Silicon Valley, where many believe that "software is eating the world." But have we, as Robert Gordon argues, already had the best of the revolution?

The end of economic growth

The extraordinary technological innovations of the past century are unlikely to be repeated
January 21, 2016

Read Lawrence Summer's review of Gordon's book here

This article is an edited extract from "The Rise and Fall of American Growth: The US Standard of Living since the Civil War", Princeton University Press  

In the century after the end of the Civil War, life in the United States changed beyond recognition. There was a revolution—an economic, rather than a political one—which freed people from an unremitting daily grind of manual labour and household drudgery and a life of darkness, isolation and early death. By the 1970s, many manual, outdoor jobs had been replaced by work in air-conditioned environments, housework was increasingly performed by machines, darkness was replaced by electric light, and isolation was replaced not only by travel, but also by colour television, which brought the world into the living room. Most importantly, a newborn infant could expect to live not to the age of 45, but to 72. This economic revolution was unique—and unrepeatable, because so many of its achievements could happen only once. 

Economic growth is not a steady process that occurs at a regular pace. Instead, progress is much more rapid at certain times. There was virtually no economic growth for millennia until 1770, only slow growth in the transitional century before 1870, remarkably rapid growth in the century ending in 1970, and slower growth since then. My thesis is that some inventions are more important than others, and America’s growth in the century after the Civil War was made possible by a clustering, in the late 19th century, of what I call the “Great Inventions.”

Since 1970, economic growth has been dazzling and disappointing. This apparent paradox is resolved when we recognise that recent advances have mostly occurred in a narrow sphere of activity having to do with entertainment, communications and the collection and processing of information. For the rest of what humans care about—food, clothing, shelter, transportation, health and working conditions both inside and outside the home—progress has slowed since 1970, both qualitatively and quantitatively.

Our best guide to the pace of innovation and technological progress is total factor productivity, a measure of how quickly output is growing relative to the growth of labour and capital inputs. Since 1970, that has grown at barely a third the rate achieved between 1920 and 1970. My chronicle of the American standard of living rests heavily on the history of innovations. But any consideration of the future must look beyond innovation to contemplate the headwinds that are slowing the vessel of progress. Chief among these is the rise of inequality, which since 1970 has steadily directed an ever larger share of the spoils of the growth machine to the top of the income distribution.

"Air travel is less comfortable than before, making the experience more time-consuming and stressful"

The idea that a single 100-year period, the “special century,” was more important to economic progress than any other so far, goes against the theory of economic growth as it has evolved over the last 60 years. Growth theory features an economy operating in a “steady state” in which a continuing inflow of new ideas and technologies creates opportunities for investment.

But this model does not apply to most of human history. According to Angus Maddison, the great historian of economic growth, the annual rate of growth in the western world from AD 1 to AD 1820 was a mere 0.06 per cent per year, or 6 per cent per century. Or, as summed up by the economic commentator Steven Landsburg: “Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture—but none of that stuff had much effect on the quality of people’s lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level… Then—just a couple of hundred years ago—people started getting richer. And richer and richer still.”

The designation of a “special century” applies only to the US, which has carved out the technological frontier for developed nations since the Civil War. However, other countries have also made stupendous progress. Western Europe and Japan largely caught up to the US in the second half of the 20th century, and China and other emerging nations are well on their way.

Progress did not suddenly begin in 1870, but the US Civil War (1861-65) provides a sharp historical marker. The first Census of Manufacturing was carried out in 1869; coincidentally, that year brought the nation together in a real sense, when the transcontinental railroad was joined at Promontory Summit in Utah.

Our starting point of 1870 should not be taken to diminish the progress made in the previous half century. A child born in 1820 entered a world that was almost medieval: lit by candlelight, in which folk remedies treated health problems and travel was no faster than hoof or sail. Three great inventions of that half century—the railroad, steamship, and telegraph—set the stage for more rapid progress. The Civil War showcased these advances when northern trains sped Yankee troops to the front and steamships blockaded supplies to the South. During the War of 1812, news still travelled so slowly that the Battle of New Orleans was fought three weeks after a treaty had been signed to end that war. But by the time of the Civil War, daily newspapers published the outcomes of battles mere hours after they occurred.

Let’s identify those aspects of the post-1870 economic revolution that make it impossible to repeat. We are so used to our creature comforts that we forget how recently they were achieved. In 1870, rural and urban working-class Americans bathed in a large tub in the kitchen after carrying water from outside in pails and warming it over an open hearth. All this was such a nuisance that some people bathed once a month. Similarly, heating in every room was once a distant dream—yet it became a daily reality in the decades between 1890 and 1940.

