Resisting Stagnation and the New Dark Age
by Benjamin Studebaker
There’s a lot of talk lately by Summers, Krugman, and others that we may be in a period of secular stagnation, in which the rate at which the economy grows in the wealthiest countries falls substantially and permanently. Observing this, some are quick to point to demography as the cause. If populations are not growing as swiftly as they once did, it would indeed make sense that growth rates would fall. Under this thinking, slower growth isn’t a problem, because per capita growth is theoretically still strong–the economy is growing slower in aggregate, but it’s growing at the same speed relative to the size of the population. The trouble is that on further investigation, the demographic explanation does not sufficiently account for what’s going on. Not only are growth rates slowing, but per capita growth rates are slowing, and have been slowing for a while, beginning far before the recent economic crisis. This throws Kurzweil’s theory of accelerating returns into doubt, and undermines the central precept underlying our capitalist society–that the labors of this generation today are meant to make the next generation’s lives go better. If stagnation is the way of the future, it’s a much more serious problem than we presently recognize, one that ultimately threatens not merely our dreams of better lives for ourselves, but the very stability of our civilization.
First, it’s important to show that demography doesn’t fully explain what’s going on. I’m often fond of pointing to this graph, which shows that average annual growth rates are poorer now than they were in the 50’s and 60’s:
The demography guys claim that this is a natural process because population growth rates have slowed over this same period, such that the a slower growth rate might still nonetheless be indicative of a similar rate of progress given that it’s being dispersed over a smaller number of people. The population data does indeed confirm that this is one of the things going on:
They claim that the high growth rates experienced in the 50’s and 60’s were an aberration, a consequence of a booming population rather than a realistic permanent target rate.
However, I contend that this does not fully explain slowing growth rates. If we stop looking at the raw growth rate and instead look at growth in per capita GDP, as Robert Gordon has done, we see that even accounting for changes in the rate of population growth, our rate of improvement is much worse than it was a century ago:
The implication of this data should shock you–if correct, Gordon’s data indicates that by 2100, growth rates in the most advanced economies will be equivalent to the rates experienced in 1700. It’s not merely the 50’s and 60’s that would be a “blip”–the entire industrial revolution would be an aberration. This would have a slew of consequences, none of them good:
- Dreams and Hopes Dashed–forget the singularity, cryogenics, space colonization, jet packs, whatever your pet future technology from the world of science fiction was. The true model for the future is not Star Wars or Star Trek, but The Sims–a perpetual suburban dystopia.
- An End to the Ethos of Progress–the social and cultural motivator that has kept our societies and economies running these past couple centuries has been the thought that through our work, we would build substantially better lives for ourselves and our children. People in feudal times worked at subsistence level because they had no reason to believe that additional toil would result in anything valuable. As per capita growth rates fall, this feudal mentality will likely return as incentives collapse, only further reinforcing the decline.
- Nihilism or a Return to the Churches–before the industrial revolution, what toiling the peasants did do was not for progress or gain in this world, but for admission to heaven in the next. During the industrial revolution, religions were weakened by the prioritization of progress. Either these religions will make a recovery, or human beings will find themselves increasingly beset with a sense of futility and purposeless. Their coping mechanism? “YOLO”–extensive drug use, risk-taking, and a collapse in productivity.
- Disintegration of the Welfare State and Capitalism–as stagnation robs citizens of positive incentives to work, the state will increasingly have to rely on sticks in order to ensure that the subsistence level is met, just as the feudal lords once did. That means that the consequences of being unproductive will have to worsen. Taken to its logical conclusion, the result would be de facto serfdom, with citizens compelled to labor by the state. Capitalism itself would collapse, as there would be no point in generating surplus wealth for investment.
- Collapse of Democracy–those who are held in permanent economic inequality as serfs are will soon find that their masters no longer consider them equal politically either. But perhaps most depressingly, in a world of increasingly medieval sensibilities, the people will find themselves incapable of truly caring.
- Localism, Communitarianism, and the Return of Old Values–unable to identify with broad social principles like “democracy” or “capitalism”, people will group themselves by family, tribe, or faith. This will increasingly make large political units impossible. Large federations like the United States would collapse, globalization would reverse, and old sexist and racist cultural mores would resurface.
- Inability to Fight Global Warming–without technological development, the climate change the industrial revolution is bringing about will be impossible for future generations to combat. Coastal cities will flood and millions will die.
This may sound far-fetched, but it roughly corresponds with the way in which modern historians believe the Roman Empire disintegrated. The Romans relied on expansion and the worldly wealth and glory the state brought them to provide for their sense of purpose and social coherence. As Rome became increasingly unable to provide for these improvements in living standards for its citizens, they turned to Christianity, made debt slaves out of the population to compel them to work, replaced the republic with the principate, and finally with the dominate. Eventually, Rome itself disintegrated, splitting into a myriad of small states that remain divided from one another to this day. We underestimate the extent to which a sense of progress in our lives and in the wider life of society is psychologically essential to the way we presently conduct ourselves at our peril.
That said, this trend can and should be fought. Something is making it harder for our civilization to make advancements at the pace it once did. This cause, once located, might be reversible. I hypothesize that the reduction we have seen in technological advancement over the past half century is caused primarily by market failures. The kinds of technologies that might enable us to grow at higher rates have entry barriers that are too high for the private sector. In an economic system in which companies are expected to prove short-term revenue growth and profitability, big, open-ended, failure-prone investments at the borders of human possibility are not viable. Instead, investment has a tendency to rapidly accumulate in sectors that happen to show short-term gains, and the result is bubbles. The unfortunate reality is that what is profitable for the individual investor a week, a month, or a year from now is often not profitable for society. Indeed, these investments are often shown later to have been wasteful, when the bubbles pop. We need the state to invest in technologies and sectors that the private sector deems too risky, to absorb the losses private investors are unwilling and unable to absorb. Many of these state investments will fail, but this is by design–it is the state’s unique capacity to operate in a way totally unlike any business, to endure years and decades of financial losses that makes it uniquely suitable for this task. With the right application of human and intellectual force while our civilization retains the ethos of progress, the drive and determination necessary to affect great things, we might hit on some breakthrough that permits us to avoid the calamity that the steady state outcome undoubtedly is.
Reblogged this on dliwcanis.
Thanks for sharing!
I like this post very much! The prospects are indeed not that good, but they are not hopeless, either.
I’d like to comment in one statement though. You say, “Indeed, these investments are often shown later to have been wasteful, when the bubbles pop.” It is true that many investments turn out to have been wasteful, but some succeed; in their aggregate they are not a waste. Think biotechnology! Most biotech companies fail, but some have yielded great successes making the whole industry a success. Now, if you only think about non-productive & speculative bubbles, they turn out to be wasteful in the aggregate, too.
Thank you! I agree entirely–private investment is generally extremely useful as it puts to work funds that would otherwise lie dormant. In that line I was intending to refer to the kind of investments that contribute to bubbles, those that contribute to misallocations of investment due to unfortunate conflicts between what is most profitable for the investor over a short period and what is most productive for wider society in the long run. The issue there is not with investment per say, but with the distribution of investment throughout the economy. In this way, far more houses were constructed than were needed in the mid-2000’s, diverting funds that could have been better used to fund things like biotechnology companies purely because housing was considered the best way for individual investors and firms to profit and not because there was any well-considered basis for believing society as a whole required that number of houses.