A look at the wonders coming from the Third Industrial Revolution

Summary: We can understand our potential future only by comparison with our pasts. On the cusp of the Third Industrial Revolution, we can look to the Second for insights as to what lies ahead. First we look at the grim facts of our current slow growth, then at how the Second IR reshaped America. The Third IR might do the same.

Industrial revolution

A vision of our future:

The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections

Robert J. Gordon, Professor of the Social Sciences, Northwestern U

National Bureau Economic Research (NBER)
February 2014 — Gate

Abstract

The United States achieved a 2.0% average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population. Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9% for output per capita, 0.4% for real income per capita of the bottom 99% of the income distribution, and 0.2% for the real disposable income of that group.

  1. The primary cause of this growth slowdown is a set of 4 headwinds, all of them widely recognized and uncontroversial.
  2. Demographic shifts will reduce hours worked per capita, due not just to the retirement of the baby boom generation but also as a result of an exit from the labor force both of youth and prime-age adults.
  3. Educational attainment, a central driver of growth over the past century, stagnates at a plateau as the U.S. sinks lower in the world league tables of high school and college completion rates.
  4. Inequality continues to increase, resulting in real income growth for the bottom 99% of the income distribution that is fully half a point per year below the average growth of all incomes.

A projected long-term increase in the ratio of debt to GDP at all levels of government will inevitably lead to more rapid growth in tax revenues and/or slower growth in transfer payments at some point within the next several decades.

There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred 4 decades ago. In the 8 decades before 1972 labor productivity grew at an average rate 0.8% per year faster than in the 4 decades since 1972. While no forecast of a future slowdown of innovation is needed, skepticism is offered here, particularly about the techno-optimists who currently believe that we are at a point of inflection leading to faster technological change.

The paper offers several historical examples showing that the future of technology can be forecast 50 or even 100 years in advance and assesses widely discussed innovations anticipated to occur over the next few decades, including medical research, small robots, 3-D printing, big data, driverless vehicles, and oil-gas fracking.

Here is the story Gordon tells in two graphs, comparing growth during our golden years vs today’s slow trod.

Gordon-2014-figure-5
Robert J. Gordon (2014)

Gordon gives a breakdown to the factors accounting for this large slowing in growth, looking at a different metric:

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Gordon-2014-figure-7
Robert J. Gordon (2014)

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The current slowdown, running 1972, is an intermission. Gordon gives good reasons to believe it will continue. But it might be ending now, as the Third Industrial Revolution begins (slowly). To understand what might lie ahead, we must look back to the birth of the Second Industrial Revolution.

Bat Masterson
Bat Masterson

Consider Dodge City in 1877. Bat Masterson is sheriff, maintaining a semblance of law in the Wild West. Life in Dodge is only slightly better from that in an English village of a century before. But social and technological evolution has begun to accelerate. Bat cannot imagine what lies ahead.

  1. The Transcontinental Railroad unites America, beginning the end of the regional identities that until now divide us (completed in 1869, 3 years after the first transatlantic telegraph line).
  2. The theory of evolution remains controversial, 17 years after the famous debate between Bishop Wilberforce and Thomas Huxley (“Is it on your grandfather’s or your grandmother’s side that you claim descent from a monkey, Mr. Huxley?”).
  3. Medicine and public health remain primitive. A bedside manner and diagnostic skill are doctors’ most reliable tools. In 3 years Pasteur will discover the first artificially generated vaccine (for chicken cholera).
  4. Next year Paul Haenlein will fly the first aircraft powered by an internal combustion engine.
  5. In 2 years Karl Benz will patent the first practical automobile engine and Edison will design the first practical electric light.
  6. Geo-politically stability results from a multi-polar system in which Empires play the largest role, and most of the world consists of western colonies. This point is two-thirds through the Long Peace between the Napoleonic Wars and WWI.
  7. The deterministic certainties of Newton still rule in science. Great discoveries in thermodynamics and electromagnetism gave confidence that more discoveries lie ahead, which unexpectedly will shatter those certainties.

Early Ford

In the next half-century Bat Masterson saw every aspect of life in American change. This excerpt from Gordon’s paper tells about the ignition of the Second Industrial Revolution.

At least 3 aspects of the Second Industrial Revolution {IR#2} have received less attention than they deserve.

First is the multi-dimensional nature of the revolution. Unlike the one-dimension information and communication technology (ICT) revolution of the past 40 years, the creations of IR#2 spanned multiple dimensions. Between 1890 and 1930 the American household became fully “networked,” replacing its previous isolation by 5 types of connections – electricity, gas, telephone, running water, and sewer pipes. Running water and sewers in turn contributed not just to the first phase of female liberation but also laid the foundations for the conquest of infant mortality in the first half of the 20th century.

