A Time to Sow and a Time to Reap
We are living in an age of deep pessimism about humanity's economic prospects. The global financial crisis has receded, but the hoped-for robust and lasting economic recovery has failed to arrive. Northwestern University Professor Robert Gordon's pessimistic bestseller, The Rise and Fall of American Growth, argues that the innovations being generated in the 21st century will not drive economic growth as much as the great inventions of the past. Larry Summers, one of the world's most influential economic thinkers, warns us that we are living in an age of "secular stagnation" in which global economic growth is permanently stuck in slow gear.
But Summers did not invent the idea of "secular stagnation." Instead, another Harvard economist, Alvin Hansen, first introduced this term in a speech delivered in 1938. In this speech, Hansen observed that American economic growth had long relied on a vast physical frontier of new territory, high rates of population growth, and fundamental innovations in technology. By the 1930s, the physical frontier was long gone, America's population was growing more slowly and aging more quickly, and the rate of technological progress seemed subdued. Like the modern thinkers who echo his thoughts and even reuse his terminology, Hansen saw limited grounds for hope and much reason to be pessimistic.
Looking back from our 21st century vantage point, though, we can see that Hansen's fears were not realized. After World War II, America enjoyed a surge of rising productivity and expanding prosperity the likes of which it had never known. Europe and Japan rebuilt faster than anyone thought possible, and their entrepreneurs and inventors soon made important contributions to the stream of inventions and products that buoyed Western living standards in the postwar decades.
This golden age appeared to come to an abrupt end in the 1970s, as the effects of the great inventions of the 20th century began to fade and productivity growth, especially in the United States, dropped to much lower levels. MIT economist Bob Solow was alarmed by the fact that productivity growth remained low well into the 1980s, despite the increasing ubiquity of computers and other kinds of information technology. "I see computers everywhere," he famously quipped in 1987, "except in the productivity statistics."
Again, from our modern vantage point, we know that Solow was quickly proved wrong, just as Hansen had been. Within just a few years of his famous complaint, the information technology investments that Solow saw everywhere created a productivity surge that was about as powerful as that of the 1950s and 1960s.
Time after time in industrial history, we see periods of rapid productivity growth followed by much slower periods, as illustrated in the first chart. These patterns arise because invention is not a smooth and steady process but a lumpy and uncertain one. It is very hard to know in advance which of the many promising technologies currently under development will actually create whole new industries and whole new dimensions of human possibility. And, when the global economy is stuck in a period of slow productivity growth, as it appears to be today, it is very hard to know when and how it will end. But the industrial history of the last two centuries provides us with abundant evidence that periods of "secular stagnation" eventually end, because human ingenuity always succeeds in coming up with new technologies sufficiently impactful to drive another era of accelerated productivity growth. So long as we sow the seeds of education, research, and development, we can reasonably expect that a harvest of new breakthroughs will eventually come. But we must be patient. In industrial history, there is a time to sow and a time to reap.
In times of disappointing economic performance, we are tempted to abandon the policies that produced growth in the past but seem to fail us in the present. But the basic elements of a market-driven approach to economic progress have proved their worth over time. This approach includes a vital role for government in providing high-quality education at all levels, building the infrastructure needed for a modern economy, enforcing property rights (including intellectual property rights), and supporting basic scientific research. But it also requires that government leave the process of turning science into new products to the private sector. If governments combine the functions mentioned above with a strong commitment to economic openness—to a reasonably free flow of goods, capital, and people within and across countries—that will help ensure that new ideas, regardless of where they arise, receive the legal protection, financial support, and commercial development needed to turn them into new products and, sometimes, whole new industries. And open markets ensure that nations can benefit from this process, even when the invention takes place abroad.
One of the surprising lessons of British history, illustrated in the second chart, is that the living standards of the average British worker grew much more rapidly after World War II, during a period of American economic dominance, than they ever had during the 19th century zenith of British industrial supremacy. Britain was able to import the inventions of larger, more dynamic economies, like the United States, Japan, and Germany, and those inventions drove British growth.
Today, many Japanese may look enviously across the Pacific at an American economy that appears to be growing far more rapidly than Japan's has for decades—but, in fact, Japan's rate of GDP growth adjusted for the size of its working age population has been even faster than America's, in part because Japan has full access to the innovations of Silicon Valley as well as its own. In these disappointing times, demagogues, like Donald Trump, are advocating an abandonment of our longstanding commitment to economic openness as a path to economic salvation. But it is a continuing commitment to openness that offers our best hope for the next wave of productivity growth.
From the beginning of the industrial revolution through the end of the 20th century, the world's industrial advance has rested on a very narrow base of talent. The inventors who created Britain's first industrial revolution represented a tiny fraction of the world's population. The second industrial revolution of electricity and motorization was driven by a larger population of engineers, technicians, and professional managers. But the world's inventors were still mostly male, mostly European or American, and almost entirely resident in a handful of Western countries. Today, large developing nations like India and China are educating millions of engineers and scientists. And modern information technology allows engineers in India or China to collaborate in real time with the best, brightest, and most experienced inventors in Japan or the United States. In my research on the globalization of multinational research and development, I have found the quality of the inventions created by engineers working for multinational firms in China is as high as the quality of inventions created by these multinationals in their home countries. The rise of inventive capability in emerging markets is not a threat to Japan and the West. Quite the contrary, it represents a massive broadening of the global talent pool that is our best hope for a new wave of productive invention. In time, it will produce a new wave of inventions that will enrich our lives and the lives of our children. Realizing the potential benefits requires an ongoing commitment to openness—to global trade, global investment, and the global movement of human talent—and a commitment to market-driven invention. That commitment can seem costly at times like this. But the long-term benefits are well worth the cost.
The current slowdown is nothing new, nor will it last forever. What we must do now is continue to sow, with patience and courage. In time, we shall reap.