodic debates, this time on the pace and effects of technological progress. Moderator Ryan Avent framed the debate thus:

This leads some scholars to conclude that accelerating technical change is an illusion. Autonomous vehicles and 3D printers are flashy but lack the transformative power of electricity or the jet engine, some argue. Indeed, the contribution of technology to growth may be weakening rather than strengthening. Others strongly disagree, noting that even in the thick of the Industrial Revolution there were periodic slowdowns in growth. Major new innovations do not generate immediate economic results, they reckon, but provide a boost over decades as firms and households learn how to use them to make life easier and better. The impressive inventions of the past decade—including remarkable growth in social networking—have hardly had time to make themselves felt across the economy.

Which side is right? Is technological change accelerating, or has most of the benefit from the IT revolution already been realised, leaving the rich world in the grip of continued technical stagnation?

Taking the “pro” position on technological progress is Andrew McAfee of MIT; taking the “con” position is my colleague Robert Gordon, whose recent work on technological stagnation has been widely discussed and controversial (see here a recent TED talk that Bob gave on technological stagnation and one from MIT’s Erik Brynjolfsoon on the same TED panel).

McAfee starts by pointing out that stagnation arguments rely on short-run data (post-1940s is definitely short run for technological change, as Bob also argues). Often 100 years is more of the timescale for looking at technological change and its effects, and since modern digital technology is mostly a post-1960 phenomenon, are we being premature in declaring stagnation? McAfee also points out that the nature of the changes in quality of life arising from technology makes those changes hard to capture in economic statistics. In the Industrial Revolutions of the 19th century, mechanical changes and changes in energy use led to large, quick productivity effects. But the nature of digital technology and its effects is more distributed, smaller scale but widespread, and focused on the communication of information and the ability to control processes. That makes for different patterns of both adoption and outcomes from the adoption of digital technology. It also makes for more distributed new product/service innovation at the edges of networks, which is another substantively different pattern in economic activity than seen in the 19th/early 20th century. Kevin Kelly also made many of these observations in a January 2013 EconTalk podcast with Russ Roberts.

I am, not surprisingly, sympathetic to this argument. I also think that framing the question as “is technological change accelerating?” is not helpful. As with any other changes arising from human action and interaction, rates of technological change will ebb and flow, and it’s only really informative to look retrospectively at long time periods to understand the effects of technological change. That’s why economic history, especially the history of innovation, is valuable, and attempts at predictive forecasting with respect to technology are not useful, or at least should be taken with massive grains of salt. It’s also why this Economist debate is a bit frustrating, because both parties (but especially Gordon) rely pedantically on the acceleration of the rate of change (in other words, the second derivative being positive) as the question at hand. Is that really the interesting question? I don’t think so, because of the ebb and flow. It’s how technological change affects the daily lives of the population that matters, and how, in Adam Smith’s language, it translates into “universal and widespread opulence”. There are lots of ways for that to manifest itself, and they won’t all show up in aggregate productivity statistics.

Gordon’s stagnation argument seems to have the most purchase when he makes this claim in his first debate post:

A sobering picture emerges from a look at the official data on personal consumption expenditures. Only about 7% of spending has anything to do with audio, video, or computer-related goods and services, including purchases of equipment to paying the bills for cable TV or mobile-phone subscriptions. Fully 70% of consumer spending is on services, and what are the largest categories? Housing rent, water supply, electricity and gas, doctor and dentist bills, hospitals, auto repair, public transport, membership clubs, theatres, museums, spending in restaurants and bars, bank and financial services fees, higher and secondary education, barber shops and nail salons, religious activities, air fares and hotel fees—none of which are being altered appreciably by recent high-tech innovation.

He’s right that some of these categories are in industries that are less prone to change in quantity, quality, or cost due to innovation, although it’s important to bear in mind with respect to electricity, medical care, and financial service fees that much of the apparent stagnation arises from regulatory institutions and the innovation-reducing (or stifling) effects of regulation, not from technological stagnation per se.

McAfee rebuts by elaborating on the slow unfolding of innovation’s effects in the past. He then offers some examples (including fracking, very familiar to KP readers!) to illustrate the demonstrable productivity impacts of technology. He doesn’t fully go at what I see as the Achilles heel of the stagnation-productivity argument — the extent to which small-scale, distributed effects on product differentiation, product quality, and transaction costs are not going to be reflected in aggregate economic statistics.

At the end, the readers find for McAfee. But in important ways the question is both pedantic and unanswerable. I think a better way of framing the question is to ask the comparative institutional question: what types of social institutions (culture, norms, law, statute, regulation) best facilitate thriving human creativity and the ability to turn innovation into new and different products and services, into transaction cost reductions that change organizational and industry structures, and lead to economic growth, even if it’s in ways that don’t show up in labor productivity statistics?

5 thoughts on “Economist Debate on Technological Progress

  1. What worries me is that I believe there is a clear case that innovation has slowed down where governments have become involved, or where someone has decided to be afraid.

    The Nerva rocket is a classic example. That was a nuclear rocket (fission, heating hydrogen) that would have allowed for 38 percent of the start weight of a rocket go up in orbit as pay load, compared to a measly 6 percent with chemical rockets. Now, going off into space might not be “useful”, but the Nerva project was shut down at the beginning of the 1970s because it worked. And as it worked, people might like the idea, so Congress cut funding.

    Today, without superstitious fear of “radiation”, the X-prize would have involved Nerva-style nuclear rockets, or something even better. A trip to Mars was supposed to have been made in 1985 with two Nerva rockets (for redundancy). 6 months there, 6 months back, the direct route without any slingshots.

  2. Only 7% of U.S. consumer spending is on A/V, but I suspect that more than 7% of U.S. leisure hours (or even waking hours) is devoted to A/V. That might be a better indicator of the potential for consumer surplus..

  3. That 7% figure is just generally of dubious significance. It is a common phenomenon that when, due to innovation and progress, productivity in a sector has grown massively, prices may drop so far as to render the sector an insignificant (or apparently insignificant) part of the economy.

    Think of agriculture. Only two hundred years ago it represented the overwhelming majority of GDP. Then, thanks to technological progress, it shrunk to a tiny fraction of the economy, while the population is vastly better fed and supplied. Are we to conclude that the progress of a tiny industry, as measured by current GDP share, was therefore insignificant?

    Or, imagine if you will, an effective, patent-free panacea was invented, resulting in the cure of every disease at negligible cost. After its phase-in, health care would constitute an insignificant part of the economy. Yet would anyone argue that there was no significant technological progress?

    The better way to measure technological progress, and many other things, would in terms of consumer surplus which would not exhibit such distortions. Unfortunately, consumer surplus is notoriously trickier to measure than GDP.

  4. Have a look at auto repair. Your car has a bunch of sensors and processors that all talk to the diagnostic computer telling the auto tech if anything is wrong. Without them we would be driving substantially less efficient and more polluting vehicles. I think that is a productivity increase.

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