Innovation Growth and Capitalism

Robert J. Gordon (Northwestern University) recently published this wonderful peace of science that was immediately and widely admired, discussed and then discarded. The reason why it has been discarded is obvious, Gordons point being:

“Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”

Of course this is not acceptable to anyone in the establishment, as growth ideology has “no alternative” in politics since the days of Thatcher, Reagan and Kohl.

To understand the patterns of growth in the past 250 years, Gordon defines three Industrial revolutions in this period of seemingly endless growth:

"The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is,
IR #1 (steam, railroads) from 1750 to 1830;
IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900;
and IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. 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 – urbanization, transportation speed, the freedom of females 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.”

This is very consistent with the arguments I have presented here in this blog in which I have applied the Ideas of Marvin Harris Cultural Materialism to understand our society and provide an outlook to our future.

The described Industrial revolutions have several things in common:

1. All industrial revolutions have not been initialized by market forces but are the result of infrastructural investments made by “the State”. Providing the populace with access to water, electricity, sanitation, means of transportation, health care, free access to the internet are clearly in their essence of socialist and egalitarian character. I would also add, that the basis of these revolutions has been laid by government funded research and science and also needed a social revolution and the invention of the welfare state to come to pass.
2. After the groundwork of an industrial revolution has been laid, the private sector and market mechanisms made use of it to provide the applications needed to benefit from this revolution. As households had access to water, gas and electricity the private sector could start selling them washing machines and dish washers, electrical stoves, central heating, electric light bulbs etc., freeing productivity for more and more production and thus growth.
3. All revolutions depend on each other, take away energy and the returns of transportation or information technology will be taken away also.
4.  When a saturation of the markets opened by a revolution has been reached (the moment everybody has a washing machine) further inventions in this market provide less growth until the market degenerates into a consumer market that rather satisfies status symbols than freeing additional productivity.
5. The returns of each industrial revolution, meaning the amount of freed productivity, diminish with every revolution. It is very probable that no future revolution will bring us the same returns that the beginning of the age of fossil fuels has brought us.
6. The longer the basis for the industrial revolution has been established and the markets saturated, the more the private sector gained control over the distribution of the commodities to increase their profits. As this devolution has progressed, the less the private sector has contributed to growth by providing new applications of the revolution. Today more and more people are denied the commodities that led to freeing productivity by the private sector, making the private sector itself an important reason why real growth slows in the saturated industrialized societies and worldwide.

As we can see from the above graphic, Gordon predicts growth to go on but to slow in the future.

In the near future we will need to invest more and more productivity into compensating the loss of cheap energy resources that led to this chain of industrial revolutions. Freed productivity by cheap energy will so be lost to us for a long time until we have finished compensating, if we can compensate the decrease of oil production at all.

There are no efforts under way to find a new source of cheap energy. It is very likely that growth will not only stop, once oil production declines, but we will be thrown into the greatest recession of all times.

We will also need to invest more and more into dealing with the negative effects of earlier revolutions and past growth. The effects of wasting fossil fuels will have to be faced. For this, there is no end in sight and climate change can go on to harras us for hundreds of years and bind a lot of productivity.

Dealing with these negative effects of past growth can only be achieved by a joint social effort and not by "the markets" which produced the problems we face today. Achieving the current productivity in the future without further exploitation of common ressources will require an industrial revolution itself, dealing with the climate crises another.

Benefitial innovations by "the market" will probably only deal with compensating these negative effects of past growth and not provide a new industrial revolution. These will have much less return in freed productivity, examples are energy efficiency, digitalization or automation. Most innovation though will try to cope with the ever decreasing sastisfaction of new consumer products in satuated markets by finding new excessive ways for wasteful consumption.

Economists and politicians promising endless growth do not have an answer to the arguments written here. The TINA (there is no alternative) propaganda is, of course, a lie. The assumption that only the invisible hand of the market provides the innovations we need for growth is also not only false, the neoliberal market ideology is very much opposed to real innovation.

Past growth was an interplay of investments by society and market mechanisms providing new means to free productivity based on innovations in science, social organisation and infrastructure.

Capitalism can be viewed as the part of the system that has provided individuals and companies the means to profit from the achievements of society by profiting from finding new ways of making use of these achievements or making production more efficient. As the mutual benefits of new applications of technology decline by the law of diminishing returns, capitalists seek also profits in disregard of the common good.

Today capitalism is a problem for society as profits of this interplay of society and the market accumulate in the hands of very few capitalists only. Capitalism today prohibits growth by draining ressources and productivity for wasteful production and accumulation of wealth and is not by itself able to start a new industrial revolution. Accumulated capital and power that was formed from the exploitation of achievements and ressources of society is itself wary of change as it undermines its means for profit and power.

State controlled socialism on the other side would be a problem as the benefits of this interplay for the individual and private company and thus the motivation for finding new applications are nonexistant and potential for productivity gains might not be realized. The political elite in state socialist systems is wary of change as it potentially undermines its source of wealth and power.

Corruption of the government and stagnation are the result of either of the two extreme ideologies, it seems.

This interdependence between state and markets is ignored by neoliberal economic ideology. the state is always pictured as inefficient and the private sector as the only source for innovation. Looking at Gordons analysis of growth we can only conclude that liberalisation, privatization and austerity are clearly in total opposition of what has provided us with growth in the past. It will take away freed productivity by controlling and taking away the commodities we need (water, gas, electricity, health care, education, homes). It is implemented solely for the sake of private capital gain and in disregard of the common good.

This course will inevitably lead to a new social revolution and it does so right now as many see that the chicago boys concepts are a total failure.

What social revolution the end of growth will bring us can only be guessed (the Bolivian water war could be a hint though) and I have tried to do so in this blog. I can only urge my readers to understand that endless growth is a dream and policies and ideologies that base themselves around endless growth will fail.

In short, the current policies ensure not only the end of growth but the collapse of society.