Here are some thoughts on economic growth that aren’t yet coherent enough to be a Vox article…
1. Technological progress in a particular industry often has diminishing returns, and it’s possible to reach the point where it’s hard to imagine significant further improvements.
2. Clothing is the best example. Americans tend to run out of closet space before we run out of money to buy clothes. The fraction of our household incomes we spend on clothing has been steadily declining, even as we own dozens of outfits each.
3. As the production costs of clothing have continued to fall, a larger and larger fraction of the value people get from the clothing they buy — especially at the high end of the market — reflects social factors rather than economic ones. Someone might pay $40 for a T-shirt that cost $5 to produce because it carries the label of a famous designer.
4. For products like this, there’s little room for technological progress to lower clothing costs further. A 2x improvement in textile manufacturing productivity might reduce the shirt’s $5 manufacturing cost to $2.50. But we shouldn’t expect technological progress to reduce the $35 that goes to the designer and retailer. They’re selling exclusivity as much as they’re selling a piece of clothing.
5. A similar point can be made about food. The average American family has been able to comfortably afford more than enough food for many decades. And the quality and variety of food available to the average American has been steadily improving over time. Supermarkets now offer such a wide variety of high-quality, convenient food that there seems to be little room for further improvement. As with clothing, food prepared at home has become a smaller and smaller fraction of households budgets, even as the quality and variety of the food we consume has improved.
6. As ingredients have gotten cheaper and incomes have risen, we’ve spent less at the grocery store and more at restaurants. As with high-end clothing, most of the value of a restaurant meal comes from factors that can’t easily be improved by technology. Restaurants with human waiters tend to be more prestigious than restaurants that make you order at the counter precisely because people like to have other people serving them. If you figured out a way to serve fancy restaurant food from a vending machine, people would not see that as an improvement.
7. So families have been spending a shrinking share of their incomes on basic necessities like food and clothing. Where has their income gone instead? During the 20th century, there was a steady stream of new inventions — cars, televisions, washing machines, refrigerators, telephones, electric lighting, personal computers, and so forth — that soaked up peoples’ growing disposable income.
8. Over the last 30 years, this process has continued for information technology — we’ve seen the invention and widespread adoption of personal computers, gaming consoles, DVD players, smartphones, and so forth. VR headsets seem to be the next big thing. But outside of the IT sector, significant new inventions have been few and far between. Today’s kitchens have the same suite of labor-saving appliances — a refrigerator, oven, dishwasher, microwave, blender, and so forth — as the kitchens of the 1980s.
9. There has been a big debate about whether there has been a “slowdown in innovation” — with the implication that this represents a flaw in the way our economic system is working. But maybe we’re just running out of big problems that could be solved with technology.
10. One way to see this is to look at how wealthy Americans spend their money. A century ago, rich people could spend their money on a wide variety of technological luxury goods — electric lighting, telephones, automobiles, indoor plumbing — that substantially improved their quality of life. Today, very wealthy people have private jets, but otherwise it’s hard to think of examples of major technologies that are available to them but not to Americans with more modest incomes.
11. Instead, wealthy people spend money on two things that are not really amenable to technological improvement: positional goods (famous paintings, Manhattan real estate, Harvard tuition) and labor-saving services (nannies, housekeepers, chess tutors, art dealers).
12. As we get wealthier, I expect the previous point to describe the budgets of more and more Americans. People in large coastal cities are spending more and more money on housing in desirable locations — a positional good. And as the cost of food, clothing, furniture, and other goods has declined, child care costs have loomed larger and larger as a factor in the budgets of two-income households.
13. Education also fits this pattern. People are spending more and more money to send their children to fancy schools and colleges. And I while some aspects of the educational process can be improved by technology, elite schools mostly have the characteristics of a positional good. You can view a lot of MIT classes online for free, but people still seem to be willing to pay hundreds of thousands of dollars for their kids to be members of MIT’s undergraduate class — because what they’re really buying is access to an exclusive club.
14. I think we’re running out of room for technological improvements in most areas of economic life, with three big exceptions: IT, medicine and transportation. The IT part is obvious — smartphones were just invented recently, and VR seems likely to become a big market in the next few years. Obviously, if someone finds a cure for cancer, heart disease, or AIDS, that would create a tremendous amount of value. It’s also easy to imagine transportation technologies that people would pay a lot of money for: self-driving cars, affordable private airplanes, personal helicopters, supersonic airplane flights, space travel. It’s possible that physics or logistical constraints will prevent these from ever coming to fruition, but we can at least imagine ways these products could get better.
15. Energy is a third area where there seems to be a lot of room for progress — especially in solar panel and battery technology, as well as electric cars. But this is an interesting case because the primary selling point isn’t that they will make our lives qualitatively better so much as that they’ll help prevent a worsening of our collective living standards due to climate change.
16. This isn’t to say that there’s no room for further economic growth. Most American families can comfortably afford food, clothing, and shelter, but we’d all like these things to consume a smaller share of our incomes. More important, there are still some people in the United States and billions of people outside the United States who have yet to achieve the standard of living most of the people reading this post take for granted. It will take several more decades, at least, for the median income in countries likes India and Nigeria to reach American levels.
17. What this does mean, however, is that in the future most growth may be “catch-up growth,” in the sense that the economy will be focused on providing more and more people with the same standard of living that someone in the top income quintile of the United States enjoys today. That’s different from the 20th century, when even wealthy families could look forward to inventions (like air conditioning, televisions, and the internet) that would provide dramatic improvements in their standard of living.
18. This also means that we should expect a gradual slowdown in productivity growth rates. As people get wealthier, a smaller and smaller share of their household income will be devoted to goods and services that are amenable to technological improvement.
19. This could be seen as a pessimistic take, but the optimistic way to think about it is that Americans in the top half of the income distribution have arrived: we’re getting pretty close to the highest level of material comfort and security that it’s possible for a human civilization to have. Our children and grandchildren probably won’t enjoy a much higher standard of living than we do, but that’s mostly because it’s hard to imagine what a much higher standard of living would look like.
Update: I tweaked the example in point 3 after Saku Panditharatne convinced me that the original version was overstating my case.