End of economic growth?

End of economic growth?

Despite the fascinating innovations, today’s digital technologies are doing little to impact the kind of prosperity that previous generations enjoyed. 

Growth since 1970? “Simultaneously dazzling and disappointing.” Think the PC and the Internet are important? Compare them with the dramatic decline in infant mortality, or the effect that indoor plumbing had on living conditions. And the explosion of inventions and resulting economic progress that happened during the special century are unlikely to be seen again, Gordon argues in a new book, The Rise and Fall of American Growth. Life at the beginning of the 100-year period was characterized by “household drudgery, darkness, isolation, and early death,” he writes. By 1970, American lives had totally changed. “The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once,” he writes.

The graph below shows average annual percentage growth on X-axis. Total factor productivity measures innovation. It peaked in the 1940s and was strong through the 1970s. 

Average Annual Percentage Growth

Each bar shows 10-year average prior to the year shown. (Total factor productivity is a measure of innovation.) Ref: MIT Technology Review

The  data published by OECD (bit.ly/1UGKt3Y) kind of supports this argument. First look at some simple macroeconomic concepts: Economic growth comes from two main sources. Putting more people to work and enabling workers to produce stuff more efficiently. The technological breakthroughs and human capital development allow companies and nations to be more productive, grow, and, potentially, let workers earn more money. Hence the productivity growth is a good parameter to measure the potency of the technological innovation. Productivity is measured by GDP per hour worked. GDP per working hour measures national income / total hours worked in economy.

GDP per hour worked: Average annual % increase

Each data point shows '10-year average annual % increase' prior to the year shown. (Total factor productivity is a measure of innovation.) Ref: OECD Data - bit.ly/1UGKt3Y. View my Google Sheet for raw data on: bit.ly/1tfYTyQ

This is going to affect you in all walks of life. Key Points to think:

  • The growth of almost all developed economies may stay stagnated over the next couple of decades - till we get a big technology breakthrough. (Many tech pundits believe that the impact of recent technology is yet not kicked in. Many believe that Artificial Intelligence could be the one to turn the tide.)
  • This will impact the salary growth, unemployment rates, the standard of living. (We could all look at post-1990 Japan for effects of stagnating economy. It has a deep deep impact on all walks of life.)
  • If you are immigrating from developing the country to a developed one, think twice, for you may not see the same growth as those who moved to the developed countries over the last few decades. I am looking at the GDP per hour data.

Norway: $75 / hr

India: $3.5 / hr

So developing economies like India has the huge headspace to bring more people into the workforce and improving productivity - even with the existing set of technologies.

  • If you are a startup entrepreneur, think of the ways to impact this. Think of the ways which impacts the labour productivity significantly. 

 

Reference:

  1. http://bit.ly/1UFv6J0
  2. http://econ.st/219Pfst
  3. http://bit.ly/1WBq03w 
  4. http://bit.ly/1YbLBiL
  5. http://bit.ly/1WHMzE7 - OECD Compendium of Productivity Indicators 2016. 
  6. GDP per Hours Worked v GDP per Capita: GDP per capita measures national income per population GDP per working hour measures national income / total hours worked in economy. GDP per capita would probably be the first measure to look at. It is the most obvious reflection of national income per person.GDP per hours worked is also useful for determining the productivity of an economy. Though it depends what determines the number of hours worked – For example, is a low number of hours (and high GDP per hours worked) due to unemployment or greater efficiency leaving more time for leisure?GDP / working hour could be inflated if there is a rapid drop in employment and hours worked. For example if unemployment increased by 1 million because firms became much more strict in getting rid of surplus labour (causing structural unemployment) this would cause an increase in labour productivity and higher GDP per working hour. But, the rise in unemployment is a clear drop in living standards.On the other hand, you could argue that if you have to work 30 hours a week to earn $400 a week. This is a much better living standard compared to a country where you are forced to work 50 hours a week to earn $400 a week. Ref: bit.ly/1U4Fugo
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