The mysteries of growth elude us.<\/p>\n\n\n\n
That\u2019s the best conclusion to draw from reading Dietrich Vollrath\u2019s book \u201cFully Grown\u201d.\u00a0 This is unfair to Vollrath whose thesis is simply that recent slower growth can be explained by taking a look at demographics.\u00a0 Societies with a large elderly population as a percentage of their total are destined to grow more slowly.\u00a0 All the huffing and puffing of anxious policy makers to encourage investment, savings, or any other conventional spur to growth won\u2019t work.\u00a0 That aging population is a deadweight that no amount of other effort can overcome.<\/p>\n\n\n\n
Vollrath is very thorough in digging through every nook and cranny of what might increase or decrease growth rates.\u00a0 He discusses all the usual topics.\u00a0 Can we blame taxation or regulation?\u00a0 Perhaps, but they\u2019re not significant enough to explain what\u2019s going on.\u00a0 Baumol gets a look in and, yes, the great switch to services and away from manufacturing, is putting a brake on growth.\u00a0 But it isn\u2019t the biggest brake.\u00a0 Not by far.\u00a0 How about our overly concentrated industrial sectors: is our obsession with oligopoly slowing things down?\u00a0 Of course it is.\u00a0 Those corporate \u201cmoats\u201d to create rents for the benefit of greedy shareholders and executives are diverting energy away from growth.\u00a0 But that too is insufficient an explanation for what\u2019s happening. \u00a0<\/p>\n\n\n\n
There\u2019s no point in reprising the entire book here.\u00a0 Go read it yourself.<\/p>\n\n\n\n
Here, though is the summary:\u00a0 between 1950 and 2000 average annual growth was roughly 2.25%.\u00a0 Between 2000 and 2016 that rate of growth dropped to 1.00% per annum.\u00a0 Fully 1.00% of that 1.25% decline can be attributed to two big causes:\u00a0 0.80% to the effects of smaller families and aging \u2014 aka \u201cdemographics\u201d \u2014 and 0.20% to the switch to being a service economy.\u00a0 These changes are called \u201csuccesses\u201d by Vollrath.\u00a0 They are signs of society\u2019s arrival at a new era of social satisfaction and success.\u00a0 We have so improved our manufacturing capability that it chews up less of our resources, so even fairly major improvements in future productivity will fail to move the growth needle much.\u00a0 Our prosperity has delivered opportunity also.\u00a0 Lifestyles have adapted to the cornucopia.\u00a0 We have smaller families.\u00a0 We make different career choices.\u00a0 We live longer.\u00a0 The impact of this host of newly available options has altered the demographic framework within which economic activity takes place.\u00a0 These are all \u201cgood things\u201d.\u00a0 They are signs of society reconstructing itself and settling into a comfortable, and different, set of arrangements.\u00a0 The days of blistering growth are gone.\u00a0 The rush for wealth is past.\u00a0 Now it\u2019s a question of valuing and enjoying the fruits of all that hard work.<\/p>\n\n\n\n
Well, that\u2019s the story Vollrath tells.<\/p>\n\n\n\n
He also points to one or two failures: The other 0.25% of the decline in per annum growth can be attributed to changes in the structure of the economy. It has become too rigid. There is less churn both of workers and businesses. The Schumpeterian engine is sputtering. The slowing churn means that we are not re-allocating our resources towards higher productivity activity as effectively as we once did. To some degree that\u2019s because of those moats businesses like to build to generate extra profits. And to some degree it is because we have lost the social mobility that provided a boost to the growth engine in the early postwar years. <\/p>\n\n\n\n
That\u2019s it. That\u2019s the story.<\/p>\n\n\n\n
Underlying it though, and what intrigues me most, is the way in which economists have been slow to adapt to the unfolding drama.<\/p>\n\n\n\n
Vollrath sweeps all the demographic factors under the heading of \u201chuman capital\u201d and then, in his chapter 6 he moves on as follows \u2026<\/p>\n\n\n\n
\u201cHaving accounted for the role of human capital, we can now turn back to the other main source of growth slowdown, residual growth.\u201d<\/em> <\/p>\n\n\n\n He then says we don\u2019t actually know what this \u201cresidual\u201d is. There is, he says, no formal definition of it, so it remains, as Moses Abramovitz called it in 1955, a measure of our ignorance.<\/p>\n\n\n\n Naturally, since 1955 economists have worked assiduously to give explanations of what this residual is.\u00a0 They have attempted to reduce our ignorance.\u00a0 But, by and large, they have failed.\u00a0 For Vollrath in 2020 to say that we have no formal definition of the residual is quite an indictment of the effort so far.\u00a0 We remain remarkably ignorant after almost seventy years of work.<\/p>\n\n\n\n Why?