{"id":3515,"date":"2015-05-14T15:39:20","date_gmt":"2015-05-14T10:09:20","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3515"},"modified":"2015-05-14T15:39:20","modified_gmt":"2015-05-14T10:09:20","slug":"why-economic-growth-cannot-be-taken-be-for-granted","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/05\/14\/why-economic-growth-cannot-be-taken-be-for-granted\/","title":{"rendered":"Why economic growth cannot be taken be for granted"},"content":{"rendered":"

\"safety-of-chit\"<\/a><\/p>\n

Mrs. Lintott<\/i><\/span><\/span><\/span><\/a>: Now. How do you define history Mr. Rudge?
\n<\/span><\/span><\/span>Rudge<\/i><\/span><\/span><\/span><\/a>: Can I speak freely, Miss? Without being hit?
\n<\/span><\/span><\/span>Mrs. Lintott<\/i><\/span><\/span><\/span><\/a>: I will protect you.
\n<\/span><\/span><\/span>Rudge<\/i><\/span><\/span><\/span><\/a>: How do I define history? It’s just one fuckin’ thing after another. <\/span><\/span><\/span><\/p>\n

\u2013 Alan Bennett, The History Boys<\/i><\/span><\/span><\/span><\/p>\n


\nEconomists these days do not give much importance to economic history. As Cambridge University economist Ha-Joon Chang writes in <\/span><\/span><\/span>Economics\u2014The User’s Guide: <\/i><\/span><\/span><\/span>\u201cMany people consider <\/span><\/span><\/span>economic history<\/b><\/span><\/span><\/span> [emphasis in the original], or the history of how our economies have evolved, especially pointless. Do we really need to know what happened two, three centuries ago.\u201d
\nNevertheless, a good understanding of economic history is necessary to ensure that we don’t take things for granted. Take the case of economic growth. In the times that we live in we take rapid economic growth for granted. But for much of humankind that wasn’t the case. As best-selling author and economist Tim Harford put it in a column \u201cEconomic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.\u201d
\nChang makes this point in his book. Between 1000AD and 1500AD, per capita income, or the income per person, grew by 0.12% per year in Western Europe. What this means is that the average income in 1500 was only 82% higher than that in 1000. \u201cTo put it into perspective, this is a growth that China, growing at 11 per cent a year, experienced in just six years between 2002 and 2008. This means that, in terms of material progress, one year in China today is equivalent to eighty-three years in medieval Western Europe,\u201d writes Chang.
\nFurther, at 0.12% Western Europe was growing at a very fast pace in comparison to other parts of the world. Asia and Eastern Europe during the same period grew at 0.04% per year. Hence, by 1500 the per capital income in these parts of the world would have been 22% higher than that in 1000.
\nThings did not improve in the centuries to come. Between 1500 and 1820, the per capita income in Western Europe averaged at 0.14% per year, which wasn’t very different from 0.12% per year, earlier. Some countries like Great Britain and Netherlands which were busy building a global empire and had also got a central bank going, grew a little faster at 0.27% and 0.28% respectively. So by modern standards the world was in a depression between 1000AD and 1820AD.
\nThings improved over the next 50 years. Between 1820 and 1870, the per capita income for Western Europe grew by 1% per year, which was significantly higher than anything the world had seen earlier.
\nOne reason for this turbo-charged growth was the start of the industrial revolution. In the years leading to 1820 many new production technologies were invented. \u201cIn the emergence of these new production technologies, a key driver was the desire to increase output in order to be able to sell more and thus make more profit,\u201d writes Chang.
\nAlong with this, the evolution of banks and the financial system also helped. \u201cWith the spread of market transactions, banks evolved to facilitate them. Emergence of investment projects requiring capital beyond the wealth of even the richest individuals prompted the invention of the <\/span><\/span><\/span>corporation, <\/i><\/span><\/span><\/span>or limited liability company, and thus the stock market,\u201d writes Chang. And this helped enterprises raise the money required to start a business, something which is at the heart of capitalism.
\nAfter 1870, the production technologies kept improving. The economist Robert Gordon divides invention and discoveries into three eras. The second era came between 1870 and 1900 and according to him had the maximum impact on the economy in particular and the society in general.
\nAs he writes in a research paper titled\u00a0<\/span><\/span><\/span>Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds<\/span><\/span><\/span><\/em> \u201cElectric light and a workable internal combustion engine were invented in a three-month period in late 1879\u2026The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits\u2026included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,\u201d writes Gordon.
\nBased on Gordon’s research paper, Martin Wolf wrote in the Financial Times: \u201cMotor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared.\u201d
\nIn fact, Gordon makes an interesting observation regarding this increase in productivity by comparing motor power to a horse. As he writes: \u201cMotor power replaced animal power. To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That\u2019s an interesting measure of how much efficiency was gained from replacing the horses.\u201d
\nAnd all these inventions drove economic growth. As Bill Bonner told me in an interview I did with him a few years back: \u201cTrains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity \u2013 fired by coal, oil\u2026and later, atomic power \u2013 made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental\u2026with diminishing rates of return from innovations.\u201d
\nThese game changing inventions are now a thing of the past. Harford explained this to me through a couple of brilliant examples when I interviewed him for The Economic Times<\/a> a few years back. As he told me: \u201cThe 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn\u2019t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.\u201d
\nThe same seems to be true for medicines. \u201cLook at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven\u2019t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn\u2019t be worried about antibiotic resistance if we thought we could create new antibiotics at will,\u201d Harford added.
\nSo the basic point is that growth of economic productivity has petered out over the last few decades because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
\nNevertheless, what these game changing inventions did was that they led to the assumption that economic growth will continue forever. But will that turn out to be the case? As Gordon wrote in his research paper: \u201cEconomic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.\u201d
\nAnd this might very well come out to be true. The core of Gordon\u2019s argument is that modern inventions are less impressive than those that happened more than 100 years back. \u201cAttention in the past decade has focused not on labor-saving innovation, but rather on a \u00a0succession of entertainment and communication devices that do the same things as we could do\u00a0before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety \u201cdumb\u201d cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,\u201d writes Gordon.
\nAnd that isn’t happening anymore.<\/span><\/span><\/span><\/p>\n

The column originally appeared on The Daily Reckoning<\/a> on May 14, 2015<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Mrs. Lintott: Now. How do you define history Mr. Rudge? Rudge: Can I speak freely, Miss? Without being hit? Mrs. Lintott: I will protect you. Rudge: How do I define history? It’s just one fuckin’ thing after another. \u2013 Alan Bennett, The History Boys Economists these days do not give much importance to economic history. … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14,30],"tags":[481,1083,1268,1514,2491,3116,3975],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Business<\/a> Equitymaster<\/a>","qubely_excerpt":"Mrs. Lintott: Now. How do you define history Mr. Rudge? Rudge: Can I speak freely, Miss? Without being hit? Mrs. Lintott: I will protect you. Rudge: How do I define history? It’s just one fuckin’ thing after another. \u2013 Alan Bennett, The History Boys Economists these days do not give much importance to economic history.…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3515"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=3515"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3515\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=3515"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=3515"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=3515"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}