In itself, there is nothing new about gloom laden “declinism” of this sort; it’s almost as old as humanity itself, and invariably it’s in the ascendant at times like this, when everyone is down in the dumps and barriers to growth seem almost insurmountable.
Yet there are good reasons for believing there may be something in it this time around. With long yields on government bonds in any halfway creditworthy advanced economy tumbling to historic lows, this seems to be the predominant view of millions of investors around the world. Money managers are betting on low to nil or even negative growth way out into the indefinite future.
Now it may be that these very low yields are just a bubble created by the present climate of extreme risk aversion and massive central bank intervention. Financial repression may have prompted a wholly artificial market in government bonds, which on the greater fool theory, investors have for the time being decided to climb aboard and exploit. It may be no more significant than that.
We also know from historic experience that economies take a long time to recover after serious financial crises, when the system as a whole typically enters a collective process of paying down and writing off past debts. Such “deleveraging” can go on for an awfully long time, but eventually a new equilibrium is reached, everything reboots and the dance begins anew.
Even so, these bizarrely low returns could be something much more troubling. Prof Gordon’s big observation is that if you take the great sweep of history, the elevated growth of the past few centuries is in fact a quite unnatural state of affairs. Between 1300 and 1750, the UK economy hardly grew at all in per capita terms. The read through for the world economy is even more startling. According to Prof Gordon, world GDP per capita between 1000 and 1820 grew a barely perceptible average of 0.04pc a year. For virtually a whole millennium, the world got no richer at all.
As Prof Gordon has remarked in a recent article for the Centre for Economic Policy Research, “the past 250 years could turn out to be a unique episode in human history”.
Whether it is now largely over is another matter, but Gordon certainly advances a superficially plausible case for it.
In Gordon’s view, growth in today’s advanced economies since 1750 has been driven primarily by a sequence of three industrial revolutions. The first, beginning in the UK, involved steam engines, cotton spinning and railways. The second, and much more important one was derived from three central inventions electricity, the internal combustion engine, and indoor plumbing, the latter of which gave the masses running water and sanitation.
The transformational effect of these breakthroughs continued to feed growth right up to the 1970s, when previously stellar rates of productivity improvement took a notable dive. The third industrial revolution, mass computing and communications, has failed to have quite the same impact and in any case, we now seem to have entered a period of very slow, non-transformational innovation. It’s the end of history, if you like.
To illustrate his point, Prof Gordon proposes what he calls a simple thought experiment. You can either keep all the technology we seem to have grown so dependent on in the past decade, mobile phones, tablet computers, Twitter and so on, or you can have any one of the transformational technologies of the second industrial revolution, but not both.
This is a clever trick to play, for the answer is obvious. However, it is also faintly disingenuous, because in reality technological change tends to be incremental, frequently goes unexploited for long periods of time, and certainly does not fit as neatly as Gordon suggests into these separate historical phases.
It is not hard to pick holes in Prof Gordon’s argument. What about the Renaissance, or indeed the invention of the printing press? How come these big leaps forward didn’t have the same traction as the inventions of the second industrial revolution? As for running water, the Romans were using this work saving device more than 2,000 years ago. Why did it take so long to catch on?
I’m sorry, but I don’t buy any of this, and nor do Julian Jessop and Andrew Kenningham of Capital Economics, who in a recent analysis, roundly and rightly dismiss Gordon’s ideas as a load of bunkum. “There is no compelling case that the pace of technological change and productivity growth in advanced economies will be slower in future than in the 20th century,” Capital Economics concludes. “On the contrary, there are good reasons to believe it might accelerate”.
This is not just because of the wealth of developing new technologies and innovations, which for the time being remain largely under exploited (what about bio and nanotechnology?), but it is also because transformational growth is rarely ever a universal affair. In fact, during the millennium-long stagnation Gordon refers to, there were plenty of episodes of much faster, localised growth. The distinguishing feature was not inventiveness, but the political and institutional environment necessary to allow commerce to flourish.
Today, growth in the world economy as a whole is proceeding at a pace faster than at almost any stage in history. This is mainly to do with the developing world playing catch-up, which in itself creates some very negative, structural headwinds for existing advanced economies.
Yet you cannot help but think that this overall growth in human potential, wealth, knowledge and computer processing power will in time produce levels of inventiveness we can as yet only dream of.
In any case, the application of technology is more the product of macroeconomic progress than its underlying cause. The two are sometimes quite difficult to disentangle, but I don’t think there is any doubt as to what’s really driven growth this past 250 years capitalism, fractional reserve banking and free enterprise.
And if we are looking for reasons why growth in advanced economies may now have stalled, it is not because human inventiveness has hit the law of diminishing returns, but because - grown lazy on entitlement, big state spending, and the prioritisation of leisure over work - we’ve lost our appetite for risk, enterprise and self improvement. If things don’t change, then Gordon will very likely be proved right, but it won’t have much to do with technology. The financial crisis has provided Western economies with a mighy wake-up call; they ignore it at their peril.