What one thinks about the medium-term future of the world economy depends on the answers one gives to five questions about productivity growth:
1. Rapid American productivity growth has continued through the recession. What conclusions should we draw from this? This question has two possible answers. The first answer is that changes in America's labor market have eliminated the old pattern by which firms tried to hold onto productive and experienced workers through the trough of the business cycle, because they knew they would be wanted soon and would be very expensive to replace. Such "labor hoarding" meant that measured productivity dropped in American recessions. Perhaps this institutional factor has now been erased from the American economy. However, if it has not been erased--if "labor hoarding" still exists--that means that the underlying productivity growth trend of the American economy has continued to accelerate, and that the future of Americna growth for the next ten years is very bright indeed.
2. Why are there such huge differences in productivity growth between the U.S. and mainland Europe--especially in information technology-heavy services? One possible answer is that European firms have, like American ones, invested heavily in information and communications technologies but that they have, in contrast to American firms, not yet figured out how to reorganize their work flow in a way to make their computers more than decorative paperweights. This suggests that Europe's problem is a deficiency of management consultants. The second possible answer--the one that Alan Greenspan strongly favors--is that firms will not undergo the unpleasant bureaucratic disruptions necessary to increase productivity until they can smell the profits from reorganization, profits that come either from reducing costs (by firing workers) or from meeting greatly expanded boom-time demand. Since the European Central Bank's policies make a boom in Europe nearly inconceivable, and since it is nearly impossible to fire workers on a large scale in Europe, no productivity boom.
3. How will the current intellectual property wars be resolved? Will they be resolved in a way that greatly increases the profits of CD and movie companies and that slows the adoption of broadband and other advanced information technologies? Or will they be resolved in a way that implicitly or explicitly confiscates a bunch of the intellectual property of CD and movie companies, but that gives consumers and other users enormous incentives to adopt broadband and other advanced information technologies? It is clear to me that the second would be better for economic growth, but that the first is more likely.
4. What is the size and salience of our current industrial revolution compared to past industrial revolutions? This is the one question to which the answer is clear. The classic British industrial revolution saw technological progress that reduced the price of making maybe 3% of GDP by 5% a year--a direct leading-sector technology-driven acceleration of 3% x 5% = 0.15% per year. Today's ongoing industrial revolution in information technology, communications technology, and biotechnology is reducing the price of making maybe 10% of GDP by at least 15% per year--a direct leading-sector technology-driven acceleration of 10% x 15% = 1.5% per year. Our modern leading sectors have ten times the technological-revolutionary relative salience of the leading sectors of the classic Britis industrial revolution.
5. The developing world: what does the forthcoming transformation of the service sector into a tradeables sector mean for the world economy? In the second half of the nineteenth century, the invention of the iron-hulled steam-driven ocean-going steamship meant that trans-oceanic trade was no longer restricted to the precious luxuries (silks and spices) and the biological products with interesting properties (coffee, tea, tobacco, sugar, opium) of the pre-industrial era. Instead, staple agricultural and industrial products--flour, meat, leather, steam engines, steel rails, locomotives, furniture, basic apparel, and so forth--became tradeable across oceans as well. Moreover, the trans-oceanic telegraph cable allowed for the rapid transmission of news around the world and for the first time made run-of-the-mill not-risk-loving investors comfortable making large scale investments in enterprises on other continents. The consequences were enormous.
Now we are looking forward to a world in which all kinds of white-collar paper-shuffling and information-processing--jobs that have been the monopoly of European-derived language-speakers located in the wrold's industrial core, and the monopolization of which has played a key role in boosting the standards of living of the industrial core's white-collar workers--can now or soon will be able to be performed anywhere in the world by anybody literate in one of the languages of the industrial core. What effect will this have on the distribution of income within the industrial core? What effect will this have on the rate of growth of the developing world. Even if first-world barriers to agricultural and textile and apparel imports remain, EC customs will be unable to restrict trade in bits over the internet: if Algerians are not allowed to grow citrus and export it to Europe, they will be able to process French-language documents.
Save for (4), I do not have nicely-potted answers to any of these questions. But on the answers to these questions hinges a great deal of our vision of what the world economy will be like in two decades...Posted by DeLong at January 26, 2003 11:56 AM | Trackback