Economic growth not only thing that matters

When you say that the golden days of growth are over, expect lots of attention. Robert Gordon, a professor at Northwestern University, has been going around for several years making exactly this case. He now has a book, “The Rise and Fall of American Growth,” summarizing his argument in magisterial detail.

Gordon’s main thesis is that the low-hanging fruit of technology has, essentially, been picked. He argues that a small handful of Great Inventions – electricity, the internal combustion engine and a few others – propelled growth to dizzying speeds from about 1870 through 1970. But there are only so many big, important ideas to be discovered.

Gordon’s idea has a little more popular appeal than it ought to, for two reasons.

The first reason we are too eager to believe Gordon is that when we consider the impact of technology, we think in terms of how much it changes our lives. Economists generally believe that humans have a decreasing marginal utility of wealth, meaning that each successive increase in material abundance matters.

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The same principle applies to technological progress – inventions that take us from the brink of starvation to prosperity and security will seem more important than what comes after, even if both add the same to GDP. That can create the illusion of stagnation.

The second reason I think we’re too willing to believe Gordon is that technology isn’t the only thing that improves society.

Public services such as urban sanitation curbed disease and improved health dramatically. Health and safety regulations helped as well. Public education greatly increased workforce skills.

There is a good argument that big government was responsible for a significant amount of the growth in developed nations between 1870 and 1970.

But unlike science and technology, government probably has an upper limit of effectiveness. Some of the productivity slowdown we have observed may be due to our success in improving how we govern ourselves.

We should consider the possibility then that government quality, as much as technology, is what has stopped improving. •

Noah Smith is an assistant professor of finance at Stony Brook University and a Bloomberg View columnist.

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