Seth Roberts

Seth Roberts

Personal Science

The Great Stagnation (Part 1)

Tyler Cowen's new book is about lack of innovation.

Posted Mar 08, 2011

Tyler Cowen has written a short Kindle book called The Great Stagnation. I have a lot to say about it. This post is about the context, how it fits into a bigger picture. In a later post I'll discuss its ideas.

At the end of The Economy of Cities (her favorite among her books), Jane Jacobs said if a flying saucer came to Earth she'd want to know how they avoided stagnation. The main battle in any society, said Jacobs, is not between rich and poor or owners and labor but between those who benefit from the status quo and those who benefit from new ways of doing things. The status quo usually wins, no surprise. And the status quo tends to become more powerful over time, which is why Jacobs didn't know if profound stagnation could be avoided as a kind of terminal state. When she wrote The Economy of Cities (published 1969), she saw stagnation mounting in the American economy - in transportation, for example. By stagnation she didn't mean lack of growth; she meant lack of useful innovation, causing problems to stack up unsolved. If you keep doing the same things, but more intensely, you will grow in conventional economic terms (e.g., GDP) but you aren't solving your problems. Doing more of the wrong thing (e.g., treating all diseases with pills) counts as growth but such growth makes things worse, not better, because bad ways of doing things become more entrenched.

Most people see Jacobs as someone who wrote about cities. She saw herself as someone with new ideas about economic development - especially innovation. Cities are important above all because city people are more innovative than rural people. Tractors, for example, grew out of city inventions (the internal combustion engine, etc.). The same person (same IQ, same wealth) will be more innovative in a city than outside of one.

Stagnation is a major problem at all levels of the economy. A few years ago, a friend of mine who worked at the Chicago Tribune said it was clear newspapers were in trouble long before craigslist. As early as the 1980s, he said, there were bad signs. They were ignored. The people in charge kept doing the same things. Had they started trying new things at the first signs of trouble, they might have found a way out. But they were complacent. By the time they stopped being complacent, it was (apparently) too late. Gone (1999) by Renata Adler, a great book, is about the disastrous consequences of stagnation at The New Yorker. The Innovator's Dilemma by Clayton Christensen is about stagnation at industry-leading companies, such as DEC, GM, and Microsoft. Failure to innovate enough was what Christensen found when he tried to understand why industry-leading companies frequently lost their lead. Not only do these companies lose their lead, they often go out of business.

How to avoid or recover from stagnation, Jacobs was saying, is the central question of economic life, with no clear answer. Yet it is roundly ignored. In the Berkeley Public Library a few years ago, I picked up an introductory economics textbook for junior colleges, 700 pages long. It had one page - fact-free, poorly-written - about where new goods and services come from. This is typical of the introductory economics textbooks I've seen. It reflects the profession as a whole: I estimate about 1% of mainstream economic research is about innovation. It should be half the field.

To study innovation is to study what controls it, what makes the rate of innovation go up or down. Thorstein Veblen (not a mainstream economist) wrote one essay and two books about it. Adam Smith wrote nothing interesting about it, as far as I know, nor did Keynes. I remember nothing interesting about it in The Worldly Philosophers by Heilbroner, including the chapters on Schumpeter and Veblen. There have been no Nobel Prizes about it. (Among the Economics prize-winners, Robert Fogle has done the best work about it, whereas Samuelson's textbook is a monument to lack of understanding of innovation and its importance.) Ed Glaeser's new book The Triumph of the City emphasizes that cities boost innovation but Jacobs said this 40 years ago. Because cities tend to grow (increasing innovation as they grow), why do whole societies stagnate? Apparently a countervailing force overcomes the innovative power of cities. I have never heard an economist make this point nor say what the countervailing force might be.

In Collapse, Jared Diamond showed how whole societies collapsed (ran out of food and disappeared) when they failed to innovate enough. Instead of blaming lack of innovation, Diamond blames overfishing, overhunting, soil problems, and so on. His list of "different" causes of collapse is like a list of "different" kinds of paranoia: persecution by the FBI, persecution by the CIA, persecution by the police, and so on. If a society does the same thing over and over, at increasing intensity, eventually it will collapse. The collapse may have many proximate causes.

Tyler does not assume that all growth is good. Perhaps influenced by Robin Hanson, he points out that vast health care spending has done little for American health. Much poorer countries get the same results. When you spend four times as much but get the same results, it implies stagnation. Presumably the 20% we share with poor counties is spent on the oldest stuff. If so, the most recent 80% of growth was worthless and a great deal of it has been a kind of churning, useless research passed off as useful. It entered the health care system, people paid for it, but it didn't help them. It is entirely possible that some of the expensive health care found in America but not poor countries is beneficial and some of it is harmful.

Tyler sees the forest - a society-wide failure to solve important problems. The tremendous accomplishment of his book is to bring the puzzle of stagnation to mainstream economic attention ("the most talked-about economics book of the year so far" according to this review). I am too far from economics to guess what influence it will have on research, but if mainstream economics becomes even 2% about innovation and stagnation (= lack of useful innovation), that will be great intellectual progress.