Grasping Reality on TypePad, by Brad DeLong

Enabling and powering the enormous increase in material wealth—its essential prerequisite, in fact—has been the explosion in human technological knowledge, the creation of this explosion requiring not just scientists and engineers and means of communication, but also a market economy that made it worth people’s while to funnel resources to scientists and engineers so that they could do their jobs. We, however, have had not just technological breakthroughs, but a breakthrough in the creation of the research laboratory—a breakthrough in that we have now routinized the process of creating constant and successive technological breakthroughs.

The consequences have been overwhelming.

Growth economists make truly heroic assumptions to construct very rough estimates of a quantitative index of the value of the human race’s collective knowledge of technology and organization in the broadest sense—the value of the ideas about how to manipulate nature, about what people find useful for life or entertaining or useful for status, and about how humans either as individuals or production teams or societies can productively organize to make and distribute. In the framework I find most useful, they calculate output per worker Y/L as an increasing function of the capital stock per worker K/L —how much in the way of produced means of production the typical worker is assisted by—and the efficiency of labor E. Holding the capital-output ratio K/Y constant, a 1% increase in the efficiency of labor E drives a 1% increase in production per worker Y/L . Holding the efficiency of labor E constant, a 1% increase in the capital-per-worker K/L ratio drives an 0.4% increase in production per worker Y/L.

They—we—then posit that the efficiency of labor E is itself a function of the value of the human race’s collective knowledge H and of the natural resources at the disposal of the typical worker N/L. The baseline assumption I use is that natural resources are half as important as knowledge: a fall of 3% in the natural resources at the disposal of the typical worker if balanced by a 1% increase in the value of knowledge leaves the efficiency of labor unchanged; and a 1% increase in both the value of knowledge and in resources per worker raises the efficiency of labor by 1%.

This strikes most people—this strikes me—as a somewhat odd way to proceed. The real value of production per worker and of natural resources per worker seem to be somethings we could measure and get our hands dirty calculating. But efficiency of labor? Value of ideas? Eighty years ago John Maynard Keynes warned us economists against excessive quantification of the not properly quantifiable that would make a mockery of true quantitative analysis:

Approximate statistical comparisons depending on some broad element of judgment rather than of strict calculation… may possess significance and validity within certain limits. But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity.… To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth—a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis…

Real scientists calculate quantitative values for abstract things that cannot be seen: the change in momentum is the force times the time over which it is applied; the change in kinetic energy is the force times the distance over which its is applied; an electron or positron absorbs or generates a photon (and a photon either splits into an electron and a positron or an electron and a position collide and annihilate each other, producing a photon) in a process governed by the fine structure constant, which is a value estimated by experiment of 0.007297351 ± 0.000000006. These laws hold, as best as we can tell, exactly: they are inscribed in the deep structure of the universe, and hold for all forces, all momentums, all kinetic energies, and all photon-electron-positron interactions.

By contrast, the claim that output-per-worker Y/L varies systematically with capital-per-worker K/L with a quantitative coefficient of 0.4 is a rough rule of thumb. The claim that, holding the capital-output ratio K/Y constant, the efficiency of labor E is proportional to production-per-worker Y/L is a definition. The claim that labor efficiency E, the value of knowledge H, and natural resources per worker N/L are such that if the second and third grow at the same rate the first grows at the same rate as well is a definition. And the claim that knowledge H is thrice as important as resources N/L in advancing the efficiency of labor E is not even a rough rule of thumb: it is a guess.

There is no machine buried deep inside the earth emitting some kind of force field penetrating the universe that generates as a natural law the aggregate production function which growth economists like me like to write as:

with α=0.4 and φ=3. And so any quantitative conclusions reached by using them should be taken with many, many grains of salt. Nevertheless, I find the framework very useful in organizing my thoughts, in generating questions to investigate, and, yes in producing very rough approximate magnitude. Queen Victoria does not appear to have been a much better queen than Queen Elizabeth. But from all historical accounts Gloriana appears to have been a much happier woman than the Widow at Windsor.

So set our quantitive index of the global value of human knowledge H equal to a value of 1 back 10000 years ago, at the end of the Gatherer-Hunter and the beginning of the Agrarian Age. Then by the year 1 this value index stood 3.5. By the year 1500 the index of the value of knowledge stood at 4.75: given similar resources, because of more knowledge about how to use nature and organize humans one worker in the year 1500 could produce things of the value it would have taken 4.75 typical workers of 8000 BC to produce.