The flood of inventions that followed the Civil War transformed life. When electricity made illumination possible with the flick of a switch, the process of creating light was changed forever. When lifts allowed buildings to extend vertically instead of horizontally, the nature of land use was changed, and urban density was created. When small electric machines replaced huge, heavy steam boilers, the scope for replacing human labour with machines broadened beyond recognition.

So it was with transport. When cars and other motorised vehicles replaced horses, the quarter of agricultural land devoted to feeding those animals was freed up. Progress in transport has been stunning; it took little more than a century from the first primitive railroads which began replacing the stagecoach in the 1830s to the Boeing 707 flying near the speed of sound in 1958.

The transition of the food supply from medieval to modern also occurred during this century. The Mason jar, invented in 1859, made it possible to preserve food at home. The first canned meats were fed to Northern troops in the Civil War, and during the late 19th century a vast array of processed foods, from Kellogg’s cornflakes and Borden’s condensed milk to Jell-O, entered American homes. Clarence Birdseye invented a method for freezing food in 1916, although it took until the 1950s before people had domestic freezers. In 1870, shoes and men’s clothing were bought from shops but women’s clothing was made at home, and the sewing machine had only recently reached the mass market. By the 1920s, most women’s clothing was bought from retail outlets that did not exist in 1870—namely, the great urban department stores and, for rural customers, mail-order catalogues.

"Not a single American household was wired for electricity in 1880. By 1940, nearly 100 per cent of US urban homes were wired"

Some measures of progress are subjective, but life expectancy and the conquest of infant mortality are quantitative indicators of the advances made in medicine and public health. Public waterworks not only revolutionised the daily routine of the housewife but also protected every family against waterborne diseases. The development of anaesthetics in the late 19th century made the gruesome pain of surgery a thing of the past, and the invention of antiseptics cleaned up the squalor of hospitals.  

This century was unique not only in the magnitude of its transitions but also the speed with which they were completed. Not a single American household was wired for electricity in 1880. By 1940, nearly 100 per cent of US urban homes were wired, and 94 per cent had water and sewer pipes, more than 80 per cent had interior flush toilets, 73 per cent had gas for heating and cooking, 58 per cent had central heating, and 56 per cent had refrigerators. In short, the 1870 house was isolated from the rest of the world, but most 1940 houses were “networked,” having the five connections of electricity, gas, telephone, water and sewage.

The “networked” house, together with modern appliances, changed the nature of housework. Women no longer had to devote long hours to doing laundry on a scrub board, making and mending clothing, and baking and preserving food, paving the way for their participation in the workforce. The improvement in working conditions for men was even more profound. In 1870, more than half of men were engaged in farming, either as proprietors or as farm labourers. Their hours were long and hard; they were exposed to heat in the summer and cold in the winter, and the fruits of their labour were at the mercy of droughts, floods and insect infestations. Working-class jobs in cities required 10 hours of work per day, including Saturdays. More than half of teenage boys were in work, and male heads of households worked until they were disabled or dead. But by 1970, the whole concept of time had changed, including the introduction of blocks of time that were barely known a century earlier, including the two-day weekend and retirement.

Thanks to these irreversible changes, in the half century after the Civil War America changed from an agrarian society of loosely linked small towns to an increasingly urban and industrial society with stronger private and governmental institutions and an increasingly diverse population. The urban percentage of the population, defined as those living in organised governmental units with a population of 2,500 or more, grew from 24.9 per cent in 1870 to 73.7 per cent in 1970.

The importance of the Great Inventions was on display in the aftermath of Hurricane Sandy, a freakishly powerful storm that devastated much of New York City and the coast of New Jersey in October 2012. Sandy pushed many of its victims back to the 19th century. Residents of New York City below 34th Street learned what it was like to lose the lifts that carried them to and from their apartments. Not only was vertical movement impeded, but the flooding of the subways, along with the blackout, eliminated the primary means of horizontal movement as well. Anyone without electricity also lost such modern inventions as lighting, air-conditioning and fans for ventilation, and refrigerators and freezers to keep food from spoiling. Many residents had no heat, no hot food, and no running water. Those living in New Jersey were often unable to drive as petrol station pumps could not function without electricity. Moreover, communication was shut off after batteries were drained on laptops and mobile phones.

So, what has happened since the special century ended in 1970? First, with a few notable exceptions, the pace of innovation has slowed. Second, rising inequality meant that the fruits of innovation are no longer shared equally: those at the top of the income distribution continue to prosper, but a shrinking share of the economic pie makes its way to the Americans in the middle and bottom of the income distribution.

