Monday, 23 May 2011

The Great Stagnation and consumption-biased change

A debate has been going on within economics (and in my head) about how the economy is changing.

Tyler Cowen thinks there is a "Great Stagnation": all the low-hanging technological fruit (trains, planes, automobiles) has been harvested; we've grown for the last thirty years by getting some efficiencies out of existing processes, but that has limits; and there's no new major new invention on the horizon which will transform living standards further in the coming century.

Umair Haque says something similar in more provocative language: the old models are bankrupt, we need a new mode of life - moving away from consumption and towards eudaimonia. A bigger TV doesn't provide any more satisfaction, just a shallow, temporary endorphin hit and a status upgrade relative to some of your friends. [Update: Umair comments on twitter that "my definition of eudaimonia is economic, not just psychological"]

But the default position of economists - including me - until recently has been: things are always getting better, even if it isn't obvious. Economic growth continues; on average, we are twice as rich as we were in 1985, and four times as rich as in 1965. We might not feel that much richer - because we spend the money on new things, and because some of the wealth has gone to China, India or Dubai - and above all because we quickly acclimatise to any change in circumstances. Regardless, things are indisputably better.

The second part of this argument is that we are still creating new inventions - most of them on the Internet - but that much of this production is not captured in GDP figures, because people don't pay directly for a lot of the value they receive.

Who's right? Haque would argue that the default position is complacent, indeed wilfully blind to what's really happening. Cowen would argue, I think, that we have just about managed to squeeze some growth out of the last fifteen years but its lack of productive foundations has caught up with us and shown up in the financial crisis and recession; and there's not much hope for the future. Other regions of the world might still have some catch-up growth to sustain them for a while, but the West does not.

Bryan Caplan looks at this in an interesting way. He suggests that we have experienced "consumption-biased technical change":
Firms are figuring out ways for small numbers of workers to create tons of value - then give it away to consumers for pennies or less. And as far as I can tell, the CPI totally ignores these benefits. CPI bias: Now worse than ever. Quality of life: Now better than ever.
So we may have all the consumption goods we could possibly want - many of them being informational goods like Twitter feeds or TV shows rather than physical ones. But the production of these goods might be concentrated in the hands of an ever-smaller group of people.

If this is true, it raises a couple of important questions. Take this insight to its logical conclusion: imagine that in 30 years time we have a world in which everything we need is produced by 5% of the population, and the other 95% is happily consuming the costless electronic outputs of those 5%.
  1. Do we get satisfaction from production as well as consumption? Surely we do. This was the main insight of Will Hutton's mid-90s work The State We're In. If so, then just being able to consume without producing will not make us happy.
  2. What will society - and its power relationships - look like in this world? If 5% of people can produce everything, what will they demand from the other 95 in return?
The classical answer to the second question is that demand for goods and services is limitless, so the 5% will still want something that the 95% can provide: whether it's more convenient takeaway food deliveries at all times of the night, or ever more massages and haircuts. In plain economic terms, that's fine; but the work may not be at all satisfying.
    I still tend to be optimistic - I think both individuals and societies are good at finding solutions that work for them - but put in these terms, I can more clearly see what the problem is.

    What might the solutions look like? It would be a bit contradictory to suggest that I can deliver the answer to a problem which by its nature needs decentralised answers; but here are some ideas that might contribute:
    1. Production will become more competitive; on twitter, production and consumption are closely intermingled and it's hard to clearly distinguish the two. This might help to spread both the satisfaction of being productive, and the material rewards for it, to a wider group.
    2. Production and consumption might become more specialised into groups. Some production will certainly be carried out at a global scale (Hollywood movies or Justin Bieber's twitter account); but others will be country-wide (Downton Abbey, Stephen Fry's twitter account) and others specialised to individual groups like economists (the Keynes-Hayek rap, Tim Harford's twitter account) and even smaller, overlapping groups (random economics lectures on YouTube, or my twitter account). The global scale, as you'd expect, is ahead of the local on these measures. So it currently appears that we have asymmetric rewards, with only the global producers picking up the attention (and money). But perhaps a new middle class will emerge, composed of all those who sit at nodes in a worldwide network producing anything with an audience of more than a few dozen.
    3. Competition might drive up standards of production - so that blog posts, tweets, YouTube videos - even Daily Mail columns - need to have a high quality of research and production behind them in order to get any attention. This would provide more people with a role in producing them. (The same argument applies to sandwiches and cars, by the way, not just virtual products)
    4. Investment in education may increase, so that more people are capable of competing for the attractive production roles (and in turn, more production roles are created to absorb them). This is likely to be required anyway if any of the first three outcomes are to occur.
    5. I'm not a fan of this one, but I know some people believe in it: local production may return. Organic farms, local microbreweries and community-based tailors or housebuilders could become important to the economy again. However, I think the appetite for being involved in productive work is not sufficient to outweigh the low efficiency of this kind of economic model.
    The insight that might help close the gap is this: while there is probably a limit to the quantity of what we can enjoyable consume, there is no limit to its quality. Quality can be in the traditional sense of better-made and better-performing objects; or funnier, more cleverly written TV shows; or most fundamentally, objects that are more tailored to their audience.

    When a continually growing production efficiency from one direction, meets a growing and diversifying market for tailored goods and services from the other, a new balance will emerge: a more personalised life where your production and consumption are integrated, in which you are a member of several audiences, smaller and more intimate than the mass market you participate in today.

    1 comment:

    PunditusMaximus said...

    It really doesn't surprise me to see a conservative/libertarian economist grasping for straws as to why we haven't had economic growth for 30 years of conservative regimes.

    Maybe . . . it's the 30 years of conservative regimes?