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.
Interesting topic, IMO. Here’s a note.
Just because it’s hard for you and me to imagine technological improvements in our lives doesn’t mean it’s so hard for others. In fact I would bet there are plenty of historical examples of people who were unable to imagine technologies and lifestyles that seem obvious to us in 2016.
You mentioned yourself that medicine is one of the areas in which technological innovation might still provide higher living standards and I would agree with you. In fact, I would say that designer children, extended life spans, and extended periods of youthful health are more potent lifestyle enhancements than microwaves and dishwashers. I’m sure for those with more knowledge there are other possibilities that are obvious.
I mean consider that future generations might value virtual goods much more than we do. I know Second Life seems hokey at the moment, but maybe it was just ahead of its time…
we need new strategies for excess money to support our economies
This is interesting, thoughtful, and well written. (Sure it’s not good enough for Vox? 😉
I’ve been intrigued by similar writings along these lines and don’t feel qualified to comment articulately, especially in the jargon used by orthodox economists. But I keep feeling that there’s a sort of inversion where there’s assumed to be something wrong if “the economy” doesn’t produce ever better numbers—as if people exist to work and consume for the pleasure of economists. The way I think about it, and your thinking here lines up with it, people might reach a level of satiety where they don’t need to consume much more. Our collective reaction to the drop-off in economic growth in such case should be: “OK. Cool.”
(I do think there will be groundbreaking innovations, though, appearing obvious and foretold in hindsight, that push those numbers ever higher. And more importantly make people better off.)
Fun post, thanks. I find it interesting how rarely we directly talk about happiness & well being when we talk about economics even though that’s what this whole thing is about. A few thoughts to throw in:
1) Our cultural attitudes about what makes us happy is dynamic and unpredictable. Material excess is fairly new to our culture. There is little evidence that wealth beyond the comfortable basics creates happiness but most of us still have a strong instinct to acquire stuff. Hard to know how persistent that acquisition instinct will be in our culture.
2) Technology itself could rapidly accelerate changes in our ideas about happiness. We have all sorts of technologies that can monitor our facial expressions, stress hormones, heart rates, etc. that are in the earliest stages of public adoption. These technologies will provide more empirical evidence of what activities and situations make us calm and happy. If living in a big, cavernous house really doesn’t make us happy, we will likely learn this in a more convincing, personalized way. Enough evidence of this taken to heart by enough people and the market for big houses goes down.
3) There are endless ways for us to improve existing types of products (smarter video games, quieter battery powered lawn movers, smarter watering systems, more effective electric massage tools, etc.) and plenty of new product types to come (drones, VR, hoverboards, hyperloops, jet packs?). The question is how lustily to we consume each new iteration (which is really about how we pursue happiness). And how effortlessly and non-toxically can we get rid of the old stuff to make way for the new (as many homes really are facing stuff saturation).
4) It’s kinda funny how when we say “the end of economic growth” mostly we mean the end of making tons of durable goods. Better to think of the economy as doing stuff rather than making stuff. Someone helps me by watching my kids. I help someone by teaching them piano. Service sector is way up as productivity has increased in making durable goods. This is good: we get stuff + services + more free time. Once we free ourselves from the metaphor of economic growth = more stuff we have a more accurate and more helpful picture of things. A better metaphor is economic health — how efficient is our economy? how inclusive? how non-toxic? how much does it help us get what really makes us happy? Traditional measures like whether GDP expanded will become increasingly outdated for measuring economic health.
6) What’s scary isn’t that we will run out of new types of things to make or run out of meaningful things to do with our time, but it’s the rapid pace of change we’re faced with. It’s hard to think of any jobs that will be the same 20 years from now. It’s hard to know how many jobs AI and robotics will replace and how we will be able to adapt to these changes politically.
For an opposing view (that of “exponential technological
change is just around the corner”) look at the Singularity University propositions and specially for the talks of Jose Cordeiro.
This sounds quite a bit like what Robert Frank has been talking about. His econtalk appearances have been very good even though I think he is too quick to describe better products and services as being positional
This kind of prediction has been made before, most notably by Keynes. Writing in the 1930s, Keynes predicted that in 100 years, 1) England would be eight times richer, and 2) as a result of this massive abundance of wealth, people would only work 15 hours per week and our biggest problem would be trying to think of ways to occupy our time. Prediction 1 has come true, but prediction 2 has not. People have not yet run out of amazing new inventions to make and sell.
I’m making a different prediction than Keynes: that a lot of people will continue working hard, but they’ll be doing it for status (via ownership of positional goods and the ability to hire people to perform prestige-enhancing services) rather than greater material wealth.