Progress has been focused more narrowly in the areas of entertainment, communications and information technology. In these areas, change does not arrive in a great and sudden burst, as it did with the by-products of the Great Inventions, but it is evolutionary and continuous. For instance, the advent of television in the late 1940s and early 1950s caused attendance in cinemas to plummet—but movies did not disappear. Instead, they increasingly became a central element of television programming, especially with the advent of cable television. Similarly, television did not make radio obsolete but rather shifted the radio from being the centrepiece of living room furniture into a small and portable device, most often listened to in the car. Nothing has appeared to make television obsolete; instead, its technical aspects have become ever better, with huge, flat, high-definition screens becoming standard.

Landline telephones dominated communications from their invention in 1876 to the breakup of the Bell telephone monopoly in 1983. Since then, mobile phones have prompted an increasing share of households to abandon landlines. Information technology and the communication it enables have seen much faster progress since 1970. The transition from the mainframe computer of the 1960s and 1970s to the personal computer of the 1980s to the web-enabled PC of the 1990s to smartphones and tablets of recent years represents the fastest transition of all—but, again, this applies to a limited sphere of experience. Total business and household spending on all electronic entertainment, communications and IT (including purchases of TV and audio equipment and mobile phone service plans) amounted to only about 7 per cent of US gross domestic product in 2014.

Outside the spheres of entertainment, communications and IT, progress was much slower after 1970. The major changes in food have involved much greater variety, especially of ethnic food specialties and out-of-season and organic produce. There has been no appreciable change in clothing other than in styles and countries of origin; imports of clothing have caused an almost complete shutdown of the domestic US apparel industry. The microwave oven has been the only post-1970 kitchen appliance to have a significant impact. Cars and trucks accomplish the same role of transporting people and cargo as they did, albeit with greater convenience and safety. Air travel is less comfortable than before, with seating configurations and increased security making the experience more time-consuming and stressful.

America’s achievements since 1970 have been matched by most developed nations, but in one important regard the US fell behind, struggling with its healthcare system. Compared to Canada, Japan, or western Europe, the US combines by far the most expensive system with the shortest life expectancy. Progress in medicine has also slowed compared to the great advances made between 1940 and 1970, which witnessed the invention of antibiotics, the development of procedures for treating and preventing coronary artery disease, and the discovery of radiation and chemotherapy, still used as standard treatments for cancer.

Can we quantitatively measure the changes in American society since the special century began? Shown in figure 1 are the data for the standard of living, productivity, and hours worked per person from 1870, divided at 1920 and 1970. For each of the three periods there are three bars, each depicting the average annual growth rate over the respective interval. The left (orange) bar in each group shows the growth rate of per-person real GDP, the middle (blue) bar growth in real GDP per hour (that is, labour productivity), and the third (red) bar growth in hours worked per person.

There are two striking aspects to this data. The first is the symmetry of the graph: the first and last periods are almost identical in the height of each bar, but the middle period (1920–70) is quite different. Output per person growth is substantially higher in the middle period, and productivity growth is much higher—2.8 per cent per year compared to 1.8 per cent in the first period and 1.7 per cent in the last period. The much greater excess of productivity growth over output per person in the middle period, compared to that in the first and last periods, reflects the sharp decline in hours worked per person between 1920 and 1970. This raises two questions: why did hours worked per person decline so rapidly in the middle interval? And, did rapid productivity growth cause hours to decline, or did the decline in hours worked per person in some way contribute to relatively rapid productivity growth?

The decline in hours worked per person from 1920 to 1970 reflects numerous factors that all point in the same direction. First was the long-run decline in hours of work per week for production workers, which by 1920 had already declined from 60 to 52 hours per week. Second was the influence of New Deal legislation, both in reducing hours directly and also in empowering labour unions that fought for and achieved the eight-hour workday and 40-hour work week by the end of the 1930s.

An unrelated factor was the baby boom of 1947 to 1964, which increased the child population (those aged 0 to 16) relative to the working-age population (16 to 64) and thus reduced the ratio of hours worked to the total population. The reverse feedback from productivity growth to shrinking hours reflects the standard view in labour economics that as real income rises, individuals choose not to spend their extra income on goods and services, but rather opt for extra leisure—that is, by working fewer hours.

The change in hours worked per person in the first period (1870–1920) was negligible and presumably reflects modest declines in the working week for urban manual workers, offset by the effects of shifting employment from farms to cities, where working hours were longer and more regimented. The slight increase in hours worked per person after 1970 mixes two quite different trends. In the first portion of the interval, roughly between 1970 and 1995, hours worked per person rose as a reflection of the movement of women from housework into market employment. Then, after 1996, hours worked per person fell as a result of a steady decline in the labour force participation rate of prime-age males and of young people. After 2008, these labour force dropouts were joined by the retirement of the older members of the baby boom generation.

