The Great Stagnation (Part 1)

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.

16 Replies to “The Great Stagnation (Part 1)”

  1. Very interesting post. A couple of points, though:

    1. I think that even successful organizations can look as though they’re stagnating. One of my favorite books in understanding my adopted state of Michigan, David Halberstam’s “The Reckoning” is in part interesting because it shows how completely screwed up Nissan was during the period of its greatest growth in the U.S. As he tells it, only the fact that Japan was so far from the U.S. and the leaders of the company never came here, coupled with the presence of one maverick employee who was later brought back to Japan and punished for his independence, allowed them to be successful here. It was still a much better-run company than Ford was in those days, which is also noteworthy.

    2. I read “The Innovator’s Dilemma” recently and don’t recognize your summary of it. What I found fascinating was his idea that it’s exactly well-run, customer-focused companies that have trouble dealing with innovation. The case of hard disk drives was fascinating, where the regular move from larger to small drives seems pretty predictable, yet no company that was the leader in one size was able to maintain that for the next smaller size. Each of the smaller sizes was relatively more expensive and slower, so their customers didn’t have a use for it (but other customers did). Then when HP tried to get ahead of the cycle they failed because they assumed people would put the drives in portable devices that might be dropped and needed expensive disk-parking, when the market that developed was for big stationary videogames (where their product was too expensive).

    I think I agree with the overall thrust of your argument, as well as what it implies about the danger of the “too big to fail” concept. But I suspect from my own experience that the distinction between “innovation” and “stagnation” is only clear in retrospect.

  2. thanks, Igor, I’ve fixed it.

    aretae, Olson’s work is certainly important, but from what little I know of it he says nothing about how new goods and services arise and become widespread. It rarely involves what Olson calls “collective action”. For example, tractors were a new good that greatly increased farm productivity. Many people became better nourished. This had nothing to do with what Olson writes about, as far as I know. Paul Romer’s work is relevant, I agree.

  3. I have one nitpick about the description of innovation by rural vs. urban people. I think it’s important to make this clear in order not to insult rural people. They’re just as innovative as urban people, just as clever, etc. The difference is that cities give innovation a better chance to stick as part of our culture. It’s the environment, not the individuals, that leads to people making innovation a part of their lives.

  4. There are examples of companies that fail to innovate and then get into trouble (i.e. GM, others mentioned here) but there also examples of companies that don’t innovate but remain successful, such as Coca-Cola. They sell essentially the same product that they did nearly 100 years ago, in fact trying to innovate nearly led to disaster (“new Coke”).

    My view is that economies are like ecosystems, with companies playing the part of species within it. In some areas of the ecosystem, constant innovation (evolution) is required for survival (i.e. birds and bugs in the rain forest). In others, the status quo is required (i.e. sharks, which have not evovled for millinea).

  5. Doesn’t IQ and the Wealth of Nations explain creativity. I like mentioning this kind of book because it’s all about race. So if almost all creativity is by smart white men I guess what’s needed for creativity is white men. An absence of state funded dysgenics would be good and also an absence of religion.

  6. UncleLongHair, I think Coke executives would beg to differ with you that their company hasn’t innovated. Coke is sold in far more countries now than 50 years ago and the company itself has a much bigger product line. I also hear that a Coke in New York tastes quite different than a Coke in Beijing. The company used to make a big deal of “same taste worldwide”. Which brings up another big set of Coke changes: in advertising.

  7. Seth, love the post! Intrigued by the great divide you mention between those who benefit from the status quo and those who benefit from the way things are. Robin Hanson has listed questions that one should try to answer about a great divide: In particular,

    1. How is this division a key division, underlying many others?
    2. How do people acquire their sides in this conflict?
    3. How has this conflict lasted so long, without one side winning?
    4. How could one side finally win such an old conflict?
    5. Why is one side better than the other in an absolute sense?
    6. Why can’t those folks be persuaded that their side is bad?
    7. Why can’t peaceful compromise replace conflict?

    For 1, I’d cite how this leads to gov inefficiency, which leads to _lots_ of issues. For 2, I’d say people take sides based on local incentives, and can have different stances on status quo vs new thing on different issues (although peoples’ stances across issues appear to tend to be correlated, perhaps for the sake of cognitive dissonance?). For 3, I’d say it’s because once a group gets power they always have the incentive to keep it. For 4, I guess we’re not sure whether side can win. For 5, innovation is not better absolute of course, but better in terms of more likely to lead to survival and benefit of humans. For 6, they don’t want to be persuaded because that would mean they’d have to admit their relative selfishness. For 7, it certainly could if you had the right incentive structure in place, but right now it can’t.

    Do you agree with these and/or where do you stand?

    (sorry for long comment, I got carried away)

  8. I think the innovation solution is known. For years and years, while Dave and Bill were alive, HP was an innovation fire hose. Even today, under leadership which does not value innovation the way the founders did, HP continues to bring significant technology to the world. In 2012, next year, HP will bring its memristor memory to market.

    A background note – few people are aware of this but it will change the computing world because memristor memory in combination with the crossbar latch can 1) act as a CPU 2) emulate a neuron 3) is incredibly dense – one terabye per cm2 or one petabyte per cm3! Watch the Stan Williams You Tube videos for more info.

  9. Andy, my answers to those questions are different from yours and for better or worse are long and complicated. The conflict arises people are always inventing new stuff and new ways of doing things — that’s human nature. I think personality differences (“rebel” vs. “conservative”) have a lot to do with what side you take and that these personality differences, as Frank Sulloway says, are partly determined by birth order. It’s crucial to the health of a society that both sides of the conflict have plenty of supporters. If there aren’t enough rebels, innovations will never be adopted. That produces collapse. If there are too many rebels, innovations are adopted too quickly, before they have been shown to be safe. I think there is a “divide” (a bimodal distribution) because the conflict is beneficial — active resistance to innovation pushes innovators to do better. To have someone attacking this or that innovation is better than not having such a person (“peaceful resolution”).

  10. I enjoyed Cowen’s book, and I appreciate you post. As often proves the case, you show that Jane Jacobs was a prescient thinker.

    As a very interesting complimentary perspective on these issues (including climate change), I highly recommend two works by Canadian political scientist Thomas Homer-Dixon:
    1. The Ingenuity Gap: Facing the Economic, Environmental, and other Challenges of our Increasingly Complex and Unpredictable World (2000); and
    2. The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization (2006).

    Homer-Dixon questions, somewhat like Cowen, although on a larger scale, whether we can continue to innovate our way of jams. In the second book, following the leads of Diamond and Joseph Tainter, among others, he catalogs the perils we face from a variety of challenges, especially concerning energy.
    Many think that parts of our education are a shambles, yet despite one program after another, we’re still “waiting for superman”. Likewise with energy sources, we still waiting for an energy regime that minimizes our strategic vulnerability, not to mention minimizing risks associated with carbon emissions.

    Finally, Ian Morris in Why the West Rules, among others, reminds us that we’ve lived through an extraordinary 200+ years that are unlike any before and that changed the world more than any since the advent of agriculture, cities, etc. Can this continue? We should do all we can to make it so, but can we plan on it?

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