<\/p>\n\n\n\n The problem is that as we follow in the footsteps of Solow and Swann, the twin originators of modern growth theory, we remain attached to their basic format. They were being loyal to the tradition that the key factors contributing to growth were the same \u201clabor\u201d and \u201ccapital\u201d that the profession has always used. Never mind that neither of those two are well articulated. What, exactly, is \u201clabor\u201d? Is it the energy consumed in production? Is it the skill of a worker? Is it the time spent? Is it all of those? Or some combination? Labor is never specified as tightly as economists love to claim all their formal work specifies the logical relationships in their modeling. The elegance and logical completeness of their math is betrayed by the sloppiness of their definition of \u2014 or, rather, lack of definition of \u2014 their inputs. The same can be said of \u201ccapital\u201d. So, when the work begins with a foggy duo of inputs it is hardly surprising that, no matter how impressive the subsequent math, out pops a very large and embarrassing \u201cresidual\u201d. <\/p>\n\n\n\n The problem with our ignorance is not the skill with which economists can manipulate and extend the math. It is in our understanding or what, exactly, the factors of production are. <\/p>\n\n\n\n This is why the ugly term \u201chuman capital\u201d emerged.\u00a0 As noted above Vollrath had to resort to using it.\u00a0 It seems to be a grab bag of stuff that people do and learn during their lives.\u00a0 Years of education, experience, various sorts of knowledge \u2014 however acquired \u2014 are all scooped up and mixed together in a fuzzy and imprecise melange that ought to embarrass a profession proud of its precision.\u00a0 All we know is that it seems to be pretty important.\u00a0 As are the various skills used to mix that melange with the machinery and other forms of fixed capital that we deploy in production.\u00a0 Mixing human and fixed capital is also a skill\u00a0 \u2014 non-economists call it organization or coordination \u2014 that is not reflected anywhere in the traditional production function.\u00a0 In other words, there seems to be little space for inserting actual production into the factors deployed to estimate growth.\u00a0 So we remain ignorant and stuck with our antique duo of labor and capital.\u00a0 Whatever they are.<\/p>\n\n\n\n This ignorance is, of course, also a residual of the profession\u2019s making.\u00a0 It is stuck in the past.\u00a0 Stubbornly stuck way up what a biologist would call a fitness peak, it has long lost the ability to reconstruct new versions of models to attack its key problems.\u00a0 And, surely, figuring out why growth happens and at what pace, is a central problem for economics to solve.\u00a0 But stuck as it is with its antiquated inputs its struggles on by attaching ever more elliptical and abstract circles to its original ignorance in a valiant attempt to rise higher in its understanding.<\/p>\n\n\n\n All science has opportunities to alter.\u00a0 Observations arise that appear to negate or challenge an older idea.\u00a0 So new ideas emerge to accommodate the science to the observation.\u00a0 Economics, though, has avoided exploiting such moments.\u00a0 Hence its antique nature.\u00a0 We could, for instance, have used the Coase query in the 1930\u2019s to build the existence of the firm as a centralized factor of coordination into our explanations of the economy.\u00a0 But that appeared to violate the prior notion that markets were both perfect and unsurpassed at coordination.\u00a0 So, rather than rebuild, economics shunted the firm into a side track under the rubric of \u201ctransaction costs\u201d and forgot about it.\u00a0 The side track was even given an imposing name — the New Institutional Economics. Later generations simply assumed the challenge had been met and that transaction costs explained the presence of firms so they could get on with their work oblivious to the gaping hole that business coordination implies in their perfect marketplaces.\u00a0 Likewise, the discovery of the Solow residual was an opportunity to re-evaluate what the proper factors were in growth theory.\u00a0 But a discipline so path dependent on the use of labor and capital was unable to re-invent itself.\u00a0 Like transaction costs the residual was given a name that made it sound thought-through and vaguely academic \u2014 \u201ctotal factor productivity\u201d sounds like an imposing concept rather than a bucket of slop \u2014 and so we remain ignorant, but aligned with our roots. \u00a0<\/p>\n\n\n\n As an aside, one consequence if the original Solow model is that, eventually, capital will not contribute to growth at all.\u00a0 Why?\u00a0 Because of the depreciation of old capital.\u00a0 Some time in the future all new capital investment will be consumed by replacing the older stuff.\u00a0 It will, on the margin, have zero growth effect.\u00a0 This ought to focus minds.\u00a0 If capital is then off the table, and the residual remains opaque, economists are reduced to relying on labor as an explanation of growth.\u00a0 And that is hardly new.\u00a0 I believe it was Adam Smith who said: \u201cThe most decisive mark of prosperity of any country is the increase of the number of its inhabitants.\u201d\u00a0 Apparently what was correct in 1776 will be the revelation of theory in the near future.\u00a0 Have we not learned anything since?<\/p>\n\n\n\n I suppose it is inappropriate to go on.