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:
And in real terms, median household income has still not reached the level it was at even two recessions ago:
Additionally, productivity growth has been low (and decreasing since 2000 excepting a moderate burst during the Great Recession):
Finally, the labor share of the economy has been decreasing, particularly since about 2000:
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:
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.