This post originally began as one on where economic growth comes from. After working on it for a while I realized that a blog post was not a good format for dealing with the topic. It was a book and the book has been written many, many times over.
We don’t really know where economic growth comes from. It’s a product of savings, debt, money, work, natural resources, and the tremendous extent and enormous pliability of human wants. No one of those things is sufficient to create growth. In general, government debt and money that’s simply spent into existence by the government create less growth than private savings and debt because of deadweight loss.
We have not reached the fully realized extent of human wants. There are still millions of Chinese and Indians who are desperately poor, in want of even the basics of life. Even in the United States where most people have the basics of existence there are two things which exemplify that even here we have not reached the fully realized extent of human wants: the self-storage industry and the iPad. Even at the depth of the recession the self-storage industry was reporting stable earnings or growth. The iPad is, in essence, a loss leader for apps. Apps have possibilities as limitless as human ingenuity. That has not yet been fully realized, either.
We have also not reached the fully realized extent of the available natural resources. I won’t document that but, rather, give you a little parable that should give you the general idea. Once upon a time obsidian was traded over an enormous area—tens of thousands of square miles, the full extent of the known world. It was used for tools, decorations, everything that made life possible and enjoyable. Obsidian became scarce. Some clever nutcase began to use copper instead. They began to supplement copper with bronze because it was cheaper and tougher. Then iron. Then steel. Then glass and plastic and in the near future smart sand. Human beings live in a tiny skin on the outside of an enormous planet and all of the resources we utilize have been obtained from that skin. There’s a lot more planet and a lot more planets.
Finally, other than a few mentally ill individuals nobody wants healthcare. We want health. Unless and until we figure out a way to start paying for health and stop paying when we don’t get it, we’ll get care but we won’t get health. We should not be surprised when, if we’re willing to compensate people almost indefinitely for care, we get a lot more care.
In preemptive response to the retort that you can’t support a multi-trillion dollar economy or employ a lot of people on apps (an observation with which I agree), I would point out that people also said that you can’t build a billion dollar company selling hamburgers at fifteen cents each.
It takes a half dozen guys to design a great app. It then takes zero guys to manufacture it, distribute it, store it and sell it. I’m a big fan of apps but they aren’t hamburgers or steel. And many of them are designed to eliminate jobs — for example the iPhone app that allows you to walk into an Apple store and walk back out with earphones or a hard drive without ever interacting with a clerk.
So, if we are designing apps to eliminate jobs, and they can only be judged successful if they eliminate jobs, how can they both be successful and yet create net jobs? Schrodinger’s employees?
Incidentally, one of the biggest contributors to the success of apps, as well as smart phones, etc? GPS: a government program without which there would be no Google Maps or Foursquare or Garmin etc . . . I suspect the deadweight loss has been more than compensated for.
Dave,
Your description of resources reminded me of two things. First is Minecraft. Second is this post at another blog I spend time at.
Andy:
I lost my 15 year-old to Minecraft for about four months. He eventually escaped.
Apps are an example, Michael, not the totality. The fact that there are growth industries is prima facie evidence that there will be future growth industries.
For the last several decades the labor involved in direct production (mining, agriculture, factory floors, etc .) has been going down but the labor involved in indirect production (design, marketing, advertising, public relations, information technology including web page design and production) has been going up.
I think we need more of both, the labor force to support them, and public policies including foreign policy that support them. As I have said before here, that we are paving over prime farmland that agriculture, for example, is not seen as a major growth industry are due to poor public policy.
Specifically, I was thinking of this passage, written in 1939, and also the part on rationalization:
Michael. I haven’t play it, but I got drawn into to watching a series of tutorial videos which sucked way several hours of my time. I think it’s probably best for my health and marriage if I keep Minecraft far away from me.
Anyway, the point is that even though there are a finite number of resources in the game, they seem infinite.
