April 4, 2011 2:56 am

The spectre of a jobless online world

The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, by Tyler Cowen, Penguin eSpecial, RRP £2.30/$3.99

Battered by recession and menaced by China, the US hungers for explanations of its relative economic decline. Tyler Cowen, an economist and blogger, has provided one: that the country has run out of technological juice.

Where many believe innovation keeps growth ticking along, Cowen posits a world of “periodic technological plateaus, and right now we are sitting on top of one”. As a result, America increasingly resembles Japan: ageing, stagnant, overgoverned and waiting for a technological burst to get the motor going again.

This provocative thesis is one reason The Great Stagnation is the most discussed economics book of the year. Another stems from its format. Inspired by Marginal Revolution, the must-bookmark blog for economics nerds that he publishes, Cowen released the book only in electronic form. This ensured a timely arrival just as the US was emerging from financial meltdown and looking for answers.

Cheap to download and quick to read, its brevity also has much to recommend it. “Big idea” books too often spread an article’s worth of insight over hundreds of pages of padded-out prose. Cowen cannot be accused of the same mistake. Instead, The Great Stagnation is a true pamphlet for the modern age: more insightful, urgent and challenging than most publications many times its length.

That said, there are problems with the story it tells. The first concerns the route by which one might expect the internet to filter into higher productivity and growth. Cowen’s contention is that the “low-hanging fruit” of land, education and technology that once powered US growth have all been picked. Cheap land has been used up. There are fewer “smart, uneducated kids” to send to school. And the internet, in particular, has disappointed relative to innovations such as electricity and the railways.

Cowen is no Luddite: as one might expect of a blogger, he thinks life is more fun and interesting with the internet around. But he worries that today’s “web activities do not generate jobs and revenues at the rate of past technological innovations”.

This may well be correct. Facebook and Twitter are not obviously productivity-enhancing tools – as their users can all too easily attest. But this is the reason few economists look to them in particular, and consumer technology in general, as a main explanation of how technology alters patterns of growth.

Instead, most growth theorists look instead at how the internet diffuses through organisations. At first this effect was seen only in a few sectors, most obviously among super-efficient retailers such as Wal-Mart and Tesco, which used the web to reshape their logistics systems. But now other industries have reworked themselves too, and the evidence suggests they have also become more productive, boosting economic growth overall.

But this process takes time, rather than arriving in one big bang as Cowen seems to expect. The coming of electricity did not boost growth by giving workers light. Rather, it did so in much the same way as the internet today: by allowing production to be arranged in new ways. Indeed, economist Paul David has shown that productivity took close to a generation to rise after electricity’s arrival, when most of the machines in US manufacturing began to use it. Much the same is likely to be true of the internet.

The real problem, however, comes when Cowen links his argument about a technological plateau to the predicament of the US labour market. Here, his analysis is unarguable: wages are stagnant, job growth is anaemic and the very wealthy have won the largest share of recent economic gains. But to blame this on too little technological innovation, rather than too much, seems to get the problem the wrong way round.

What ails the US job market is not the result of technological churn alone, though that is a big contributor. Automation, the reconfiguration of industries, and technologies that allow jobs to be moved overseas: all have contributed to an “hourglass” labour market with a prosperous top, pinched middle and struggling bottom. In short, the structure of the US economy changed hugely in the past 20 years: the problem is too little has been done to help those left behind.

At one point, Cowen quotes Peter Thiel, a co-founder of Ebay, as saying that “people don’t want to believe technology is broken”. In fact, the more likely problem is that technology works too well. America may be suffering from a great stagnation, but but in spite of his stimulating and engaging analysis, it seems unlikely that it is happening for the reasons Mr Cowen suggests.

The writer is the FT’s comment editor

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