Also not to open this can of worms, but the uneven diffusion of positional and labour-saving goods will serve to fuel political confrontations, as relative wealth becomes more pronounced to all class members.
Whether this will serve to push society to come up with solutions or kill our hard fought golden gooses….
” If you figured out a way to serve fancy restaurant food from a vending machine, people would not see that as an improvement.”
I am skeptical. Not that long ago I was in an airport for a flight scheduled in the morning. Due to weather, no flights took off until the afternoon, so the airport was packed. It was one of those places where they have Ipads where you can make restaurant orders. Everyone (including me) was making orders all morning because we were bored, and because all we had to do was click a button. They must have made a fortune, and definitely a lot more than they would have made with people making orders in the traditional way of talking to a waiter. Of course, actual persons brought the food, but I think that wasn’t especially relevant. Robots would have worked just as well, and maybe even better.
Many of the things you say are true but I disagree with you about the scope of possible improvements. One big area of potential improvement is discovery and logistics. Consider my shoes. I’m walking around in sneakers that I’m not satisfied with. I put on a pair of ratty sneakers last weekend to do yard work: they’re much more comfortable, but not in any condition to wear in public. I would gladly pay twice what I did years ago to buy them again but I can’t find them. Maybe they’re still available somewhere but I don’t know where. It would be quite valuable to me if I could find another pair as comfortable, and believe me, I’ve invested a fair bit of time and effort trying on different shoes from different brands but I’ve so far been unsuccessful. Similarly, I open my dresser and there are a few of my shirts that I like a lot and a bunch I don’t like so much. Again, I would gladly pay double if I could find more shirts that I like. It’s perfectly reasonable to expect future technology to help me find these items in the future, or maybe to affordably buy custom versions that suit my tastes.
For food, many people like going out but I don’t. I want tasty, affordable food to come to me when I want it. I’m visiting Berlin and the ease of getting tasty food, inexpensively, is far easier than in the suburbs of Silicon Valley where I live, and much more affordable (and even with the increased variety at my home things that are typically and easily available in Berlin are not so in one of the wealthiest areas of the U.S.). There may be a lot of choice of restaurants to go to, but if I want to go eat at 7pm on a Friday night, it’s usually quite difficult and the costs beyond simply buying the food pile up. The time, the cost of parking, etc. Personally, I will highly value having food prepared at home with little of my effort.
It’s wonderful for you that current technology already provides services in the mode that you prefer but for others we still see the valuable improvements that remain to come. Growth in living standards still has room to grow.
What do you think the main advance in your thinking is here beyond what Fred Hirsch published in 1977 (Social Limits to Growth)? Are you just saying that quantitatively we’re further along?
That is a good question! Maybe I’m just re-hashing arguments that others have made before. I’m going to order his book so I can find out. Thanks!
I’m not sure that hiring people to perform prestige enhancing services will be an area of significant expenditure if AI/robots can perform the same services in a more customized manner.
That actually may be a significant area of further innovation: the diffusion of high end expertise.
An extreme version of this effect is “positional goods.” Only one person can have the world’s largest yacht, and its price keeps getting higher. Productivity increase in producing the world’s best __________ is always zero, in some sense.
Let me state the American Dream, as best I understand:
A family should be able to afford a single family home with a yard, a garage, and bedrooms for the couple and 2.5 children. That home should be within a 30-45 min or so commute to work at a career that makes full use of the adults talents. The neighborhood should be safe along the lines of 1960 crime rates and the public schools should be good enough to provide the children a chance to be whatever their talents are suited for. If someone has college level intellect they should be able to go to college without accumulating too much debt.
If you want to live right in the city you might need to downgrade to a townhouse or good apartment that could accommodate the family. The same requirements related to crime and schools should apply.
All of this should be affordable on a mortgage that represents a reasonable % of income for the husband only. The wife is free to work, but money shouldn’t be the reason she has to work. The basic necessities of life should be affordable on a single income while maintaining debt load as a reasonable % of income.
Health insurance covering mainstream necessary care should be affordable as a % of income. Ones budget if they avoid extravagance ought to be enough to have savings for a rainy day.
A successful society is one where the above is true. Or at least true for the majority, maybe a janitor struggles but the majority of your bell curve should have access to the above.
Are we providing that to more or less people the in the past? The answer to that is more important they whether we have iPhones or VR Porn.
Obviously, does not remember Jimmy Carter.
* Housing in desirable locations in coastal cities is not a positional good. It’s supply is primarily restricted by politics (apartments are illegal to build in most places), not consumer status. The test is that the market outcome would produce a lot more housing in desirable locations absent collusion by homeowners though politics.
