The Great Stagnation and the end of Growth?

In the context of sluggish recoveries or even stagnations in developed countries,  Matthew Ridley discusses "The Great Stagnation" theory.

Prediction is hard. Predictions always tell us far more about the predictors themselves than they do about the future. This is as true for generations as it is for individuals: when those in past eras tried to forecast the technology that would exist today, they invariably extrapolated from the technological developments of their own lifetime. Occasionally this can lead to surprising accuracy (witness the prediction from 1910 that in a century’s time we would all carry 

“cordless telephones”[1]), but more often people get it wildly wrong. The late 1960s, a time that had recently witnessed the invention of the jet engine, the motorway and space travel, abounded with predictions that we would have flying cars and colonies on Mars by now.


Looking back on such predictions with the arrogance of hindsight, it is easy to chuckle at how over-optimistic previous generations were. Yet perhaps the extrapolations of people in the 1960s were not so wild after all, given their own experiences, and it is subsequent generations – we – who have let these people down. Many of those alive in 1970 had seen extraordinary change within their own or their parents’ lifetimes – not only the invention of the television, air travel and antibiotics, to name but a few, but the transformation of indoor running water, electric power and the car from luxuries to necessities. The stream of inventions from the late 19th century to the early 20th that changed life in such dramatic fashion is often called the “Second Industrial Revolution”[2].

Such life-changing inventions still make a huge difference to our lives today. Leave out electronics, and consider everything you own or use: most of it will have been invented in the Second Industrial Revolution, and reached the mass market in the fifty years before 1970. Sure, computers and the internet make a big difference to your life, but has anything invented in the past forty years really had the same impact as the inventions I listed above?

No, says a growing and vocal school of thought. Many economists now support an idea which economist Tyler Cowen dubs ‘The Great Stagnation’, a theory consisting of three broad hypotheses:

Firstly, that living standards in the developed world have not been improving as fast as they once were.

Secondly, that this has little to do with policy mistakes, or China taking our jobs. It is because of slowing innovation, and other fundamental constraints on the ability of our modern economies grow further.

Thirdly, that this slowdown suggests that steady economic growth is not the birth-right of the rich industrialised world. Growth is lumpy, and barring unforeseen spectacular new innovations to rival those from a century ago, will be slower in future in the developed world.

The first point has much data on its side. It really is true that in the US and Western Europe, incomes have not grown as fast since about 1973 as they did beforehand, in the post-war era (some European countries were still catching up to the rich ones in 1973, but when they did so they slowed down). In the US, median wages have almost stagnated since then. What’s more, growth in total factor productivity – a measure of the economy’s efficiency and a useful proxy for technological advancement – has also slowed significantly in the Western world since the early 1970s. And because of the growth of government in the economy, the productivity figures may be even worse than they look – government productivity often tends to be overstated[3].

If the data do not lie, then we are not growing as fast as we once were. On to the second point – why not? In the views of the “stagnationists”[4], innovation since 1970 has been simply less revolutionary than what came before. Robert Gordon, one of the most radical proponents of the ‘Great Stagnation’ hypothesis, poses a question to audiences whenever he gives a lecture: would you rather a) give up all technology that was invented in the last ten years – no Facebook or smartphones – but keep everything else the same, or b) keep all recent technology, but give up running water and indoor toilets? I do not need to tell you which option the audiences choose. Yet, when everyone plumps for b), they have in Gordon’s words “been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent”[5].

Other explanations are more prosaic but no less effective in underscoring the inevitability of the decline in growth. Cowen and Gordon restrict their focus to the US economy, though their points are relevant to other rich countries too. Cowen argues that in the hundred years before 1970 we picked a lot of ‘low-hanging fruit’ that we cannot pick again – for instance, almost entirely rural populations became mostly urban, and access to education expanded to a small minority to almost everyone, both of which could produce a huge one-off gain for living standards.

Many dispute these explanations, of course. A popular argument from the left is that incomes growth and productivity have slowed because of rising inequality and the adoption of free-market policies that give the state less of a role in promoting innovation and managing economic growth. Almost as popular on the right is the idea that growth has slowed because of the increasing size of government and regulatory thickets that slow innovation.

Unfortunately, neither policy explanation is quite satisfactory. The left should squirm at the fact that most of the inventions of the Second Industrial Revolution were brought about in a world of states far smaller and more laissez-faire than today (and growth from 1945 to 1970, when interventionism had its heyday, came mainly from the widespread adoption of old inventions rather than new innovation[6]). The right would do well to remember that even if environmental regulations, or government spending on health and education, do hurt growth and innovation – which they might not – most people would still regard their overall living standards as higher because of such interventionism.

The third point that I raised above is about the future, not the past, and so leaves room for the most argument. In the extreme pessimist corner, Robert Gordon thinks it possible that by the end of this century the US will grow no faster than Britain did in the Middle Ages (0.2% per annum, if you were wondering). Others think that a renewed acceleration in growth driven by new and exciting innovations is just around the corner.

We cannot say who is right, because, almost by definition, innovations and their impact cannot be predicted accurately. However, a more interesting question is what we think future growth will look like. Both the optimists and the pessimists view growth as lumpy, driven primarily by a few big innovations, with incremental improvements to existing technology largely a sideshow.

If this view is correct, it could have profound implications for the way that society is organised. The steady productivity growth of about 2% that we enjoyed before 1970, around which Western societies built welfare states, may not be here to stay; whether it does depends on the largely unknown factor of lumpy innovations. Entitlement systems built on the assumption of continued stable growth will have to be reformed.

I don’t know that, of course, because prediction is hard. In the end, perhaps the whole debate about future growth really tells us more about the debaters, and about the time we live in, than about the future. It is little wonder that ‘stagnationist’ ideas have gained influence at a time of such economic hardship in the West. With short-term growth slow and faltering, it is easier to believe pessimistic ideas about growth in the long run. They absolve us of the need to find solutions to our current economic malaise. So when future generations, however rich or poor, look back at this period in history, perhaps that is what they will chuckle at.


[1] Brehmer, Die Welt in 100 Jahren (The World in 100 Years).
[2] Gordon, “Is US economic growth over? Faltering innovation confronts the six headwinds”, The National Bureau of Economic Research, August 2012.
[3] Cowen, The Great Stagnation.
[4] Erik Brynjolfsson uses this phrase in his TED talk opposing Robert Gordon.
[5] Gordon, “Is US economic growth over? Faltering innovation confronts the six headwinds”, The National Bureau of Economic Research, August 2012.
[6] Tyler Cowen states that the economist Charles I. Jones has found this from “disassembling” US economic growth.