\u00a0 Nothing will change.\u00a0 Solow, I think was sensible enough to realize the mess his residual was implying.\u00a0 He probably thought it would disappear after suitable subsequent research.\u00a0 But all that research has done is to explore what might be in the bucket of slop, but it hasn\u2019t replaced it with anything resembling the sort of crisp and elegant definitions that economics like to present to the public as being part of its modus operandi. \u00a0<\/p>\n\n\n\n The effort goes on though. Perhaps something will emerge. Our libraries groan under the weight of volumes dedicated to papers analyzing various growth models. All sorts of potential factors get discussed: culture is a recurring theme. Education is another. Energy and information pop up now and again. The list of possible replacements for labor and capital is long. Heck, even technology made it into the mainstream, not as something that drops to earth from the skies \u2014 in its \u201cexogenous\u201d form \u2014 but as something that appears within the system by way of innovation \u2014 in its \u201cendogenous\u201d form. The words themselves imbue the concepts with gravity. Who knew innovation was a thing? Who knew it was part of the competitive business landscape? Critics like myself ought shut up when confronted with such sparkling insights. Nobel prizes have been dished out for the insight that business innovates in order to get a leg up in a competitive stetting. No. Seriously, who knew that innovation might be taking place within an economy? And not, presumably, being transported here from Mars. <\/p>\n\n\n\n I know.\u00a0 I am being snarky.\u00a0 Rightly so.\u00a0 I felt bad for Vollrath in his chapter 6 as he explained why economists use the residual as an actual thing instead of an admission of ignorance.\u00a0 You would think that after seven decades or so of hard work he wouldn\u2019t have to.<\/p>\n\n\n\n As a footnote: in 2012 Ignacio Palacios-Huerta published a collection of essays written by leading economists predicting the future.\u00a0 Solow was a contributor.\u00a0 His essay was titled \u201cStray Thoughts on How It Might Go\u201d.\u00a0 It is a lesson in well-informed but humble speculation by someone who has mastered the concept of growth.\u00a0 The extraordinary rise in prosperity during the twentieth century he mentions at the outset sets the scene well \u2014 then he ranged across a series of topics such as the environment, inequality, resource depletion, and development in other less economically developed nations, each of which might affect the replication of that growth.\u00a0 As I read it I began to wonder why some of those things never made it into his formal theorizing.\u00a0 He clearly thought of them as pertinent.\u00a0 So where are they in growth theory?\u00a0 If they are important enough to chat about in a short speculation on the next hundred years, if they have that sort of relevance, ought they not be somewhere in the models?\u00a0 Maybe then the residual would shrink a bit.<\/p>\n\n\n\n For someone such as Solow to be as openly inconsistent a this, and yet feel comfortable with it, presumably because the press of staying within the tried and true lanes of theory prevents him from being truly novel, is quite depressing.\u00a0 We are stuck both with his theory and with his residual.\u00a0 And not a very good understanding of growth as a consequence. \u00a0<\/p>\n\n\n\n Then again, physics has \u201cdark matter\u201d so economics is not alone. It\u2019s just that dark matter sounds so much more interesting than \u201cresidual\u201d. <\/p>\n\n\n\n OK. Let\u2019s call it total factor productivity and just pretend we know what it is.<\/p>\n\n\n\n I hope nobody notices our ignorance.<\/p>\n The mysteries of growth elude us. That\u2019s the best conclusion to draw from reading Dietrich Vollrath\u2019s book \u201cFully Grown\u201d.\u00a0 This is unfair to Vollrath whose thesis is simply that recent slower growth can be explained by taking a look at demographics.\u00a0 Societies with a large elderly population as a percentage of their total are destined […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[43,623,646,748],"class_list":["post-3493","post","type-post","status-publish","format-standard","hentry","category-economics","tag-economics-theory","tag-growth-theory","tag-solow","tag-vollrath","has-post-title","has-post-date","has-post-category","has-post-tag","has-post-comment","has-post-author",""],"_links":{"self":[{"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/posts\/3493","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3493"}],"version-history":[{"count":20,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/posts\/3493\/revisions"}],"predecessor-version":[{"id":3521,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=\/wp\/v2\/posts\/3493\/revisions\/3521"}],"wp:attachment":[{"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3493"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3493"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radfordfreepress.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3493"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}