* This analysis leaves open the possibility of replacing workers directly though automation. Sure, people want to be served by waiters. But they’d be just as happy if no human hands ever touched their food. There are a lot of examples like that which will be accessible in the next 15 years.
There’s an assumption to all this that there will continue to be enough of the earth’s natural and mineral resources to go around for everyone in the ‘developing’ world to be able to consume as much as the average US family.
Our technical expertise as a species is excellent – so good in fact that most constraints on our population’s expansion have been overcome – with the result that the numbers simply increase. Leading to greater pressure on the resources and a decreasing quality of life all round. Except for the megarich. Though their coastal properties may decrease in value due to climate change risks.
* Great post, agree with most of it.
* I do not think we have reached the max. standard of living for the time being thou, not even close. Algorithms should help power things like self-driving cars, humanoid robots (imagine servant for everyone) & drones that can improve our lives significantly in the next 100 years, possibly as soon as 40 years, triggering a spectacular economic boom reminiscent of the 1920’s, 1950’s, & 1990’s in the US.
*The problem is those advances (and any other significant advance for that matter) seem highly unlikely to be functionally ready for the 15-20 years, leaving us in a period as described in your post at least for that period until significant next technological advances do appear.
*The last 35 years (especially the last 15 years) have seen the world debt levels (private & to a lesser extent public) exploing DESPITE with a slowdown in technological progress & productivity growth.
*On top of other problems, the faith of the peoples in democracies to provide sustained growths has been greatly undermined in the last 20 years, in part due the processes described in this post. Trump is very good case study on this matter.
*The threat for the global civilization to collapse (like it has done many times in history) & trigger a somewhat dystopian scenario for humanity is rather elevated atm, higher than at any point since WWII in my opinion, and will remain so for a couple of decades as the lack of productivity growth sees standards stall, & even falling in developed nation at the expense of catching-up, developing ones.
“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.”
Watch star trek.
I think most of the big differences between today’s society and the society on Star Trek are based on technologies like transporters and faster-than-light travel that are probably not possible given the laws of physics. Replicators are cool but not that much better than a modern grocery store.
I don’t see any mention of artificial intelligence in this blog post. Before the middle of this century, I expected world per-capita GDP more than doubling every decade, due to AI:
Why future economic growth will be spectacular
The point of invention is that it’s not yet conceived. We’re nearing a point where thoughts can direct things (for disabled), especially a computer. There’s leaps and bounds to be made.
If there is a slow down, it’s because of external forces such as poor economic environment, not because areas to invent are limited.
If economic were stellar then, as a prior poster pointed out, there’d be development of quality goods. We’ve filled up our lives with the cheap versions. Now the upper middle class is ready to have the same goods, but pay for a quality version they way the originals were built.
The pressure for that will come as equality faces the world. Cheap versions won’t be as cheap because cheap labor will become middle class. As the prices go up and we get used to that… then finally the next step will be that the “haves” will want quality since the cheap won’t be so cheap and tempting.
The move to greater world economy may be one of the biggest apparent slow downs in goods and development of goods, until the catch up has happened.
The United States currently accounts for almost 25% of consumption on the planet and we’re already seeing vast ecological collapse on a global scale, so I think it’s pretty difficult to envisage the remotest possibility of raising an additional 5 billion people to that living standard without a few extra planets on hand.
I’m disappointed to read these thoughts on economic growth which do not include the REAL limitations that humanity has already reached : the LIMITED RESSOURCES on earth. Economic growth refers to EXPONENTIAL growth. Any scientific will understand that an exponential growth of economy is not sustainable in a finite world. Science says that growth has a limit for earth. The economic growth after the second world war was fueled by a cheap and abundant energy : OIL. Oil makes plastics, high crop yields, fertilizers, cheap metal extraction, medicines…Oil products are all around you. Many experts say today that we’ve reached the world oil peak production . Since 2006, we’re on an undulating plateau in term of world oil consumption. The Economic growth requires oil production growth, which is no more possible. After the undulating plateau, the oil availabilty will decrease by 3-4% per year which is also an exponential decrease! The reality is that the US GDP has already reached its ABSOLUTE MAXIMUM and within the next 20 years, since OIL will become scarcer : plastics, cars, medicines, planes, house heating will become more and more expensive and shortages will occur. And don’t think that alternative energy will solve the problem. Today, new alternative energy account for 2% of the global energy production. Solar cell and wind mills generate energy for a much higher cost than oil. At night and without wind, try to swith on your washing machine.