Have we been thinking about economic growth all wrong?

“The implication of Philippon’s paper is as simple as it is disturbing: We should expect economic growth to slow down in the long run, and the big leaps forward of the last couple centuries may be an aberration.

This conclusion is far from certain, and it goes against decades of assumptions on how to model economic growth. But Philippon brings a lot of data to bear on his thesis, which makes some intuitive sense, and even the possibility of it being true should alarm us.”

“What Philippon does is attempt to assess whether TFP actually does, in practice, grow exponentially. He first looks at two datasets covering TFP in the US and finds, instead, linear growth since World War II: TFP does not increase by a set percentage each year, but a set amount (0.0245 points, if you’re curious) each year. It doesn’t compound; it just gradually, steadily grows. You’re getting $2 a year, not 2 percent of an ever-increasing pile.

Extending the data back to 1890, he finds linear growth, but with a break: slower growth from 1890 to 1933, and faster after 1933, but steady and non-exponential in each period. He then extends the analysis to 23 relatively wealthy countries, from Japan to Germany to Spain. A linear model fits better here, too.”

“The US and other rich countries have experienced a well-documented decline in productivity growth, especially TFP growth, since 2004 or so. Philippon’s findings could help explain why that is. The slowdown is only there if you assume TFP should be growing exponentially. If you assume mere linear growth, it’s not that things have gotten worse in recent decades. It’s just that they were never that good.

That’s an alarming conclusion, mostly because from the standpoint of human history, the past few centuries have been very good. Before the 17th to 18th century or so, human economies grew extremely slowly. Agriculture showed little productivity growth, meaning there was a fixed population that farming societies could support. Living standards varied mostly based on how many people were around; when the population suddenly shrank (as in the Black Death in Europe) people grew richer on a per capita basis, and when the population swelled the opposite occurred. This is known as the “Malthusian trap.”

“Until about 1800, the vast bulk of people on this planet were poor,” Joel Mokyr, an economic historian at Northwestern, once noted. “And when I say poor, I mean they were on the brink of physical starvation for most of their lives.”

That pattern started to break down in the 17th through 19th centuries, a process sometimes shorthanded as the “Industrial Revolution,” but including a wide variety of cultural, scientific, technological, and economic changes. Long story short: productivity sustainably grew for the first time in human history. And it grew, by historical standards, quite rapidly, such that a far lower share of people alive in 2022 are on the brink of starvation than were in 1800, even though the population needing food has never been greater.”


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