THE US economic recovery carries on apace, with a net rise in employment of almost half a million over the past three months. The Office for National Statistics has decided that the UK never had a double dip recession, and the texture of the economic news has turned positive.
But economics is not called the dismal science for nothing. What of the longer term? Here, there is no shortage of doom and gloom. Stephen King, chief economist at HSBC, has just published an interesting and well-written book When the Money Runs Out. Pessimism also infects the high command of the US academic economics establishment.
The source of these melancholy views is an influential paper by Robert Gordon, published by the National Bureau of Economic Research in August 2012. The title poses a stark question: Is US Economic Growth Over? Gordon’s answer is basically “yes”. There are a few nuances to this, but he takes a bleak view of the prospects for the US economy during the rest of the twenty-first century.
For Gordon, the basic problem is that all the major technological innovations are behind us. The period between 1750 and 1850 saw the steam engine and the railways. In the closing decades of the nineteenth century, the foundations of our modern way of life were laid down with the internal combustion engine and electricity. He argues that, in 1960, we entered the information age and, although this has brought benefits, the boost to growth that it provided is now fading.
A key question is whether this is true. Predicting how new technologies will be used is fraught with difficulty, and their full potential can take many decades to realise. Thomas Watson, chairman of IBM, made a notorious statement in 1943: “I think there is a world market for five computers”.
Even after the event, the impact of new technology can be difficult to identify. There is still a powerful school of thought among economic historians that the railway made little difference to the growth of the US economy in the nineteenth century, a proposition which strikes the layperson as absurd, but which is nevertheless believed.
But it is not just in the IT and communications sectors that dramatic advances are already taking place. Major breakthroughs in energy use and extractions have been made, with 300 miles per gallon cars, shale gas, and the huge potential of both renewable energy and energy storage. Biotechnology is even more exciting. Humans may soon have the ability to live healthy lives to the age of 200 and beyond. Sociobiology may give us deep new insights into how to deal with major social issues, such as drug addiction and crime.
Capitalism has been incredibly inventive during the 250 years of its history, and there is no reason to believe that this will not continue. The crucial requirement is not technological but political. The basic institutional structures of the rule of law and private property must be maintained so that innovators can reap the fruits of their labours.
Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World.