The mystery of the Great Stagnation

We’re not as innovative as we think we are, according to Tyler Cowen, a respected right-of-center on the faculty of George Mason University.  American innovation and American income growth are both slowing down, he said in a talk to a TED conference.

The great age of American innovation was the first half of the 20th century, not the second half, Cowen said.  During the early 20th century, electricity, the telephone, the automobile, broadcasting and aviation revolutionized American life.  Nuclear power, the space program, xerography, the personal computer, the Internet, the cell phone – these changed American life much less.

I think what he said is correct.  I could, without much discomfort, go back to living as I did in 1961.  I don’t think many Americans who were 74 in 1961 would have willingly gone back to living as they did in 1911.

Cowen said 20th century American innovation was based largely on inventions and discoveries of the late 19th century – the electrical generator and the internal combustion engine.   Most of what came after is based on a realization of the possibilities in these two things.  The main exception that comes to mind is antibiotics, also an innovation of the early 20th century.

But Cowen does not really address the question of why this is so, and nor does he connect it with the slowing of income growth.

It is important to be clear as to what Cowen said.  He did not say that people in the past couple of generations were less inventive than people of previous generations.  The person who thought of taking digital photographs with a cell phone was very ingenious.  Cowen’s argument is that the economic payoff from innovation is less than it was in an earlier generation.

Why should this be so?  One likely reason is the exhaustion of the possibilities of the great inventions of a century or so ago.  There is only so much you can do with electricity or gasoline.  Another is the exhaustion of cheap oil supplies.  If oil had been as expensive in the days of Henry Ford as it is today, we might not have had mass production of automobiles.

Why haven’t new and better technologies emerged to replace the old ones?  I don’t claim to know.  I do wonder how much innovation can come out of an economy where so much of the big rewards go to holders of already-existing financial assets rather than creators of economic value.

Cowen’s chart baffles me.  If the value of our increased production does not generate increased income, where is it going?  One possible answer is that our increased wealth is being reinvested to produce new wealth rather than consumption.  The chart fits the profile of a dynamic, creative economy.  But I don’t think so.  I think it is more likely that the increased production is generating more income for foreign bond-holders, or for OPEC oil producers, or for the upper 1 percent of Americans.

I like reading Cowen’s web log, which he maintains with Alex Tabarrok.  He has enormous erudition and sophistication, and the ability to express his ideas without animosity.  Click on Marginal Revolution to read it.  But like many U.S. economists, he is allergic to the question of income distribution.  The possibility that the economic elite’s interest runs counter to the majority’s is not on the table.

Hat tip to The Browser for the Cowen video.

Tags: Economic growth, Great Stagnation, Income growth, Innovation, Tyler Cowen