I agree there will be future growth industries. But if the growth is in areas that require fewer human workers, while industries requiring human workers decline, even my limited math skills tell me we have a problem.
Is there a growing sector where large numbers of human employees will be required? As we’ve all been discussing, if we lose our cheap Mexican labor even previously labor-intensive industries like meat packing are likely to further automate.
So far apps (using the term very broadly for convenience) have cost us bank tellers, printers, toll booth workers, papermill workers, etc… Are we actually replacing those jobs? Or are we assuming as an article of faith that somehow, by some alchemical formula, jobs will simply appear? Would you say that the app economy has overall created jobs or destroyed them?
What percentage of the population can conceivably be involved in creating apps? 1%? 5%? And what percentage of workers are in danger of losing their livelihood because of these advances? 20%?
If we are moving to a future of jobless growth then we have a very challenging picture, because it’s going to play hell with:
So far, other than restatements of faith and appeals to a very limited segment of history, I haven’t seen anyone make a compelling case for a future where 95% of people are gainfully employed.
It’s a product of savings, debt, money, work, natural resources, and the tremendous extent and enormous pliability of human wants.
From my perspective, add raw population growth and the timing issues of demographics (and to quibble, I’d refer to money as liquidity) and you can put a bow on it.
As for the Chinese, Indians etc. There have alway been, and always will be, countries, subgroups in countries etc in various states of advancement, needs and wants. As I snarked recently, not too long ago he who had the best horse thought he was King of the world. And so I believe it to a conceit and terribly myopic to observe that such and such a class in the US has reached the zenith of their wants and needs.
And as for job destruction, you can read the very same historical hand wringing as we transformed from an agrarian society to an industrial society. What fraction of the population is employed in agriculture today? The fatal mistake will be to take this hand wringing to its popular leftist proposed solution: do not encourage necessary adaptation, but make people wards of the state at the expense of those who have proved themselves best at adapting. That’s a death spiral.
The iPad is, in essence, a loss leader for apps.
I know what you’re trying to say here, but technically speaking I’m pretty sure that’s false. Apple’s profits have always been built on hardware, not software. Early reports indicated the iPad’s profit margin to be about 40%; I assume it’s only gone up since then.
It’s true for the Kindle Fire, though.
While this may appear to be needling, given your preemptive retort I think it’s important to note. There remains a lot of profit in manufacturing, which should only increase as automation & technology progress. But it remains an open question as to whether that will result in net job creation.
So, if we are designing apps to eliminate jobs, and they can only be judged successful if they eliminate jobs, how can they both be successful and yet create net jobs? Schrodinger’s employees?
Good one.
Drew:
The problem with history is that it provides any example you want. When the South was in danger of losing its slave economy some people worried it would damage the economy for decades, maybe longer. Guess what? It did. The South still lags the rest of the country. When agriculture was mechanized people worried it would empty out places like Nebraska. It did.
The opening of trade around the Cape of Good Hope killed the economies of central Asian countries that sat astride overland routes, and those economies never recovered. Look around the world and you see the wreckage left by great powers and small whose economies failed. Spain. Portugal. Mali. Armenia. Ghana. Venice. Even Rome to an extent. A lot of the failed states and declined states you see around the world were once rich and important. Some fell through war, but a lot fell for economic reasons: a resource played out, or technology changed, or demand disappeared, or they lost a vital competition.
What’s foolish is to imagine that we alone are immune to all of that.
Michael, if what you’re saying is that we are unlikely to need a large increase in unskilled, entry level employees, I agree. That’s why I think importing an unskilled labor force is imprudent and why we shouldn’t keep trying.
If you’re saying we’ll never need workers ever again, I disagree. I think we’ll continue to need workers with a variety of skills in an ever-increasing variety of areas, the requirements for which will also change. The days of going to work for GM on the assembly line and retiring 30 years later with a pension and fully paid healthcare are over.
