Lucas — and flat earth theories

These slides used by Robert Lucas in 19 May his Milliman Lecture at the University of Washington make for an interesting way to spend half an hour.

It is not Lucas’s topic, however I was reminded of Tyler Cowen’s Great Stagnation Thesis when reading his notes.

Basically, Cowen’s thesis is that we are in a structural slump because the easy growth available from free land, cheap labour and new technology is gone. He claims that:

during the last forty years, the low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau. The fruit trees are barer than we want to believe.

What Lucas points out is that the US / leader economies have been growing real income per capita at about 2% per annum for over one hundred years.  Looking at these charts, it’s hard to make a case that there’s been a trend break in the last forty years – unless you’re a follower economy like Europe, and have done the bulk of your catchup / copycat growth.

The Great Stagnation Thesis seems like an “end of science” argument to me. I understand that these “end of science” arguments show up every twenty years or so – there is an old story about a nineteenth-century patent clerk that recommend plans be made to close the office, as there would soon be nothing left to invent!

The most recent end of science book was (somewhat ironically) published in 1996 by John Horgan … read mathematician David Hoffman’s review for an account of the book’s many problems.

In rebutting Horgan’s argument, Nobel laureate (Physics) Philip Anderson described the process of science —  “The reason that Horgan’s pessimism is so wrong lies in the nature of science itself. Whenever a question receives an answer, science moves on and asks a new kind of question, of which there seem to be an endless supply”.

Science isn’t out of questions, and we’re not out of scientists, so I doubt we’re out of technical progress. It seems much more likely to me that we’ll keep discovering new stuff, and that therefore the production possibility frontier will keep growing at about 2% real per year.

It feels bad now, but my guess is that epoch-changing R&D is currently going on some place in the USA. The double dip recession of the 1980s gave us the R&D and venture capital that delivered the internet.

I have no idea what the 2030 boom is going to be, but my guess is that there will be one. And my guess is that when we look back we’ll see that real incomes continued to grow at ~2% real per annum.

I don’t have data on this (if anyone does, please email me: ricardianambivalence@gmail.com), but I suspect that new ideas are counter-cyclical. It makes sense that the opportunity cost of education and disruptive R&D is lowest when the economy is weak.

Also, we know that large firms are bad at disruptive change, and it’s when the economy is weak that there are the spare resources available for an innovative new firm to grow easily. Additionally, hard economic times make households and firms more receptive to technical change (typically for cost cutting reasons).

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7 Responses to Lucas — and flat earth theories

  1. ssec says:

    Absolutely. If we think for a moment that just 15 years we just started using e-mails… the information revolution that the Internet brought to us is epochal. It’s no plateau at all. We are just staring to accelerate. If anything the risk is in going too fast, not too slow.

  2. Manny C says:

    Agree with most of what you say R but I think theres something to Cowen’s thesis that you haven’t explored. But I’ll have to go back and read a bit more and report back tomorrow.

  3. Manny C says:

    I think Cowen’s main argument is:
    1/ the median male real income increased healthily up until 1970s. Then fell 2% over the next four decades
    2/ this is because innovation being industrialised wasn’t leading to sufficiently numerous jobs being created to offset jobs losses from declining industries. Examples he gives is that Google only employs 20000 in US, Apple employs 10000 etc
    3/ reason for constant increase in real GDP is because gains from innovative spurt related to it has been heavily skewed to a few innovators and not much has trickled down to median worker.

    Appropriately sumner made a few good points:
    1/ given that information economy is more about increasing the utility of consumer rather than more output, is GDP appropriate measure of economic health?
    2/ If not would a utility based measure be more appropriate?

    Anyone the last two questions are ones I’m considering in relation to another essay I’m reading on whether growth is good.

    • Ricardo says:

      i don’t have a strong view on the possibility that new inventions require greater inequality — but i doubt it. i do, however, think that fast change skews rewards to the elite — as they have the resources to capture the rents. thus, it’s possible that TC is right about inequality for exactly the wrong reason – it could be that a faster pace of change is depressing median incomes, and skewing rewards from innovation. if this is the case, we should expect fast growth, but weak median income growth.

      on this, Raghuram Rajan thinks that the credit bubble was an attempt to cover over inequality, however i don’t necessarily think that means we must have inequality to have growth/ progress. different nations achieve different income distributions by trading off distance from the PPF. everyone gets the internet eventually, it’s just a question of when.

      Lucas’s slides are worth reviewing on this subject. one of his claims is that the European social welfare states are stuck at permanently lower per capita income levels — as evidence for this, he points out that they stopped catching up well shy of the leader economy, and then grew at around the same rate.

      if a consequence of the bust is that we value equality over growth for a time, it may well be that we are in a sort of structural slump – as the US will catch-down to the European / follower level, as a consequence of the reduced reward for entrepreneurship.

  4. Manny C says:

    As to whether regulation retards growth potential: that seems obvious. And he provides a good story. However it could also be cultural. European countries value leisure more than the US. This will largely not be reflected in EU GDP. This doesn’t explain Japan. Although that could be explained by the bureaucratic, inflexibility of business. Alternatively, thinking of RGDP as average hours worked per week: if EU is 35hr and US is 45 (seems reasonable) then that accounts for 20% level difference Lucas refers to. This is a combination of labour demands in EU and regulation that enshrines this culture.

    As you might have guessed I don’t buy Lucas’ argument on recession as it tries to explain too much. For example he thinks Fed did too much in 2008 cf to 1930s. Wrong. They did too little. Yes reserves went through the roof by the end of 2008. But they were paying interest on those, more at points than Tbills. That was never going to reinflate economy. NGDP was already declining before Lehman collapse. He fails to note this. Monetary policy can explain much more than he thinks.

    • Manny C says:

      This: “European countries value leisure more than the US. This will largely not be reflected in EU GDP.”

      Should obviously read “European countries value leisure more than the US. This will largely be reflected in EU GDP. “

  5. Manny C says:

    Actually let me modify my first claim that Lucas was presentng something obvious. In one sense he was presenting something that most of his ideological sympathisers would reflexively profer as an explanatory variable. Yet the data supporting this is quite interesting. Haven’t seen it put together before.

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