The point of view of economists
Ordinary people have the perception that we are living in an era of great changes, unparalleled in the history of humanity. Some eminent scholars and technologists are trying to tell us that this is not the case at all: we have actually been going through a period of great stagnation for half a century. Looking closely, some suspicions arise: the engine of humanity is still oil as it was a century ago, the internal combustion engine is still there to dominate, we continue to raise and slaughter animals as in the Middle Ages and the conquest of space is still a such a chimera that Neil Armstrong's small step has really remained a small step.
The term Great Stagnation was popularized by Tyler Cowen, an Austrian School economist who teaches at George Mason University and maintains a hugely popular blog on marginalism as well as writes regularly for The New York Times. The Great Stagnation is the title of a successful 60-page pamphlet released in 2011 with Penguin Random House. This short essay has caused so much discussion that there is a 4-word Wikipedia page dedicated to it. In reality, the book has a rather eccentric but effective mileage title: The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. This pamphlet has not yet been translated into Italian, but Egea has made available in our language Cowen's subsequent essay, more substantial and exhaustive, entitled Media no longer counts: Hypermeritocracy and the future of work. Cowen is one of the most brilliant, autonomous and less conventional minds of the global debate and often finds himself in strong controversy with the heirs of the Austrian school of Friedrich von Hayek from which he comes as an education.
On the Keneysian side is Larry Summers, the egghead of Harvard and the protagonist for better or for worse of much of the economic policy of Bill Clinton and also of Barak Obama. The abrasive ex-chancellor of Harvard never misses an opportunity to assert that we are in an age of secular stagnation, preferring this heavy adjective to the more accommodating "great". Summers collected and presented his reflections in an article in "Foreign Affairs" entitled The Age of Secular Stagnation: What It Is and What to Do About It.
The great stagnation is one of the favorite topics of Martin Wolf, the chief economics commentator of the "Financial Times". An article by him titled Is it the age of great stagnation? This is why the global economy will no longer shine has been translated into Italian and published by "Il Sole-24 ore".
… and that of the technologists
There are not only economists and commentators hammering us with this concept, there are also some protagonists of the technological revolution that has its epicenter in Silicon Valley. Peter Thiel, until his support for Trump one of the most listened to voices in the Valley, wrote in his book Zero to One that, in comparison with the changes introduced by the generation of Edisons, Teslas, Curies, the Wright brothers and the innovators of second industrial revolution, those of today pale. We would have expected flying cars, writes Thiel, and we got the 140 characters of Twitter. Elon Musk, after leaving PayPal, didn't set about building a social media, but electric cars with Tesla Motors and spaceships with SpaceX to take us to Mars by 2030. Musk runs towards these apparently utopian goals as the train ran of Trotsky along the Trans-Siberian. Thiel invests in start-ups with heavy innovation, such as Modern Meadow, which aims to bring hamburgers produced with 3D printers to our tables, so as to make farms superfluous. For now, the cost of 9 dollars per kilo is rather prohibitive. It is said, however, that the flavor is there.
Perhaps the most interesting and meditated things on the great stagnation were written by an economist over seventy, Robert J. Gordon, professor of social sciences at Northwestern University and who doesn't like the limelight like Cowen or Summers. Already in 2000, faced with the explosive and ephemeral phenomenon of the new economy, he had written a seminal essay entitled Does the “New Economy” Measure up to the Great Inventions of the Past? in which he discussed the real extent of the innovations that arrived with the Internet. He recently published a book in which he collects the studies and reflections of over 20 years of work on these issues entitled The Rise and Fall of American Growth published in January 2016 by Princeton University Press. Gordon's theses, together with those of two other scholars, authors of a book with the emblematic title The Innovation Illusion, were taken up by the “Economist” in an article included in the Schumpeter column entitled Techno wars. An earlier sunny mood about technology and innovation has given way to pessimism. We have translated this article which is really full of interesting food for thought. But let's not worry too much, innovation exists and it is important.
The duel between optimists and pessimists
The most heated dispute in contemporary business pits techno-optimists against techno-pessimists. The first group argues that the world is undergoing a technology-driven renaissance. The heads of tech companies compete with each other for superlatives to describe it. Some economists say the only problem is figuring out what to do with people when machines become super-intelligent. Pessimists argue that this is nonsense: a few businesses are doing well but the economy is stalled. Larry Summers of Harvard University talks about secular stagnation. Tyler Cowen of George Mason University says the American economy has gobbled up all the easy fruits of modern history and gobbled them up ad nauseam.
