Economic Pessimism is wrong. You should be optimistic because of recombination

I was having a discussion with some colleagues  about Pikety’s book earlier this week. One particularly interesting argument someone eloquently (and forcefully)  advocated was that the real value of Pikety is not the argument about inequality. Instead, it is evidence that the period of post-war economic growth is an anomaly, and we should get used to permanent growth rates of 1-2% forever more.

This issue of economic pessimism goes to the heart of much of the current debates on economic policy. Is productivity growth limited? Do we face inevitable stagnation, which will force bitter, socially disruptive policy choices? Are the central banks just blowing hot air into a burst balloon?

Of course, you can argue that the current situation resembles the miserable dark period of the 17th century: on that score I’d highly recommend reading the great historian David Hackett Fisher’s The Great Wave: Price Revolutions and the Rhythm of History. There are previous instances of overpopulation, demographic headwinds, commodity price pressure, and the rising cost of basic goods like shelter and falling real standards of living.

But I’ve noted plenty of contrary evidence, like this the other week, or this.

And I think there is one overwhelming argument against techno-pessimism and its related fear of economic stagnation. Another fabulous recent book is W. Brian Arthur’s The Nature of Technology: What It Is and How It Evolves. Arthur argues that technology largely advances by recombination of existing technologies in new ways.  Technological recombination naturally creates new niches and new needs and new problems, which in turn call forth new solutions. (I’ll be talking about Arthur and the Sante Fe approach to systems and complexity a lot in the future.)

The more building blocks you have lying around for reassembly, the more creative technical progress is possible. And we have more such blocks lying around for reassembly than ever before in history, with better technologies (like full-text journal articles on the internet) for passing knowledge around.

That argues for expecting more technological changes, not less. I think there are profound challenges in the institutional and social adaptations needed to cope with economic evolution, but at root I am optimistic about economic growth. We’re not going back to the 1700s.


2017-05-11T17:32:43+00:00 June 11, 2014|Adaptation, Insight & Creativity, Technology|

Technology isn’t the problem, Short-term management thinking is.

Is technology going to displace workers and hollow out the middle class? Or is technology stagnating instead and bringing the great era of productivity gains to an end? Here's a good point in the Harvard Business Review:

It’s a lively debate, but here’s the perspective that isn’t being voiced: There’s more to progress than technological innovation. Breakthroughs can also result from innovations in management.

Past work by another economist, Paul Romer, helps make the point. He explains that the history of progress is a history of two types of innovation: Inventions of new technologies, and introductions of new laws and social norms. We can make new tools, and we can make new rules. The two don’t always march in lockstep. In a period of time where one type of innovation flags, the other type can sometimes forge ahead.

Go back to some of Peter Drucker's ideas, the authors say.

We would also argue for a different managerial mindset toward productivity and the best use of technology – specifically to adopt what Peter Drucker called a human centered view of them. Cowen is right when he describes today’s technologies as displacers of human work, but that is not the only possibility. Managers could instead ask: How can we use these tools to add power to the arm (and the brain) of the worker? How could they enable people to take on challenges they couldn’t before?

Management has become too short-termism in thinking, they argue, which often crowds out the innovation in how to use technology to alter social practices.

Perhaps a better way to put it is that social and institutional innovation always takes longer than technological innovation. Most of the current institutional framework we take for granted – joint-stock corporations with corporate personality, accounting (more than book-keeping), regulation, consumer credit, white-collar jobs – developed after the industrial revolution. They were invented to cope with economic change and social upheaval.

The answer to current economic challenges is not necessarily, as the liberal left thinks, massive new redistribution schemes between the “1%” and an increasingly impoverished lower middle class and poor. It's new social feedback loops and institutional innovation. And better management figuring out new ways to add value.

Picking higher-hanging fruit

Pessimism about technology and growth has become fashionable recently, following arguments by Robert Gordon and Tyler Cowen. The “low-hanging fruit” is gone, says Cowen in The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History.

The great economic historian Joel Mokyr is having none of it, however. People develop better tools, which lead to better new technologies, which lead to better tools.

If this historical model holds some truth, the best may still be to come for modern societies. Only in recent decades has science learned to use high-powered computing and the storage of massive amounts of searchable (and thus accessible) data at negligible costs. The vast array of instruments and machines that can see, analyze, and manipulate entities at the sub-cellular and sub-molecular level promise advances in areas that can be predicted only vaguely. But these tools, to beat Cowen’s metaphor into the ground, allow us to build taller ladders to pick higher-hanging fruit. We can also plant new trees that will grow fruits that no one today can imagine.

I previously mentioned Mokyr here, especially the interaction between formal expertise and practical know-how in the take-off of the industrial revolution.

The question is, of course, how it affects the labor market.


2017-05-11T17:32:44+00:00 April 5, 2014|Adaptation, Economics, Organizational Culture and Learning, Technology|