Uh uh. They declined because they refused to adapt. China is the poster child for this. Five hundred years ago they were the richest country in the world. The decline was due to changing circumstances (as you point out), war, population increase, and other factors. But mostly just because they were stuck in the past. Not because they ran out of something.
China’s resurgence began when China opened itself back up to trade and abandoned some of its old ways. Gradually, of course. Climbing into the next energy level will require another spate of changes. Maybe they will, maybe they won’t.
I think the question is whether that need results in anything like full employment. I suspect not, but I’m not insisting it’s true — I don’t own a crystal ball — I’m just insisting that we don’t know one way or the other whether there will be full employment, or even whether the possibility for full employment exists. I’m not sure we can even say that future full employment is desirable. There are other ways to maintain a civilization.
We don’t know the effects of technological change, and one of the possible outcomes is a society in which only a minority is employed. I don’t know if that’s a good or bad thing, I could write the story either way.
I honestly don’t think there are. Hunter-gatherer societies had full employment; so did agrarian ones. The very idea of unemployment is an industrial era construct.
The issue is one of incentives. If people who don’t work because there are no jobs for them live every bit as well as those who do, why work? Why should those who can’t work be supported at that level? Because you’re afraid of them? I don’t see it. Because they’ll vote themselves benefits? The workers will just walk away. You’ll imprison the workers? That’s a tyranny. A tyranny would never support the indolent.
As to your knowledge point, we don’t know what the consequences of getting up in the morning will be or what will happen when we walk across the street. Perfect knowledge of the future isn’t necessary only a reasonable basis for belief and I think we’ve got that.
Dave:
Failure to adapt implies that adaptation was possible. When trade between Asia and the near-east and Europe turned maritime, what was the adaptation the Caucasus kingdoms might have made? They had no coastline. The realities of the time did not allow them to shift to manufacturing. They had what they had by virtue of geography.
Let me ask you this: had we not cleverly sat out almost all of WW1 and the beginning of WW2 and had we taken greater damage and the Europeans less, would we still be the sole superpower today? It’s not hard to re-play that game of Risk with an outcome rather less favorable to us. We grabbed a moment in time, just as Venice did in its day, just as many nations have.
Look how Americans react to the suggestion that we may have a workerless society. Adaptation isn’t easy and sometimes it’s downright impossible.
I think you’re getting ahead of yourself, Michael. The difference between 4% unemployment (generally considered the natural level of unemployment, the effect of people changing jobs, etc.) and 9% unemployment do not a workerless society make.
If the unemployment rate had continued to drop, I’d say you were on to something but it hasn’t. We’re in a Wily Coyote moment. Policies are directed to fending off change rather than capitalizing on it.
Would and have: the Roman bread allotment being the first example that comes to mind.
No one says the non-working would live every bit as well. There could still be advantages to work. In any event, people work all the time for reasons other than meeting their basic needs — Wikipedia is kept alive by volunteers who work for non-monetary rewards. Reddit. Linux.
The idea of public service — see everything from some of the better class of aristocrats to modern philanthropists — has persisted for quite a while.
I wasn’t thinking of 9%, I was looking ahead to a prosperous society where basic needs are met and say 40% of people are unemployed. Impossible? I don’t see why.
michael, you are arguing the Luddite fallacy, that rising productivity increases structrual unemployment. Productivity has essentially risen constantly since the beginning of the industrial revolution, but employment losses have always recovered over time. This time might be different, we may be approaching the end of history and the rise of robots, but history does not bear that out. Didn’t we just experience near record low unemployment a few years ago?
Didn’t we just experience near record low unemployment a few years ago?
Didn’t that require the largest real estate bubble and one of the largest financial bubbles in the nation’s history?
If the unemployment rate had continued to drop, I’d say you were on to something but it hasn’t.
Dave, you’re constantly warning that the recovery has been largely artificial and that another recession may be right around the corner. So why wouldn’t another unemployment drop be right around the corner as well?
