Download Gordon 050314 - Michael Roberts Blog

Back in September 2012, I wrote a post on whether capitalism is a mode of production that
just suffers a series of crises, booms or slumps, or is instead (or also) a system that will
eventually break down and collapse when it passes it ‘use-by’ date. I think I still hold to my
tentative conclusions in that post (http://thenextrecession.wordpress.com/2012/09/12/crisisor-breakdown/).
But in that post, I referred to a paper by Robert J Gordon, a professor at North-Western
University entitled, Is US economic growth over?- see (http://www.nber.org/papers/w18315)
and http://www.voxeu.org/article/us-economic-growth-over.
In that paper Gordon argued that the rapid technological progress under the capitalist mode of
production in the last 250 years is now over. Growth in real GDP per capita, at least in the
US economy, will be slower that in any extended period since the Civil War. Gordon argued
there are six headwinds that will slow future innovation: an ageing population in the mature
economies; rising inequality; an increasing lack of competitive advantage for the mature
capitalist economies; poorer education because public investment in education is being
destroyed; increasing environmental regulations; and excessive debt. Gordon concluded that
US real economic growth could fall to just an average 0.2% a year for the foreseeable future
compared 2-3% of the past. Whether those headwinds justify such slower economic growth is
open to question.
Gordon suggested that capitalism drove the productive forces (and thus economic growth)
upwards from about 1750 to 1950. But since then it is in a downward spiral that no longer
takes the productive forces forward. Capitalism, at least in the mature economies, has had its
day.
Well, Gordon’s paper came in for a lot of flack from mainstream economics. The main
arguments against Gordon centred round his claim that technological progress had come to an
end. Both arch Keynesian gure, Paul Krugman and arch Chicago neo-classical economist
John Cochrane agreed that their “gut feeling” was that Gordon is too pessimistic about the
future of technology.
As Gordon put it in a sequel paper to his 2012, just released (URL), “A controversy about the
future of U.S. economic growth was ignited by my paper released in late summer 2012.1 The
debate began with my prediction that over some indefinite period of time into the future,
perhaps 25 to 40 years, the growth of real per-capita disposable income of the bottom 99
percent of the U.S. income distribution would average 0.2 percent per year, compared to 2.0
percent per year in the century before 2007. This prediction set off a firestorm of controversy
with commentary, blogs, and op-eds around the world.”
Gordon admitted that he was talking about the US and not other economies where the
‘headwinds’ may be less and that “there is plenty of room for “catch-up growth” in the
emerging markets of the world”. And he was looking at potential growth not actual real
GDP.
Gordon was criticised for underestimating the new technologies that will come into play in
driving up productivity growth over the next few decades. In his sequel, he says “the primary
role of the headwinds in predicting slow future growth escaped notice in the initial round of
controversy about innovation” He retorts: “there is no need to forecast that innovation in the
future will “falter,” because the slowdown in the rate of productivity growth over the past
120 years already occurred more than four decades ago. This sequel paper explains why the
pace of innovation declined after 1972. The future forecast assumes that innovations in the
next 40 years will be developed at the same pace as the last four decades, but reasons for
skepticism are provided for that prediction.”
So Gordon claims that he does not need to predict poor innovation from here to still conclude
that US economic growth is set to slow to a trickle over the next few decades. Gavyn Davies,
the Keynesian economist and former chief economist at Goldman Sachs who now blogs for
the Financial Times, agreed that the prospects increased living standards for the average
American household does not look good (The economic future of Americans – some
arithmetic).
Gordon predicts the real living standards of all but the top 1% in the income distribution will
barely grow at all in the decades ahead and that has been experience of the vast bulk of the
population has been no better than that since 1973. Over the whole of that period, median real
household income has actually risen by only 0.1% per annum.
However, his successor at Goldman Sachs, Jan Hatzius is less pessimistic. Hatzius points out
that the trend in college attendance continues to expand strongly, so he does not see why the
contribution of education to productivity growth should decline.
Hatzius also reckons that the rise in the profits share cannot continue indefinitely, and cites
evidence that the share of the top 1% in the wage distribution stopped rising in 1997. He
therefore reckons that rising inequality will be much less of a factor in the decades ahead.
Even so as Davies points out, the resulting future growth in median household income is still
only 1-1.5%. This is what US capitalism offers most Americans at best, and assuming no
more recessions or slumps.
