The idea that innovation and new technology have stopped driving growth is getting increasing attention. But it is not well founded
BOOM times are back in Silicon Valley. Office parks along Highway 101 are once again adorned with the insignia of hopeful start-ups. Rents are soaring, as is the demand for fancy vacation homes in resort towns like Lake Tahoe, a sign of fortunes being amassed. The Bay Area was the birthplace of the semiconductor industry and the computer and internet companies that have grown up in its wake. Its wizards provided many of the marvels that make the world feel futuristic, from touch-screen phones to the instantaneous searching of great libraries to the power to pilot a drone thousands of miles away. The revival in its business activity since 2010 suggests progress is motoring on.
So it may come as a surprise that some in Silicon Valley think the place is stagnant, and that the rate of innovation has been slackening for decades. Peter Thiel, a founder of PayPal, an internet payment company, and the first outside investor in Facebook, a social network, says that innovation in America is “somewhere between dire straits and dead”. Engineers in all sorts of areas share similar feelings of disappointment. And a small but growing group of economists reckon the economic impact of the innovations of today may pale in comparison with those of the past.
Some suspect that the rich world’s economic doldrums may be rooted in a long-term technological stasis. In a 2011 e-book Tyler Cowen, an economist at George Mason University, argued that the financial crisis was masking a deeper and more disturbing “Great Stagnation”. It was this which explained why growth in rich-world real incomes and employment had long been slowing and, since 2000, had hardly risen at all (see chart 1). The various motors of 20th-century growth—some technological, some not—had played themselves out, and new technologies were not going to have the same invigorating effect on the economies of the future. For all its flat-screen dazzle and high-bandwidth pizzazz, it seemed the world had run out of ideas.
The argument that the world is on a technological plateau runs along three lines. The first comes from growth statistics. Economists divide growth into two different types, “extensive” and “intensive”. Extensive growth is a matter of adding more and/or better labour, capital and resources. These are the sort of gains that countries saw from adding women to the labour force in greater numbers and increasing workers’ education. And, as Mr Cowen notes, this sort of growth is subject to diminishing returns: the first addition will be used where it can do most good, the tenth where it can do the tenth-most good, and so on. If this were the only sort of growth there was, it would end up leaving incomes just above the subsistence level.
Intensive growth is powered by the discovery of ever better ways to use workers and resources. This is the sort of growth that allows continuous improvement in incomes and welfare, and enables an economy to grow even as its population decreases. Economists label the all-purpose improvement factor responsible for such growth “technology”—though it includes things like better laws and regulations as well as technical advance—and measure it using a technique called “growth accounting”. In this accounting, “technology” is the bit left over after calculating the effect on GDP of things like labour, capital and education. And at the moment, in the rich world, it looks like there is less of it about. Emerging markets still manage fast growth, and should be able to do so for some time, because they are catching up with technologies already used elsewhere. The rich world has no such engine to pull it along, and it shows.