The Industrial Revolution and Productivity Slowdown in the G-7 Economies

The Industrial Revolution:

The century after 1750, saw the industrial revolution proper: invention of steam engine, spinning jenny, power loom, hydraulic press, railroad locomotive, water turbine and the electric motor--as well as the hot-air balloon, gas lighting, photography and sewing machine.

However the industrial revolution wasn’t just a burst of inventions. It was an economic transformation which revolutionized the process of invention as well. Since 1850 the pace of innovation and invention has further accelerated: steelmaking, internal combustion engine, pasteurization, typewriter, cash register, telephone, automobile, radio, airplane, tank, limited-access highway, photocopier, computer, pacemaker, nuclear weapons, superconductivity, genetic fingerprinting, and human genome map. The coming of industrial revolution marks the beginning of the era of modern economic growth: the era in that it’s expected that new technological leaps will routinely revolutionize industries and produce major improvements in living standards.

The fact that Britain was center of the industrial revolution meant that for a century--from 1800 to 1900--British levels of industrial productivity were the highest in world and British standards of living were the highest in world as well. It also meant that English (rather than Hindi, French, Spanish or Mandarin) became the world’s de facto second language. However the technologies of industrial revolution didn’t remain narrowly-confined to Britain. Their spread was rapid to Western Europe and United States. Their spread was less rapid—however still relatively thorough and complete--to southern and Eastern Europe and--most interesting perhaps--Japan.

Perhaps the most significant lesson to draw from this short look back at economic history is that standard growth models of economists apply to a relatively narrow slice of time.

American Long Run Growth, 1800-1973:

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Throughout the 19th and the first three quarters of twentieth century the measured pace of economic growth continued to accelerate. The measured growth rate of output per worker rose from perhaps 0.5 percent per year from 1800 to 1870 to perhaps 1.6 percent per year from 1870 to 1929, on the eve of the Great Depression as is displayed in Figure above. Growth slowed slightly over the Great Depression and World War II decades--a measured growth rate of 1.4 percent per year from 1929 to 1950. However then it accelerated: growth rate of output per worker between 1950 and 1973 in the United States was 2.1 percent per year.

Furthermore it is likely that true output per worker growth since 1890 has been even faster. Several economists believe that official estimates overstate inflation and understate real economic growth by 1.0 percent per year in large part since national income accountants have a very hard time valuing the boost to standards of living and productivity generated by the invention of new services and goods and new types of services and goods. So rather than 1.5 percent per year perhaps we must be thinking of 2.0 to 2.5 percent per year for the rate of output per worker growth since 1870.

If so then those of us living in U.S. today have a level of productivity--a material standard of living-- somewhere between 14 and 25 times that of our counterparts back in the late 19th century. For richer and middle-class consumers today such an estimate doesn’t seem at all unreasonable. It takes only 1/8 as much time to earn the money to buy a hairbrush, 1/12 as much time to earn the money to buy a chair, 1/35 as much time to earn the money to buy a book today as in 1895. And in 1895 no matter how long you worked you couldn't earn enough money to purchase a plane ticket or a TV or a portable CD player or a laptop computer or an automatic washing machine or an electric blender or a microwave oven.

For the relatively poor of the world or even of United States it’s not reasonable to say that their incomes and material standards of living have multiplied to so great extent. The fact of an innovation or invention has not any effect on your material standard of living if you can’t afford it.

Modern economic growth is also a shift in the kinds of things we do at work and play and in the way we live. Back in immediate aftermath of the Civil War perhaps half of all Americans were farmers. Today less than 2% of American workers are farmers and farm laborers: there are more gardeners, groundskeepers and growers and maintainers of ornamental plants in America today than there are food-growing farmers and farm laborers. Americans in the second half of the 19th century traveled by foot, by horse, by wagon, by train and by riverboat. American at the end of the twentieth century traveled by foot (rarely), bicycle (rarely), automobile, bus, train, boat and plane. Most Americans in the second half of 19th century were literate. However very few had finished anything like what we would call high school. Modern economic growth is the large-scale shift of employment from agriculture to manufacturing and now to services. In addition modern economic growth is the creation of large business organizations. Back at the start of the 19th century, a business with 100 people was a very large business organization for its time indeed.

Between approximately 1890 and 1930—or perhaps 1890 and 1950—a host of innovative technologies and business practices were adopted in the US. Europeans speak of ‘Fordism’: taking the part--Henry Ford’s assembly lines in Detroit and his mass production of the Model-T Ford--for the whole. The fact that other industrial economies were unable to fully adopt American technologies of mass production and mass distribution in the first half of the 20th century gave the U.S. a unique level of industrial dominance and technological leadership in the years after 1950.

3 factors have taken pride of place in explanations of America's place at the world economy's leading edge in its level of technology during the 20th century:

a) First the U.S. had an exceptional commitment to education: to schooling everyone (everyone who was white; and boys more than girls) even in largely-rural economy of the 19th century and to making the achievement of a high-school diploma rule rather than exception in the cities of early 20th.

b) Second, U.S. was of extraordinarily large size--the largest market in world. So the U.S. could take benefit of potential economies of scale in ways that other smaller economies couldn’t match.

c) Third, U.S. was extraordinarily rich in natural resources specifically energy. To the extent that energy and natural-resource intensive industries were at the heart of early 20th century industrial growth, U.S. was again well-positioned.

The Productivity Growth Slowdown:

However in 1973 steady trend of climbing rates of productivity growth stopped cold. Between 1973 and 1995 measured growth in output per worker in U.S. economy grew at only 0.6 percent per year. The slowdown didn’t affect the U.S. economy alone: the slowdown hit--to different degrees and with different effects--the other main economies of the world's industrial core in Japan, Western Europe and Canada as well.

The Productivity Slowdown in the G-7 Economies:

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What caused the productivity slowdown? Observers have pointed to 4 factors--Oil prices, baby boom, increased problems of economic measurement and environmental protection expenditures--and there aren’t any doubt others.

Though the causes of productivity slowdown remain uncertain. Productivity slowdown remains a mystery.

The End of the Productivity Slowdown:

As computers improved and spread throughout the U.S. economy in 1970’s and 1980’s economists kept waiting to see the wonders of computing show through in national productivity. However it didn't happen. Productivity growth slowdown continued during the 1970s and 1980s. This surprising phenomenon came to be called ‘the computer paradox’ after Robert Solow's famous 1987 observation that: ‘we see the computer age everywhere besides in the productivity statistics.

Since 1995 though productivity growth in the American economy has accelerated once again to a pace of 2.1% per year. Half a decade is a very short time on which to pin any long-run trend though there is certainly reason to hope that productivity slowdown has come to an end.

U.S. economy has benefited from a stunning investment boom since 1992. Between 1992 and 1998 real GDP rose by an average of 3.6% per year and business fixed investment soared at a 10.1% average rate--almost 3 times as fast. As a consequence share of business fixed investment in GDP jumped from 9.2% to 13.2% with much of the extra investment going into computers and related equipment. At least one major economic forecasting business attributes recent acceleration in productivity growth to this investment boom, a huge share of that is driven by rapidly-falling price of computers.

There is every reason to expect technological progress in computer and communications sectors to continue. In addition there is every reason to expect these useful technologies to continue to diffuse through the economy. So the best bet in forecasting future productivity growth is to project what has happened in past half-decade forward. If these projections are accurate then productivity slowdown has been brought to an end and its technological revolution in computers and communications that has done it.

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