The Wealth of Humans, Part II: Some Stylized Facts, and Technological Progress

<Part I>

Let’s start with some stylized facts about the economy, in particular some troubling trends over the past several decades that have become apparent in labor markets (the examples here are for the US, though broadly similar patterns persist across most advanced economies).

For one, median wage growth has been low:

atlanta-fed_wage-growth-tracker

And in real terms, median household income has still not reached the level it was at even two recessions ago:

fredgraph3

Additionally, productivity growth has been low (and decreasing since 2000 excepting a moderate burst during the Great Recession):

fredgraph1

Finally, the labor share of the economy has been decreasing, particularly since about 2000:

fredgraph2

 

All of these suggest that there is a glut of labor available. In supply and demand terms, the idea is that the labor supply curve has shifted out, driving down wages.

So what’s behind this? Economists generally agree it has something to do with technological progress: either there is too little, or too much.

Probably the most prominent proponent of the ‘too little’ hypothesis is Robert Gordon, who argues as much in his recent book, The Rise and Fall of American Growth. The basic story is that for virtually all of human history, the modal rate of economic growth has been essentially zero. The span of time extending from the Industrial Revolution to the end of the postwar era, which saw remarkable and sustained technological and economic growth, was actually highly unusual. The rather placid growth of the past 60 years is merely a return to normal. Most of the technological advances during this period, steam power, electricity, flight, and so on, led to completely transformed lives.

If you think of the today’s average home kitchen, and imagine someone from 50 years ago being transported into it, they wouldn’t have much of a problem finding their way around. Now imagine someone from 1916 being transported into the average 1966 home kitchen. The refrigerator, microwave, dishwasher, would all be totally fantastical. Even running water may be a surprise. What do we have today that could similarly wow our unwitting time traveler?

The obvious answers are computers and the internet, but the techno-pessimists have a rejoinder to this: “You can see the computer age everywhere but in the productivity statistics”, to quote Robert Solow. Here’s another look at the productivity numbers:

oph

We can see that other than a short lived burst in the early 2000s, this measure of productivity seems to have shifted to a lower growth regime sometime in the 70s. So the argument is that, sure, smartphones are nice, but they don’t really contribute to economic growth. Apparently Robert Gordon liked to pose the following question: given the choice between a life with all the available technology pre-2000, or a life with all present day technology except indoor plumbing, which would you choose?

The answer was perhaps once obvious, but with each passing year it becomes less and less clear. This is why Avent is on the side of too much technological growth being the cause of today’s problems. He’s more convinced by the arguments put forward in works like The Second Machine Age: Computing is itself a new general purpose technology like steam power, not just a fancy dishwasher, and will transform our lives like electricity did.

So why the low productivity? Well, many of the new technologies of the Industrial Revolution took several decades to show an effect as well. It takes time, not just for the technology to be adopted, but for us to change our lives to take advantage of the new possibilities.

Rather than being mired in a lengthy stagnation, we are instead on the precipice of a new Digital Revolution. And much like the Industrial Revolution, our lives and social structures will have to adapt to accommodate the changes it will bring.

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The Wealth of Humans, Part I

One of my most anticipated books of the year has arrived: The Wealth of Humans, by Ryan Avent. Avent is a writer and editor at The Economist, and author of The Gated City, a Kindle Single from a few years back that is absolutely worth reading. The stated mission of The Wealth of Humans is “to examine the challenge of ordering our lives and our labour in a world of technological abundance”.

Besides being a nod to Adam Smith’s foundational work, The Wealth of Nations, The Wealth of Humans has a double meaning. In one sense, it is about the wealth humans possess in the form of social capital, which is a key concept in the book. In another sense, it refers to the overabundance of human labor in a world of increasing automation.

From the outset, I like Avent’s approach. While I’ve read a fair amount on the future of work, Avent is the first to challenge me to think about work as a fundamentally social enterprise (rather than as an economic given), and the challenges of reorganizing society in the face of the (potential) end of work. In his words, “the promise of the digital revolution is an end to work…Creating mass digital prosperity is not about building institutions which ensure all workers benefit from economic growth; it is about building institutions which provide for people who do not work because their work is not necessary to generate economic growth” (pp.23-24).

At the moment I’m about halfway through the book, and will go into further detail once I’m finished. In the meantime, here is a lecture Avent recently gave at the London School of Economics, which is a nice quick summary of the ideas in the book (though I still highly recommend reading it!):

Political Order and Political Decay, Part I.5

Before getting into the examples of political development Fukuyama goes through in the book, I thought it might be useful to quickly clarify what a strong state is not.

A strong state is not necessarily a large state: there is an important distinction. A strong state has high quality of governance, whereas the size of a state refers to the scope of its functions. The ideal scope of the state depends on the society; a strong state is always preferred to a weak state. To illustrate the point that quality of government is far more important than scope, below is a graph of Govt Revenue as % of GDP (as a proxy for the size of the state) vs Govt Effectiveness (as measured by the World Bank’s World Governance Indicators), with the size of text scaled to the country’s GDP per capita.

gevsrev

Note that while rich states can exist across a span of government sizes, no country can be rich with poor governance. Any outliers, such as Kuwait and Qatar, are of course petro states .

To further illustrate the point, below is a graph of Government Effectiveness vs log GDP per capita that demonstrates the very strong correlation between the two.

gdpcvsge
This does leave open the possibility of causation running in the other direction. Perhaps it’s that only rich countries can afford good governance?  While I can imagine that causality can run both ways to a degree, I think again the case of petro states indicates that wealth is a not a free ticket to good governance.