Monday, February 1, 2016

Can we maintain our present rate of increase of consumption?

“we cannot long maintain our present rate of increase of consumption;the cost of fuel must rise, perhaps within a lifetime, to a rate injurious to our commercial and manufacturing supremacy; and the conclusion is inevitable, that our present happy progressive condition is a thing of limited duration.”

I was reminded of this quote last week by the many reviews of Robert Gordon’s new book The Rise and Fall of American Economic Growth . The quote is not from Gordon. It is from the English economist Stanley Jevons, writing in 1865. The point is that economists don’t have a great record of making predictions about when modern economic growth will end. I think economists are actually pretty good at predicting a lot of things, but you do not receive a crystal ball with your Ph. D.

Schumpeter distinguished between the adaptive response and the creative response. The adaptive response is what economic theory does well. When the price of one good rises you reduce your consumption and switch to relatively cheaper substitutes. These sorts of changes are predictable. The creative response is not predictable. In retrospect you can usually tell a story, consistent with economic theory, about the invention of the spinning jenny, or kerosene, or transistors, but you can’t predict it beforehand. Modern economic growth comes from these fundamentally unpredictable creative responses. I would agree with Gordon that the innovations during the late nineteenth and early twentieth centuries had a particularly large impact on physical well-being, especially water purification and sewage systems, areas in which there is apparently still some work to be done. I do think, however, that he understates the impact and the potential future impact of recent developments in science and technology on people’s lives.

I am optimistic that as long as people have the opportunity to be creative, innovation will continue. As for headwinds in the U.S. (factors militating against continued growth) I also think we should not think about the U.S. as if the rest of the World did not exist. I am hopeful that more than a billion people in Asia will have more opportunities to add to the stock of knowledge than they did in the past, and that the whole World might benefit. Of course, I could be wrong too.  

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