Growth is dead – the digital revolution won’t help

Forget the notion of a new digital age setting the developed world on a new growth path. Most important innovations have already been made. All what the digital revolution has to offer is just the icing on the cake. It is shiny and nice, but does not matter so much. Does it?

The world is in better shape than ever before e. Most indicators point upward: Wealth, Income, Health etc.  But will this trend continue in the developed world? After all, the only chance to grow in the already developed world is by technical progress, mainly driven by digital technologies.

According to Robert J. Gordon, one of the worlds leading experts in forecasting economic growth, GDP growth in the US will likely osciliate at just 0,8% for the foreseeable future. This low growth number is not only caused by less impact of technological progress, but is linked to rising inequality, deterioration of the education system, rising debt and demographics lowering the participation rate in the labor market.

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The whole developed world will properly not do better. That is a shock to all “techno-optimists”, who claim that the digital revolution will change everything. Whatever the digital revolution will change, it will not, according to Mr. Gordon, increase economic growth much.

You can only invent so much

In his excellent book The end of American Growth (see sources) Mr. Gordon takes an look at the history of the first (1830+ e.g. steam engine), second (1870+e.g. cars, telephone) and third (1995+ e.g. PC, Internet) industrial revolution. He comes up with the conclusion that todays digital revolution will not impact growth much. Why?

Not all inventions have the same impact on growth

The impact on growth of the inventions of the second industrial revolution have been immense. Take housing: Water supply, sewers, central heating, telephones, radios.  Electricity enabling food storage by refrigeration and replacing tedious homework such as washing – thereby liberating woman to participate in the work force. Every house was connected to a central grid supplying these amenities. By 1910 nearly all american households, with the exception of some parts in the rural south, were hooked up to this grid.

Quality of life improved by a measure never achieved before or thereafter. Gone were the days of hunger and sickness. Life expectancy exploded from 47 in 1900 to 71 in 1970, not too far from the 78 years now in 2016. In fact after 1970, so Robert J. Gordon, the grandest inventions have been made and adopted by the overwhelming majority of people in the US. Every new invention after that was nice, such as micro waves or mobile phones, but were not as revolutionary as the ones done before. After all, you could cook and phone before, just not as conveniently.

Same goes for cars. The number of cars per household in the US has peaked about 1970, dropping ever since. The total number of cars is still increasing, as single households got more prominent, but the growth was limited after 1970. Even as early as in the 1920’s cars were very much comparable to the modern cars today. Cars are much more comfortable, reliable and safe today, but they still serve the same needs as in the 1920: Individual transport. How much has the invention of the automatic transmission, the air bag or navigational system impacted growth? Not much, compared to the invention of the car in its entirety before.

Same for air travel. With the invention of the Boeing 707 in 1958 air travel was set at 950km/h . Speed has not changed since. Costs have dropped at the price of some  convenience in seating. Again, what is the growth effect of electronic boarding cards? Not much.

It seems that technological progress is subject to diminishing returns. In other words: Technological progress advances societies immensely at first, but as the most critical needs are served, less and less thereafter.

How much money do you spend on digital technologies?

 An average US Household spends about 7% of its disposable income for entertainment and communication. This includes all land line and mobile phones, internet, cloud services for music, apps, films, tickets for cinemas, sports or cultural events, leisure travel, restaurants, etc.

93 percent of household income is still on mundane matters such as housing (about 20%), transportation, health etc. One may conclude that the economic impact of the digital revolution on households expenditure is much smaller then the impact of the technologies invented in in the second industrial revolution has been.

But surely, digital technology is everywhere, hidden inside the expenditures for housing, transportation, health etc. there is digital technology. Often unseen by the consumer, hidden inside the production process. Is it?

The impact of digital technologies may be less then we usually expect. According to Nobel prize winner Robert Solow in 1987:

You can see the computer age everywhere but in the productivity statistics.

Conclusion: The end of growth?

The economic data, that Robert J. Gordon provides, speaks clearly. Growths has been low since 1970 and continues to fall over time ever since. Comuter technology and todays digitalization contribute to growth, but have not enough impact to stop this trend.

Humankinds material needs might have been served to a large extend already (in the developed world) and the next frontier are our immaterial needs. May be not only the limited resources of the world are limiting growth, as prophezied by the Club of Rome in 1972, but also the demand side is not craving for more goods.

But there are two caveats to this:

First of all, the measurement itself might not be right. GDP (Gross domestic product) is not easy to measure and measures just what is bought and sold in the market. But we are getting a lot of things of significant value virtually for free with internet services like messaging, information, navigation, entertainment for free. The internet economy is not easy to measure by the standards of classical GDP statistics.

Second, the impact of digitalization might be delayed still. That is the viewpoint of the „technooptimists“ such as Eric Brynjolfson (see sources). Take the example of the impact of electricity on shop floors. Electricity was invented in 1880 and quickly adopted inside homes: Electrical lights were by 1910 ubiquitous in american homes. But the adotion of electrical power to the shop floor, allowing totaly new shop floor layouts, boosting productivity immensely,  took until about 1930.

We might be on the verge of a fourth major industrial revolution. This industrial revolution might just be delayed, as we do not know how to apply digital technologies correctly yet. We do not know how to change organizations for digitalization. We do not know how to work in any way else then we currently organizing, managing and working.

Chances are, humankind will learn to organize itself socially and economically in such a way as to get the most out of the new technologies.

Something to look forward to.

Something to explore.

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