The second surprising aspect is that everything happened all at once. When all these transformations are layered on top of each other, they hardly existed in 1880 yet were nearly complete in urban America by 1929.

  1. Electricity had little initial impact before 1900 except in showpiece displays like the 1893 Chicago Columbian Exposition and the interior of department stores. But after 1900 the use of electricity took off with such speed that by 1929 virtually all urban dwellings were connected to power.
  2. {T}he horseless carriage bolted out of the starting gate from zero vehicles in 1900 to such an extent that by 1929 the ratio of motor vehicles to the number of American households had reached 89%.

The third surprising aspect is that economic progress through 1972 mainly consisted of consolidating the incomplete aspects of IR#2 across many subsidiary and complementary inventions, including the spread of consumer appliances through the 1950s, the invention of television to supplement the radio and motion picture, the spread of air conditioning from commercial to residential ubiquity, the interstate highway system during 1958-72 as a complement to the motor car, and finally the development of commercial air transport from its primitive and tiny footprint in 1940 to its creation of rapid business and personal travel with the spread of jet planes which was accomplished by 1972.

I believe a similar adventure lies ahead of us.  Robert Gordon disagrees, and the next post in this series explains why.

For More Information

(a)  His previous paper: “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds“, Robert J. Gordon, National Bureau of Economic Research, August 2012 — Gated.

(b)  Posts about the next industrial revolution:

  1. A book about one of the trends shaping the 21st century: the next industrial revolution (robots), 29 December 2013
  2. Looking at America’s future: economic stagnation, or will computers take our jobs?, 7 January 2014
  3. 50 years of warnings about the next industrial revolution. Are we ready?, 12 January 2014
  4. Experts see that the 3rd Industrial Revolution is upon us. How many jobs will be lost?, 21 January 2014

(c)  Posts about the future:

  1. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008
  2. Fears of flying into the future, 25 February 2008
  3. Good news about the 21st century, a counterbalance to the doomsters, 9 May 2008
  4. Some thoughts about the economy of mid-21st century America, 12 January 2009
  5. A look at our history – from the 23rd century, 13 April 2009
  6. A look back at our time from the 2100 A.D. edition of the Encyclopedia Britannica, 24 June 2010
  7. Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?, 28 August 2012

See all posts about this topic at the FM Reference Page Forecasts – possible futures for America and the World.

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8 thoughts on “A look at the wonders coming from the Third Industrial Revolution

  1. I think you are right. Gordon doesn’t appreciate the causal link between the depressions of 1867 and 1929. The destruction part of Schumpeter creative destruction. This is necessary before innovation can proceed because of the ugly death throws behavior of doomed entities stubbornly stands in the way. We are seeing this in our banking sector now. And health care with their obsolete large hospital model. And military with obsolete COIN. And retail with bricks and mortar stores.

  2. Another excellent post by FM. Multiple bubbles are currently at work in our economy, from the college tuition bubble to the military-industrial spending bubble to the prison-police bubble (large states like California now spend more on prisons than on educating their citizens, and 20% of all prison guards in California makes more than $100,000 per year), the Drug War bubble (more and more substances now get classified as drugs and banned even as America’s incarceration rate skyrockets far beyond that of any other nation on earth per capita, with 60% of all prison inmates in America now non-violent drug offenders jailed for possession of small amounts of some chemical or plant), the medical-industrial bubble, and now real estate bubble II.

    I wonder if FM has any explanation for why real estate prices haven’t dropped. I know about sticky prices, but if real estate prices have gotten so badly out of whack with incomes, shouldn’t basic principles of supply and demand eventually begin to return prices to a balance with incomes?

    1. Thomas,

      “I wonder if FM has any explanation for why real estate prices haven’t dropped.”

      Almost all risk asset prices have rocketed. Farmland, artwork, financial assets. Many are above historical averages; some are far above; some are at levels previously seen only at long-term peaks. The reasons are mysterious (not QE3, at least not directly. Those dollars are on deposit by banks at the Fed as reserves).

      That we’re doing this for a third time in 15 years shows a deep dysfunctionality in us.

      “Markets can remain irrational longer than you can remain solvent.”
      — Not said by Keynes, but correct nevertheless

    2. Thomas,

      Most of the things you mention are serious — but not bubbles. Bubbles are very specific kind of economic event, an inherent feature of free-market systems.

      They are not the same as “bad things”. The drug war and rising college tuition are not bubbles, and over-use of the term does not help us better understand these problems.

    1. Winston,

      Yes, Gordon lists demographics as one of the “4 headwinds”.

      I would be interested to see the value of US oil & natural gas production as % GDP over time. Now aprox 3%. While production is lower today than during the 1945-1972 era, prices are also far higher. Not sure how it has changed as % GDP.

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