Why GDP Can Grow Forever

Robert Gordon's argument that economic growth will slow down in the future made a big splash in 2012. He laid out his views in the Wall Street Journal op-ed shown above, as well is in other venues. His book The Rise and Fall of American Growth will come out on September 5, 2017. 

A key part of Robert Gordon's argument is that dramatic changes in people's lives from past economic growth are unlikely to be repeated. He writes in his 2012 op-ed:

The growth of the past century wasn't built on manna from heaven. It resulted in large part from a remarkable set of inventions between 1875 and 1900. These started with Edison's electric light bulb (1879) and power station (1882), making possible everything from elevator buildings to consumer appliances. Karl Benz invented the first workable internal-combustion engine the same year as Edison's light bulb.

his narrow time frame saw the introduction of running water and indoor plumbing, the greatest event in the history of female liberation, as women were freed from carrying literally tons of water each year. The telephone, phonograph, motion picture and radio also sprang into existence. The period after World War II saw another great spurt of invention, with the development of television, air conditioning, the jet plane and the interstate highway system.

The profound boost that these innovations gave to economic growth would be difficult to repeat. Only once could transport speed be increased from the horse (6 miles per hour) to the Boeing 707 (550 mph). Only once could outhouses be replaced by running water and indoor plumbing. Only once could indoor temperatures, thanks to central heating and air conditioning, be converted from cold in winter and hot in summer to a uniform year-round climate of 68 to 72 degrees Fahrenheit.

The main claim a typical reader would take from this passage that it will be hard to make as big a difference to people's lives with the next 150 years of technological progress as with the last 150 years of technological progress. Robert Gordon may turn out to be wrong on all counts. Some believe a technological "singularity" will come within the next 150 years that will dramatically change human existence to something "transhuman."

But even if Robert Gordon is right that the next 150 years of technological progress will not make anywhere near as big a difference to people's lives as the last 150 years of technological progress, I have a highly technical criticism to his transition from that claim to his statement

The profound boost that these innovations gave to economic growth would be difficult to repeat. 

Based on other things Robert Gordon has written, I interpret that as a statement about the effect of technological progress on real GDP growth. So interpreted, the statement "The profound boost that these innovations gave to economic growth would be difficult to repeat." may be true, but it does not follow logically from the difference technological progress has made to people's lives being hard to repeat.

The gap between "it is hard to repeat that improvement in people's lives" to "it is hard to repeat that boost to real GDP growth" has to do with what a weak reed real GDP growth is for understanding economic improvements. Let me leave aside all the many ways in which GDP can go up even if people's lives worsen. (See "Restoring American Growth: The Video" for a discussion of that.) If all non-market goods and parameters of income distribution stay the same and real GDP increases, people are indeed better off. But "How much better off?" What does it mean to say that GDP is 1% higher?

GDP was conceived with increases in quantity in mind. If people get more goods and services it is clear what an x% increase in GDP means. But more of exactly the same good or service becomes less useful very fast. If more people are getting goods that others already had, what is going on is also relatively clear. But what if enough people have all the want of exactly the same good or service they already have that entrepreneurs introduce a good that is in some respect new. It may be an entirely new good or something easy to see as an improvement in the quality of an existing good. In either case, the way government agencies factor this into GDP is that the value of the new good is measured by how much of more of the same people are willing to give up to get something new. Given how boring more of the same might be to at least some people, the amount some fraction of people are willing to give up of more of the same to get something new might be substantial. Therefore, the production of something wholly new or something seen as a higher quality modification of something old can count as a substantial addition to GDP growth.

In the extreme, if people became bored enough with more of the same, a set of truly tiny quality improvements could be counted as 3% growth in GDP, because a marginal 3% of boring products one doesn't need that much of is hardly any sacrifice at all.    

My technical point is relevant not only to Robert Gordon's argument, but also to Tom Murphy's arguments in his posts "Can Economic Growth Last?" and "Exponential Economist Meets Finite Physicist." To his statement "economic growth cannot continue indefinitely," I say,

It depends what you mean by economic growth. If you mean GDP growth, all it takes for it to grow forever at a rate always above a positive x% per year is for tiny quality improvements or novelties to be valued extremely highly relative to a higher quantity of the same old things. 

And it is not clear that what are seen as tiny quality improvements require any laws of physics, since quality improvements are all in the eye of the beholder. 

Despite my framing of this post as a correction to Robert Gordon's and Tom Murphy's arguments, the real moral of this post is the imperfections of real GDP growth as a measure of "economic growth" in the broader sense of people getting more of what they want. GDP is a quantity-metric measure of economic welfare. If quantity is no longer very valuable, a quantity-metric measure shows small improvements in quality or novelty as equivalent to large increases in quantity. 

Another way to look things is that Robert Gordon implicitly brings into his argument declining marginal utility. It is quite possible for economic growth to continue to be rapid by the conventional measure of GDP growth without it making as big a difference in people's lives as that rate of GDP growth made in the past.

 

Note: People's intuitions about declining marginal utility have other potential implications as well. See "Inequality Aversion Utility Functions: Would $1000 Mean More to a Poorer Family than $4000 to One Twice as Rich?"