So far, the award for most pessimistic view has gone to Robert Gordon of Northwestern University. In his latest book The Rise and Fall of American Growth, published in January, Gordon argues that the technological revolution is a meaningless pastime compared to the inventions that characterized the second industrial revolution - electricity, cars and airplanes - which they profoundly changed people's lives. The current information revolution, by contrast, is changing only a limited group of businesses
The pessimists
Now, a new book, The Innovation Illusion (Yale University Press) by Fredrik Erixon and Bjorn Weigel presents an even more pessimistic view. Erixon and Weigel write that the great engine of capitalist growth, the creative destruction theorized by Joseph Schumpeter, is kaput.
Apart from a handful of stars like Google and Amazon, capitalism is rapidly aging, the two authors remark. The top 100 European companies were founded more than 40 years ago. Even America, where the entrepreneurial culture is strongest, is entering middle age. The proportion of mature firms (those older than 11) declined from a third of all firms in 1987 to nearly half in 2012, and the number of startups plummeted from 2001 to 2011. Liberals blame this stagnation to overregulation. This has certainly contributed to it. But the authors argue that this state of affairs has mostly to do with the structure of capitalism itself.
Companies no longer belong to ambitious and courageous entrepreneurs but to gigantic organizations such as the Vanguard Group (with more than 3 trillion dollars in assets under management) which constantly buy and sell pieces of company ownership on behalf of anonymous investors. These organizations are more interested in money than in the companies whose shares they buy.
They are not all Mark Zuckerbergs, the authors assert. Most large companies require predictability and therefore hire bureaucrats to run them. These administrators stay away from risky investments such as those in new technologies. After growing steadily from 1950-2000, investment in IT has declined since 2000. Instead of challenging the market, bureaucratic managers focus on squeezing costs and defending niches. They amass revenues, buy back shares in their companies and strengthen their positions by merging with old rivals.
The arguments of the pessimists are to some extent true, but exaggerated, Gordon is right in saying that the changes brought about by the second industrial revolution are unrepeatable. But that doesn't mean that the driverless car means nothing.
Erixon and Weigel are right to be concerned about the disappointing data on business start-ups. But many mature companies are not led by bureaucrats at all and have been able to reinvent themselves many times: General Electric has had at least nine lives. And the impact of new companies born in the last twenty years such as Uber, Google and Facebook should not be minimized: they have all the Schumpeterian characteristics that the authors admire
In the camp of pessimists, the key argument hinges not so much on the behavior of companies and investors, but rather on macro-level statistics regarding productivity. The data from the last few years is truly depressing. Karim Foda of the Brookings Institution calculates that labor productivity in the developed world is at its lowest level since 1950. Total factor productivity (which measures innovation) has grown by just 0,1% in advanced economies since 2001 , well below the historical average.
The optimists
Erik Brynjolfsson and Joo Hee Oh of MIT, who must be counted among the optimists, estimate that the value of free services provided via the Internet, and not recorded in official statistics, can be estimated at around 0,74% of US GDP. So close to one billion dollars. Above, the cover of an ebook whose influence can be compared to that of Tyler Cowen on the great stagnation.
The optimists respond in kind with two arguments. The first is that there must be something wrong with the statistics. They don't reflect the current state of affairs because they don't take into account the considerable surplus in consumption that is produced on the Internet with free-of-charge services. But this argument is not convincing. Official statistics may understate the impact of the Internet revolution as they downplayed the impact of electricity and the automobile in the past, but they don't understate it enough to explain the current decline in productivity.
The optimists' second argument, that the productivity revolution is just beginning, is more compelling. Over the past decade many tech companies have focused on things that were more for fun than for fundamentals, to use an expression of Paul Krugman, who has developed a lively argument with Summers about secular stagnation. In reality, Silicon Valley's best companies are certainly focused on things that change the material world. Uber and Airbnb are making dramatic improvements in two major industries that have been dormant for decades. Morgan Stanley estimates that the driverless car could bring $507 billion in productivity gains to America just because people can look at their laptop instead of the road as they drive.
The real question is not whether the technological revolution has lost momentum or whether creative destruction is wearing thin. In reality, the technological revolution is taking place and Google and Amazon will be two of the most innovative companies to emerge in the next 50 years. Rather the question is whether the new economy can fend off the forces arrayed against it: an aging population, a political class that, to appease populism, restricts free trade and expands business regulation, an education system that under many aspects is failing.
The graver danger is that, as the battle between optimists and pessimists rages, the world becomes increasingly fragmented into high-productivity islands surrounded by a vast ocean of stagnation.
