The World in 2040: Major issues for Long term Macro

A recent post from Paul Krugman, (see here) where he discusses the new work by Thomas Piketty, got me thinking about some of the major long-term questions facing the global economy, and consequently, long-term macroeconomics. For my own clarity, I wanted to pull these areas together and summarise the key questions. At this point, ones view on the longer-term outlook for the global economy rests on two questions:

  •          Are you an optimist or pessimist, particularly when it comes to the role of technology in our future?
  •          On this technology, a related question is how technological advances will impact the jobs market. Will these developments, in robotics for example, lead to greater inequality, or will the benefits be shared more equally?

Gordon & the pessimistic case for long term growth

As a starting point, Bob Gordon set out the pessimistic case for longer term growth[1] in a 2012 NBER working paper. Gordon’s key point is that the rapid economic growth seen over the last 250 years could turn out to be a unique period in our history. He comes to this conclusion after analysing the economic growth of the three industrial revolutions: IR#1 from 1750 to 1830, covering steam and railroads; IR#2 1870 to 1900, covering advances such as electricity, communications, running water and the internal combustion engine; & IR#3 from 1960 to the present, which includes computers, the web and mobile phones.

Gordon states that IR#2 was the most important, as it led to nearly 80 years of rapid productivity growth. The problem is that these advances could happen only once, like transportation speed, and IR#3 has not been as encouraging from a growth perspective. To support his case, he also discusses six headwinds that will face the frontier economy in coming decades: demography, education, inequality, globalisation, energy/environment and the overhang of consumer and government debt.

Krugman and The Androids

Paul Krugman posits the technological optimists’ case in a recent post about Androids -robots that could do what humans do (see here). He asks the question of what would it look like if the digital revolution lived up to that of past industrial revolutions, and uses the advances in robotics to show how it might be possible. Such inventions like the driver-less car and speech recognition have the potential to be transformative technologies capable of new waves of economic growth.

r-g and Picketty

As Krugman points out, one might be an optimist regarding the ability of technology to support future growth, but a pessimist when it comes to how those gains will be shared. This brings us to a related long-term issue, espoused by Thomas Piketty, which is the potential trend towards inequality driven by inherited wealth. Krugman demonstrates the best model to place this theme within, which essentially is a way of understanding the difference between r, the return on assets, and g, the growth rate. It is this difference between r and g that is key to the outlook for inequality – if r is greater than g, owners of capital will do better and inequality will rise.

Inequality and Future of jobs

While Piketty’s book is more focused on inherited wealth and inequality, there is also a major question over the future of inequality due to technological innovation. This was the focus of a recent Economist briefing from Ryan Avent (see here). Avent looked into the possible trend of capital substituting for labour, while citing the recent study that showed fully 47% of occupational categories are at risk of being automated in the future.

Importantly, the briefing notes that technological changes do not affect all workers equally – some will find their skills automated, while others will find their skills complementary to the technology. Moreover, Avent notes that just because a job can be automated, does not mean that it will. Citing Nissan as an example, Avent describes how Nissan relies more on robots in Japan when producing cars, whereas it relies more on cheap labour in places like India.

The productivity gains from the forthcoming technology will be real, according to Avent, but it is also thought that the change will be disruptive. This is the case made by Erik Brynjolfsson and Andrew McAfee, professors at MIT, in “The Second Machine Age”, as the exponential growth of chip processing and memory capacity lead to disorienting change.

A Wolf ‘Institutional’ regime change

If one is a long term technological optimist, and accepts that productivity gains will ensue, even with a short term disruptive influence, it does not seem inevitable that inequality will increase. This is where the economic and political institutions of the day will play a major role, as discussed in a recent column by Martin Wolf (see here). According to Wolf, we will need to shape the good, and manage the bad from technology. One prescription required is to redistribute wealth and income, and a way to achieve this is to have the state own a share of the intellectual property of this technology. Thus the state, and hence the general population, will automatically receive a share of the income generated from these advances.

Long term questions these are, but answers will be needed sooner than we realise.

[1] Is US economic growth over? Faltering Innovation confronts six headwinds. NBER Working Paper no. 18315.

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