Today’s social-democrats are frightened by the notion of state-led investment. Keynes famously argued in the General Theory ( 1974 p. 376) that maintaining long-term growth meant that the investment function must be largely – in his word’ somewhat comprehensively’ – taken over by the state. Indeed, he thought the state should directly or indirectly control two-thirds to three-quarters of gross fixed capital formation.
If Keynes fell out of fashion in the 1970s, today, Keynes has been disinterred largely because of his views of escaping depression through fiscal pump-priming. But it is of crucial importance to recall his longer-term views on investment for three reasons.
First, his work explicitly rejects the still-influential Treasury view that savings precedes investment, and thus that public investment ‘crowds out’ the private sector and we must ‘shrink the state’—a view equally prevalent today in Brussels and Frankfurt as it appears to be in Whitehall. Secondly, as most of the world’s scientific experts keep reminding us, without significant and co-ordinated state effort to prevent it, climate change will soon have irreversible and disastrous consequences on our planet. And most recently, the eminent US economist Robert J Gordon has provided a new line or argument: the innovation cycle of the past 250 years has lost much of its force, so there will be less investment spin-off and fewer jobs in future.
The first two arguments are reasonably well-known so I leave them to one side and concentrate on the third. Gordon argues that there is no reason to believe future growth under a free-market regime is guaranteed as has commonly been assumed by succeeding generations of economists. Indeed, per capita income growth may be a one-time phenomenon confined to the short historical period 1750-2050. He posits that three main periods of innovation and growth can be identified: ‘industrial revolutions (IRs) 1, 2 and 3’. The first brought us steam and the railways from 1750 to 1830; the second is associated with electricity, petroleum, running water, indoor toilets, communications, and entertainment, and lasted roughly from 1870 to 1900; the current phase, roughly from 1960 to the present (IR 3), is characterised by such innovations as computers, the web and mobile phones.
What’s the point? Well simply that productivity growth has been falling off because the current phase has had far fewer growth-enhancing spin-offs than the previous phase. IR 2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. In Gordon’s words:
Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanisation, transportation speed, the freedom of women from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.
He hypothesises six factors as ‘subtracting from’ (or lowering) the 1.8% real average annual growth rate experienced in the USA over the period 1987-2007: demography, education, inequality, globalisation, energy/environment, and the overhang of consumer and government debt.
Demography means that the population is ageing and the dependency ratio increasing; educational standards in the US have declined, while inequality has grown significantly with serious social costs; globalisation has contributed to lowering US real wages and thus aggregate demand; the cost of failing to produce ‘greener’ energy/environment is rising; and the debt overhang arguably makes debts fuelled private and/or public growth more difficult. The whole argument can be summarised in a single diagram:
Robert Gordon is the first to admit that the argument is deliberately provocative and that per capita income growth of 0.2% per annum takes us back to the centuries preceding the industrial revolution.
He is quite right to be pessimistic; even were real per capita growth four to five times faster than he predicts (0.8-1% p.a), it would still only be half the 1987-2007 level. Crucially, were the benefits of growth over the coming 30 years to be distributed in the same way as since 1987, for the ‘bottom’ 99% the real wage remain stagnant and the gap between the ‘haves and have-nots’ would growth explosively.
Some progressive types will argue that we don’t want growth. But this begs the question – admirably posed by Joseph Stiglitz – of redefining the social ‘benefits’ and ‘costs’ which make up Gross National Product (GNP).
The US blogger and ex-advisor to Ronald Reagan, David R Henderson, says that Gordon is wrong for two key reasons – broadly echoed by the US Republican right. Firstly, ‘even in his worst case that the bottom 99 percent get per capita growth of only 0.2 percentage points annually, that would understate, and possibly understate by a lot, the growth in well-being.’ This is simply not true – there is plenty of evidence that the implied growth of inequality would have serious social costs. Secondly, Henderson says that IR 3 (the internet) has so revolutionised knowledge diffusion that we can expect the rate of innovation to increase, not decrease. He cites the Chicago economics Professor John Cochrane in support who himself cites the doyen of free-market ideologues, Robert Lucas.
This takes us straight back to Keynes’s capitalists. What sort of innovation do we want in current circumstances and by whom will it be carried out? There are plenty of innovations out there waiting to be invested in, particularly in the realm of public goods. The US (indeed the rest-of-the-world) could greatly boost demand by rebuilding social infrastructure and ‘greening’ energy supplies. But as long as investment is driven predominantly by the private sector and ignores public goods – as long as social democrats think ‘freedom’ means remaining dependent on capitalists’ ‘animal spirits’ – we shall not see the sort of growth required.
1 Seccareccia, M (2012) ‘Socialisation of Investment’; review of Arestis, P and M C Sawyer [eds] (in) The Elgar Companion to Radical Political Economy, London, 1994, pp. 375-80.
2 See Gordon’s summary article: http://www.voxeu.org/article/us-economic-growth-over;
a more detailed version is Gordon, Robert J (2012) ‘Is US economic growth over? Faltering innovation confronts the six headwinds’, Centre for Economic Policy Research, Policy Insight 63, Washington, DC: September.
3 See Wilkinson, R G and K Pickett (2009) The Spirit Level: why more equal societies almost always do better, London: Penguin Books.
This column is part of the European growth strategy expert sourcing jointly organised by Social Europe Journal, the Friedrich-Ebert-Stiftung, the Bertelsmann Stiftung, the IMK of the Hans Boeckler Stiftung and the European Trade Union Institute (ETUI).