Calculating the average rate of growth of the value of the knowledge gets us a growth rate of 0.02% per year—0.5% per generation—for the entire span years from 1 to 1500. We also see an average population growth rate for the world over this time span of 0.06% per year—1.5% per generation—as increases in technological prowess were soaked up by higher populations and thus greater resource scarcity, leaving little or none to improve humanity’s lot.

From 1500 to 1800 to 1870 our quantitative index H grows from 4.75 to 9 to 16—average proportional rates of annual increase in H of 0.2% per year over 1500-1800 and of 0.8% per year over 1800-1870. These are vastly greater than the 0.02% per year of 1-1500 or the 0.035% per year of 1000-1500. However, even the 0.8% per year of growth in human knowledge over 1800-1870 did little to raise human material well-being. Humans were perhaps 40% better off in 1870 on average than they had been in 1800—a growth rate of 0.48% per year. And, as John Stuart Mill had observed, little of this increase in production per worker trickled down to the working classes of Britain, and still less trickled down to the working classes of the rest of the world.

To a large extent, Malthus still ruled the human world of 1870. World population had grown from perhaps 900 million in 1800 to 1.3 billion in 1870—an average growth rate of 0.5% per year—and was about to grow from 1.3 billion in 1870 to 1.625 billion in 1900—an average growth rate of 0.75% per year. Contrast these population growth rates to the 0.25% per year of 1500-1800 and the 0.06% per year of 1000-1500, and see that the somewhat richer world of the Commercial Revolution and British Industrial Revolution eras was producing a substantial population response. People still had little access to effective family limitation planning. And for most people the need and desire to have surviving descendants was driving a plan to have many children—and in the richer world more of these children were surviving.

What would the world today look like if the British Industrial Revolution had not happened—if the rate of growth of the value of human knowledge H had remained after 1800 at its rate of 0.2% per year that it had attained over 1500-1800? We cannot know, but my view is that the balance of the probabilities is that the world today would look at lot like the world of 1800, or 1500, or even 1000. There would have been continued technological development at a pace four times that of 1000-1500: a rate of progress that took 100 years in the Middle Ages would have been accomplished in 25. But the world would never have become rich enough for people to begin thinking in large numbers and to substantial degrees that they should make more serious efforts to limit their fertility. And it is likely the global population growth would have reached the 0.6% per year at which essentially all of technological improvement would have gone to increasing human populations, and next to none to raising output-per-worker. Picture a world today of 3.3 billion people, a little less than half of our current population. Picture a world today with a value-of-knowledge index of 14: the level attained, historically, in 1865—a steampunk world. And picture a poor steampunk world: human real income per capita would then have been on the order of a thousand dollars per year. It would have been a world where the average person lived on 3 dollars a day, rather than our world where the average is ten thousand dollars per year and 30 dollars a day.

What would the world today look like if the British Industrial Revolution had been what there was—if the rate of growth of the value of human knowledge H had remained at its rate of 0.8% per year that it had attained over 1800-1870? We cannot know, but we can project forward. We would then see a a world today with a value-of-knowledge index of 50—the level of technology and organization that the world, roughly, attained in 1930: automobiles, not Ford’s Model T but his Model A; rural electrification a pressing issue in the United States; home appliances—even washing machines—as unusual things; radio as high-tech; radar as the frontier; the build-out of public utility networks in an attempt to capture economies of scale the hot sector for investment banking and Wall Street; no jet aircraft; no antibiotics.

How rich would such a world be? Perhaps the most relevant economist would still be Malthus. At living standards of two dollars a day with pre-industrial public health conditions human populations appear essentially stagnant. At the living standards of three dollars a day of 1800 or so human populations appear to have grown at 0.5% per year. At the living standards of four dollars a day of 1870 or so human populations appear to have grown at 0.75% per year. By the time average living standards hit 10 dollars a year after World War II the global population growth rate was 1.85% per year. Only thereafter, since 1975, have we seen population growth rates begin to slow.