But is technology and innovation really going to fail to deliver better growth over the next
few decades? The rise of robots and artificial intelligence is predicted by some to have a
exponential effect in what has been called the ‘second machine age’ in Andrew McAfee and
Erik Brynjolfsson’s influential book on the march of the robots.
I intend to return to this issue in a future post. But what cannot be denied is the productivity
growth in the US and other major capitalist economies has been slowing since the 1970s –
neoliberalism has failed to innovate. Output per hour since 1972 has risen by only about
1.3% a year, apart from the brief dot.com boom in the late 1990s.
Many critics of Gordon’s view argue that the slowdown is temporary and is caused by the
effects of the Great Recession and the cyclically weak recovery since. Once capitalists start
to invest more, productivity growth will recover to the previous trend. The only problem
with that argument is that there is still little sign of any significant return to the previous trend
in business investment growth.
In 2013, real spending on business investment in the US rose 3.8%, no more than half the rate
achieved prior to Great Recession. And what is especially noticeable is that spending on hitech innovatory equipment, the previously dynamic high growth sector with an average of 1020% annual growth, is especially weak, now growing at a pace slower than overall real GDP.
Hi-tech spending on both equipment and software has fallen as a share from 4.7% of US
GDP in 2000 to 3.5% in 2013.
US real business spending on hi-tech equipment yoy %
30
25
20
15
10
5
0
-5
-10
-15
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
It is this area that is key to boosting productivity. And real output growth per worker has
slowed from a mediocre 2.4%a year (as Gordon recorded) in the last 20 years to just 1% a
year over the past three years.
What is the reason for this slowdown in investment in new technology – well it appears to be
that the cost of new equipment and software is just too high relative the realised and expected
return on those investments – in other words, the rate of profit is not high enough.
Kenneth Rogoff, of Reinhart of Rogoff fame (or infamy) in arguing that the wrold economy
is being slowed down by excessive public and private debt (see my posts), pitched in on
Gordon’s predictions in a recent article (Malthus, Marx, and Modern Growth). He agreed
that there were obstacles to continuing the ‘previous success’ of capitalism. There was
environmental degradation; growing inequality within countries; aging populations that don’t
work; and the risk of financial crashes.
Yet he is optimistic that capitalism can overcome these challenges. After all, “so far, every
prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl
Marx, has turned out to be spectacularly wrong… despite a disconcerting fall in labor’s
share of income in recent decades, the long-run picture still defies Marx’s prediction that
capitalism would prove immiserating for workers. Living standards around the world
continue to rise.”
Rogoff continues: technological progress has trumped obstacles to economic growth. “Will
each future generation continue to enjoy a better quality of life than its immediate
predecessor? In developing countries that have not yet reached the technological frontier, the
answer is almost certainly yes. In advanced economies, though the answer should still be yes,
the challenges are becoming formidable.”
So the mainstream economists remain broadly optimistic about the future of capitalism,
despite Gordon’s prognostications – not surprisingly.
In my post in September 2012, I reckoned that capitalism get a further kick forward from
exploiting the hundreds of millions coming into the labour forces of Asia, South America and
the Middle East? This would be a classic way of compensating for the falling rate of profit in
the mature capitalist economies. I have calculated before that the world rate of profit (not
just the rate of profit in the mature G7 economies) stopped rising in the late 1990s and has not
recovered to the level of the golden age for capitalism in the 1960s, despite the massive
potential global labour force. It seems that even the countervailing factors of foreign
investment in the emerging world, combined with new technology, have not been sufficient
to keep pushing up the world rate of profit, so far.
I’ll be revisiting these measurements of the world rate of profit in a future post in the light of
new work done by young Marxist economist from Argentina.
Yes, crises or breakdown is endogenous because of the main contradiction within the
capitalist mode of production, of accumulation for profit and not need. But also it is possible
for capitalism to recover and soldier on ‘endogenously’ when sufficient old capital is
destroyed in value (and sometimes physically) to allow a new period of rising profitability.
Capitalism can only be replaced by a new system of social organisation through conscious
action of human beings, in particular by the majority class of people (the working class
globally). Without such conscious action, capitalism can stumble on.
Maybe the mainstream economists will be proved right and the new technology in the
pipeline will be applied by a resurgent capitalist revival to boost productivity and growth, but
Gordon’s evidence suggests otherwise.