Economist Robert Gordon garnered a great deal of attention in 2013 for his TED Talk, The death of innovation, the end of growth, based on his August 2012 National Bureau of Economic Research paper, Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.
According to Gordon, a professor at Northwestern University, the modern era of innovation cannot bolster U.S. growth to the same degree as the second industrial revolution.
The reasons are twofold. First, he argues, most of the big problems facing humanity were solved with inventions of the second industrial revolution, from 1870 to 1900. Electricity, the internal combustion engine, running water and other technologies enabled rapid growth for much of the 20th century.
Momentous productivity gains are achieved, for example, when women are freed from the drudgery of carrying water into the home, but they can only be reaped once. Digital technologies of the third industrial revolution have brought incremental improvements that “do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars or indoor plumbing changed it,” wrote Gordon.
Second, U.S. economic growth faces six headwinds: an aging population, a faltering education system, income inequality, foreign competition, global warming and debt. Many countries face one or more of these hurdles, but Gordon thinks the combination and severity are unique to the U.S. “My guess is that a Canadian or Swedish economist looking at the past and future of his country would not be so alarmed.”
Tyler Cowen makes a similar argument in The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. Cowen, an economics professor at George Mason University, cites challenges similar to those named by Gordon, plus access to previously uncultivated land, led to “a big and predictable stream of revenue growth across most of the economy.” “When it comes to the web,” wrote Cowen, “those assumptions are turning out to be wrong or misleading.”
On one measure, the two are correct: the United States’ contribution to global economic growth has declined each year since 1999, while the roles of countries like China, Brazil and South Korea have grown.
Yet the U.S. continues to be a global leader in innovation. In the 2013 World Intellectual Property Organization (WIPO) Global Innovation Index, the U.S. ranks fifth overall (Switzerland ranks first, followed by Sweden, the United Kingdom, and the Netherlands).
Critics draw attention to assumptions behind Gordon’s conclusion. His U.S.-centric view overlooks some 3 billion people worldwide without running water, and even the most advanced economies have not reached nirvana. In light of cancer, AIDS, and Alzheimer’s disease, not to mention malaria and neglected tropical diseases, “I think it is simplistic to say we have solved everything that needs to be solved,” said Bob Foster of the UCLA Anderson School of Management.
Another limit to Gordon’s theory is the primacy given to gross domestic product (GDP) growth. Economist Simon Kuznets proposed GPD growth as a measure of progress in the 1930s, but Kuznets himself pointed out that “the welfare of a nation … can scarcely be inferred from a measure of national income.” MIT economist Erik Brynjolfsson pointed out that, by some measures, the information sector — which includes publishing, software, data services and telecom — has barely grown since the late 1980s. “We’re underestimating the value of the part of the economy that’s free.”
Today, Gordon regrets framing his prediction in terms of innovation. “Almost all of the criticism was directed at the faltering innovation … Most of the commentators ignored the headwinds because they were so uncontroversial.” The core of Gordon’s argument is not that innovation will cease, but rather that the headwinds turn innovation into a Red Queen’s race, in which “it takes all the running you can do to keep in the same place” (from Lewis Carroll’s Through the Looking Glass).
The headwinds Gordon cites — an aging population, a faltering education system, income inequality, foreign competition, global warming and debt — are indeed daunting. They can also be seen as driving forces for innovation.
Consider Japan, where the population is aging faster than in any other country, because of declining birthrates and long life expectancy. Companies that honed their skills by automating production of electronics and automobiles are now designing robots to ease the challenges of the elderly and their caregivers. For example, an added benefit is that the technology developed for the elderly may have industrial applications that could extend the working years of younger members of the country’s shrinking population.
Average age is also on the rise in the United States. In 1965, when Medicare was created, 10 percent of the population was over age 65 and eligible. That number will be 20 percent by 2030. But the cohort currently aging, America’s baby boomers, have been unconventional at every stage. According to Michael Hodin, executive director of the Global Coalition on Aging and a fellow at Oxford, “An active, productive aging is creating and will continue to create a culture shift in which ‘seniors’ break out of the traditional roles of need and dependency and become vibrant producers in society.”
Many of the headwinds are interconnected. According to Gordon, “Globalization pushes down wages at the middle and bottom, thus aggravating inequality. And educational failures also help account for the skill deficits that prevent many young people from qualifying for job openings.”
Interconnected problems lend themselves to interconnected solutions. As Japanese companies look to rake in “silver yen” with high-tech innovation, U.S. companies are turning to a centuries-old solution to address the “silver tsunami.” Apprenticeship programs have long been widely used to train workers in Switzerland and Germany. Apprenticeship programs mitigate the loss of workplace knowledge as boomers retire en masse. On the education front, there is evidence that students working as apprentices perform better academically.
It may be that recent years of below-trend growth are not a new normal but a transition period as we begin to see what the third industrial revolution makes possible. More than two centuries after James Watt patented the steam engine, steam turbines are still the dominant source of electricity worldwide. Gordon himself credits the second industrial revolution with driving growth from 1870 into the 1970s.
One area that people have only begun to tap is Big Data. In the wake of Hurricane Sandy, a crowd-sourced traffic information application called Waze allowed the Federal Emergency Management Association to respond effectively to gas shortages. Within an hour of receiving a request for help, Waze programmers created an easy way for users to report which gas stations were open and had gas available. Fuel deliveries were routed to the places they were most needed.
The accessibility of digital technology means fewer people can start things faster, more effectively and younger. Three-dimensional printing and other forms of additive manufacturing are still in early stages but have the potential to radically disrupt ideas about manufacturing and economies of scale.
In The Wealth of Nations, Adam Smith famously described a pin factory. Individually, he said, the 10 workers would have struggled to produce 20 pins per day, but by working together and specializing they could produce more than 48,000 pins a day. Today, not only can workers efficiently produce individual widgets, they can design programs allowing them to produce widgets to order.
Three-dimensional printing is already being used for made-to-order hearing aids and dental implants, and bone replacements will be available in the near future. Health care accounts for 17 percent of U.S. GDP, and is expected to increase to 23 percent of GDP over the next two decades. Gene sequencing, wireless physiological sensors, and digital anatomical imaging are creating ever more detailed patient information and customized treatments. For example, by sequencing the tumor DNA of cancer patients, doctors can tailor treatments only to patients who will benefit.
It may be that customization, not innovation, is the driving force of future growth.