In our counterfactual world with no acceleration in technological and organizational progress after 1870, does the world as a whole ever get rich enough for population growth to begin to slow? Perhaps. Perhaps not. We can construct scenarios, the more pessimistic of which would see a counterfactual world today with our value-of-knowledge index at 50 and with 6 billion people on it. That would generate standards of living averaging perhaps 6 dollars a day: the level of prosperity the world saw in 1900. And that world might then have a future in which subsequent growth in living standards was slow, as global populations continued to grow rapidly and yet technological progress was not fast enough to leap far ahead. At a rate of growth of the value of ideas of 0.8% per year and a relative salience of ideas relative to resources parameter φ, that rate of discovery, invention, and innovation would be neutralized in its effect on the efficiency of labor by population growth of 2.4% per year.

At the 1800-1870 rate of increase of the global knowledge stock, the world would not attain today’s actual level of the value of knowledge until 2360. If the world had never grown rich enough to set the demographic transition in motion, what would the corresponding population be? How scarce would natural resources be? How rich could the world be?

But that is not the world we live in. In 1870, our economists’ heroic-assumptions index of the value of knowledge index stood at 16 for the 1.3 billion people alive then. And human life was still overwhelmingly, in Thomas Hobbes’s phrase: “nasty, brutish, and short”. The Agrarian Age that had begun with the development of agriculture and the domestication of the goat 10000 was still a reality for most of the world.

Then came the explosion. Our 7.5 billion people today have a global value of knowledge index of 421 and an average income of 30 dollars a day—10000 dollars per capita per year. The value of knowledge about technology and organization grew at an average rate of 2.3% per year over the Long 20th Century. And it is still growing. Meanwhile, humans appear to be converging on a fertility of two children per potential mother, or fewer. And human population appears to be headed for a peak around 2050 of between 9.5 and 10 billion.

That something truly big was going on was not obvious to mid-19th century economist John Stuart Mill or to late-19th century economist Alfred Marshall. But it had become very obvious by the team early-20th century economist John Maynard Keynes sat down to write, looking backward from 1919 at the pre-World War I era 1870-1914:

After 1870… developed… an unprecedented situation…. The pressure of population on food… became for the first time in recorded history definitely reversed. As numbers increased, food was actually easier to secure…. With the growth of the European population there were more emigrants on the one hand to till the soil of the new countries, and, on the other, more workmen were available in Europe to prepare the industrial products and capital goods which were to maintain the emigrant populations in their new homes, and to build the railways and ships which were to make accessible to Europe food and raw products from distant sources…. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up. That happy age lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy…. Malthus disclosed a Devil. For half a century… he was chained up and out of sight….

What an extraordinary episode in the economic progress of man that age was!… The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages…

Keynes feared, in 1919, that World War I had broken this marvelous machine of economic growth and human happiness, and that the world might face a reversion to some Malthusian dystopia. 11 years later he had seen the demographic transition coming and was pleased by the progress of technology, and had veered to optimism. He then foresaw that we today would be—in material things—in utopia:

Let us, for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day…. The needs of human being… fall into two classes—those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class… may indeed be insatiable…. But this is not so true of the absolute needs…. Assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not—if we look into the future—the permanent problem of the human race….

Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts…. To use the language of to-day-must we not expect a general “nervous breakdown”? We already have a little experience of what I mean -a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations—who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing….

I see us free, therefore, to… once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight…

How did the world accomplish its further threefold leap, relative to what had taken place in the British Industrial Revolution era of 1800-1870 in the underlying fundamentals of economic growth? Why, instead of the British Industrial Revolution growth surge petering out and being followed by a return to the Commercial Revolution era—itself a positive historical anomaly—did the rate of human progress leap ahead at a tenfold pace? Why does one year since 1870 see the relative technological and organizational progress of three years over 1800-1870, of ten years over 1500-1800, and of a hundred years over 1-1500? Just what happened around 1870 to make this shift? And what has happened between then and today to sustain it?

I see four factors as key:

1. The development of the industrial research laboratory of Edison and Tesla, and its subsequent bureaucratization and generalization
2. Globalization in goods transport, in the form of the iron-hulled screw-propellered ocean-going steamship linked to the railroad network, and subsequent developments.
3. Globalization in communication, in the form of the global submarine telegraph network linked to landlines, and subsequent developments.
4. The openness of the world—most important, perhaps, in migration, as one in seven humans changed their continent between 1870-1914, but this was closely linked to the other forms of openness that allowed transport and communications to produce globalization and that allowed research and development to diffuse throughout the world, albeit slowly.

These all four together were, I think, more likely than not enough to be a tipping point. I wish that I could do more in this book to explain why they together were a tipping point, but I do not know enough to do so. I can, however, trace their consequences.