Why did labour productivity grow so much more quickly between 1920 and 1970 than before or after? We can divide the sources of the growth in labour productivity into three components, as shown in figure 2. The time intervals are the same as before, except that the absence of some data requires us to start at 1890 rather than 1870. Each bar is divided into three parts. The top section, displayed in red, is the contribution to productivity growth of rising educational attainment; these are the widely accepted estimates of Claudia Goldin and Lawrence Katz. The middle section, shaded in blue, displays the effect of the steadily rising amount of capital input per worker hour; a continuing source of rising labour productivity is the larger quantity of capital, of increasingly better quality, with which each worker is equipped. The effect of a rising ratio of capital input to labour hours is usually called “capital deepening.”

"David counted almost four decades between Thomas Edison’s opening of the Pearl Street power plant in Manhattan in 1882 and the subsequent upsurge of productivity growth in the early 1920s"

Our designation of the “special century” appears to conflict with the behaviour of total factor productivity growth as summarised in figure 1. Apparently only the second half of that period exhibited growth that was substantially above average. We can state this puzzle in two symmetric ways: why was total factor productivity growth so slow before 1920? Why was it so fast during the 50 years after 1920?

The leading hypothesis was put forward by Paul David, who provided an analogy between the evolution of electric machinery and of the electronic computer. In 1987, Robert Solow quipped, “We can see the computer age everywhere but in the productivity statistics.” David responded, in effect: “Just wait,” implying there could be a long gestation period between a major invention and its payoff in productivity growth. David counted almost four decades between Thomas Edison’s opening of the Pearl Street power plant in Manhattan in 1882 and the subsequent upsurge of productivity growth in the early 1920s associated with the electrification of manufacturing. He attributed the delayed impact not just to the time needed to invent and perfect the machinery, but also to a sharp decline in the price of electricity itself.

David’s analogy turned out to be prophetic, for only a few years after his 1990 article, the growth rate of aggregate US productivity soared from 1996 to 2004 to roughly double the rate it had been from 1972 to 1996. However, after 2004, when growth in labour productivity stopped its eight-year surge, despite the proliferation of flat-screen desktop computers, laptops, and smartphones in the decade after 2004. By way of contrast, in the 1920s, electricity’s stimulation of industrial efficiency lasted much longer than eight years. Productivity growth soared in the late 1930s and into the 1940s, creating the remarkable average 1920-70 growth rate displayed in figure 2.

We might conclude that the electricity revolution was more important than the computer revolution. Moreover, the productivity upsurge after 1920 did not rely only on electricity, but also on the internal combustion engine. It is not surprising that motor vehicles had little impact on labour productivity or total factor productivity growth before 1920, for they had come into existence only a short time before. There were only 8,000 registered motor vehicles in 1900, yet there were 26.8m just three decades later, when the ratio of motor vehicles to the number of US households reached 89.2 per cent. Productivity in the aggregate economy depends in part on how quickly workers, including truck drivers and delivery personnel, can move from place to place. Just as the thousands of lifts installed in the building boom of the 1920s facilitated vertical travel and urban density, so the growing number of cars and trucks speeded horizontal movement on farms and in the city.

Knowing what we do about the past, what can we extrapolate to the future? We cannot predict every new invention; indeed, even for those on the horizon, such as driverless cars and legions of small robots, their likely effect and importance is a matter for debate. But there is much that we can predict. For instance, the baby boom generation is currently aged between 50 and 68, so we can predict with reasonable accuracy the effect of its members’ retirement within a percentage point or two, depending on how long many of them choose to work. If American high school students regularly rank poorly in international tests of reading, maths, and science, then a sudden spike in scores is improbable. If the stock market continues to advance, we know that inequality will increase, for capital gains on equities accrue disproportionately to the top income brackets.

My predictions that future growth will be slower than in the past are strongly resisted by a group of commentators whom I call the “techno-optimists.” They tend to ignore the slow productivity growth of the past decade. Instead, they predict a future of spectacularly faster productivity growth based on an exponential increase in the capabilities of artificial intelligence.

Some economists dismiss pessimism out of hand. The economic historian Deirdre McCloskey writes that “pessimism has consistently been a poor guide to the modern economic world. We are gigantically richer in body and spirit than we were two centuries ago.” Whereas McCloskey has room in her toolkit for only one rate of growth spanning the past two centuries, I put forward three separate growth rates over the past 150 years. Yes, we are “gigantically” ahead of where our counterparts were in 1870, but our progress has slowed, and we face stronger barriers to continued growth than were faced by our ancestors a century or two ago.