I’m not saying we’ll get to Michael’s 40% unemployment anytime soon. But we’re already at something like 20% underemployment, and I don’t see that dropping substantially anytime soon. Something has changed structurally.
Underemployment is a tricky term. Maybe I think that because I’ve been gainfully underemployed for the last 30 years. At any point during that period probably (although not certainly) including now, I could have gotten a fulltime job as an employee with some company or other. However, I really chafe being under anybody else’s direction at this point and I was burned too many times by employers to seek that out willingly or, heavens forfend, preferentially.
I also sometimes wonder about people who are holding down multiple part-time jobs. I’m the kind of person who routinely strikes up conversation with total strangers—sales clerks, people behind the counter at the Secretary of State’s Office, people I’m standing behind in the checkout line at the grocery store. You learn all kinds of interesting things that way and one of the things that I’ve learned is that lots of people work forty or more hours a week at multiple jobs. They’re not employed full time by anybody and they may not even admit to the hours they work. Are they overemployed?
As I’ve said in posts and comments I think that unemployment is staying stubbornly high as a consequence of bad policies.
PD:
The problem with history is it never gets the future right. The “Luddite fallacy” like most rules is right — right up to the point where it’s wrong.
Maxwell:
That’s my instinct, basically, that this time is different. But it’s just a feeling, little bits and pieces that don’t rise to the level of evidence let alone proof.
More generally I don’t buy an engineer’s eye view of the economy. I don’t believe it’s a machine and all you need is to open this valve and toggle that switch to cause a particular effect. I also don’t believe that a 15 trillion dollar economy only indirectly manipulated by one government, (ours) but intricately bound up with dozens of other economies (each in turn indirectly manipulated by all those governments) can be driven like a car.
I don’t think we’re driving, I think we’re being driven. And driven by forces that are only poorly understood — yes by interest rates and savings rates and taxes and all the rest. But also by herd instinct, fads, ignorance, enthusiasm, panic, genius, folly and a complex of societal and historical trends that cannot even be catalogued, let alone reliably manipulated.
I think in short that “it” is a system too complex for us to grasp let alone control. To me economists look like a bunch of 16th century physicians trying to treat plague: no doubt they’ll get it, someday, but not in time for this patient.
This might provide fuel for thinking about the question, “Where does growth come from.”
http://www.levyforecast.com/assets/Profits.pdf
Dave – As I’ve said in posts and comments I think that unemployment is staying stubbornly high as a consequence of bad policies.
I don’t buy it. Not that I think our policies are ideal, by any stretch of the imagination. But I don’t see where such a robust recovery is supposed to come from. Certainly not construction, where the most people were laid off, and where, as you have so often pointed out, prices probably need to fall further.
Manufacturing? Already producing jobs at a decent clip, but how many more is even possible at this point? The recent articles by Adam Davidson in The Atlantic and Tyler Cowen in The American Interest make clear how limited our expectations should be.
So we’re left with services, including healthcare, education, and retail. You’ve pointed out the problems in those sectors many, many times, and I agree with you for the most part.
Just don’t buy it.
Michael – I very much agree. I certainly think there are policies that should be tried and haven’t been – in general I’m in favor of government trying stuff, both Republican and Democratic approaches when it comes to the economy. But I have little faith that we’ll stumble upon a solution.
Ben – very interesting, thanks for posting that.
I think you’re looking at too short a horizon. The horizon I’m looking at is thirty years. Manufacturing shouldn’t have fallen the way it did in the early 80s; healthcare shouldn’t have grown the way it did. Construction should never have been as large a share of the economy as it became. Finance should never have grown so big. We should never have lost as much of the electronics industry, semiconductor industry, and on and on.
Bad foreign policy, trade policy, tax policy, healthcare policy, education policy, fiscal policy, energy policy, etc.
There have been absolutely horrible management decisions over the period, too. Automotive industry and airline industry, just to name two that have had egregiously bad management.