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Not All Innovations Are Revolutionary

by: Lawrence Hamtil     
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It is no secret that economic growth has been frustratingly slow for many years now.  There are many explanations for this continued phenomenon:  an increased public debt burden that is thought to have crowded out the private sector; a slew of new regulatory and tax burdens; and, perhaps most plausibly, an alarming decline in rate of productivity growth, which recently registered the weakest 5-year increase since the double-dip recession of the early 1980s.  

Many analysts, however, are not convinced that economic growth has been all that poor.  After all, statistical analysis of economic growth is extremely difficult as data are fluid and difficult to capture, and the methodology for doing so is outdated, to say the least.  These economic optimists, if you will, argue that such modern innovations as Facebook and smartphones aid productivity, but the ways in which they do so are next to impossible to quantify.

Those are certainly valid considerations, but the point of this post is to show that perhaps such measures as productivity are simply reverting back to long historical means after an unprecedented period of rapid growth.  That is the argument made by economist Robert Gordon in his book The Rise and Fall of American Growth.

Mr. Gordon argues that continued lackluster growth is largely a product of demographic shifts, - from a younger population to an older one, - and diminishing returns from continued innovation.  The demographic argument, I think, is one with which few will contend.  Mr. Gordon points out that, as of 2010, 13% of the US population was age 65 and older, compared to only 6.8% in 1940.  This is significant because, as societies grow increasingly older, they consume far more health care than a younger population, and this increased spending on our well-being, while certainly adding to our quality of life, is generally considered a drag on economic growth.

Many will likely take issue with Mr. Gordon's assertion regarding recent innovations, but upon further consideration, it seems to be undeniable.  For example, something like Apple's FaceTime is a convenient way to chat via video, but it is basically an enhanced form of real-time communication which has existed since the invention of the telephone in the 19th century.  Innovations such as WhatsApp, which allow us to communicate internationally virtually free of costs, and satellite phones that allow communication to all corners of the globe, are definite enhancements, but they are, historically speaking, marginal improvements in terms of cost and convenience.

Perhaps even more important to growth in the early half of the 20th century was the invention and widespread adoption of the automobile.  Even long after locomotives had connected the United States across a vast continent, the economic gains from this were limited because distribution from the rail hubs was still largely dependent on equine transportation.  This disconnect between modern intra-continental and primitive local transportation proved disastrous when, in 1872, an already severe economic downturn was worsened when a equine version of influenza devastated the workhorse populations, and economic activities came to a virtual standstill.  

In addition, reliance on horse transportation resulted in negative externalities which impacted productivity and growth in other ways.  For example, Mr. Gordon observes that horses, which lived in cities such as Boston in a density as much as "700 per square mile," produced "twenty to fifty pounds of manure and a gallon of urine daily."  There was no efficient way to remove this omnipresent waste from the streets, and countless people fell ill, missed work, and died from exposure to such unsanitary conditions.  Compared to the improvements upon these conditions that automobiles delivered, the refinements to transportation of the last few decades such as adding GPS units or MP3 players seem trivial.

All of this is not to say that growth is doomed to be subpar forever because the well of revolutionary inventions has run dry.  On the contrary, it is to suggest that perhaps a normalization has set in as the great leaps in medicine, transportation, communication, and productivity have long been digested and promulgated on a global scale, and improvements in these areas, though welcome, will have increasingly less of an impact on the economy overall.  While a continued reduction in the long-term rates of economic growth would have serious implications for the global economy, - and for the aging and deeply indebted developed world in particular, - it should also be noted that growth is not an end in itself.  The object of growth is to improve the quality of life for ourselves and for succeeding generations, and, to a large extent, that continues to be achieved. 

Source:  The Rise and Fall of American Growth by Robert Gordon.

The information provided above is obtained from publicly available sources and it is believed to be reliable. However, no representation or warranty is made as to its accuracy or completeness.

Lawrence Hamtil is a fourteen-year veteran of the financial services industry, having served clients in all aspects of the business during his career, which started in 2002. In 2005, he joined Dennis Wallace of Fortune Financial Services, LLC, becoming, at the time, one of Multi-Financial Securities, Inc's youngest registered representatives. In 2008, Dennis and Lawrence made the decision to become fully independent by founding their own Registered Investment Advisory (RIA), Fortune Financial Advisors, LLC. He serves clients in the United States and Europe. His financial commentary has been referenced in Barron’s online edition.

You can connect with Lawrence on Twitter ( @lhamtil) or via email, lawrence.hamtil@fortuneadv.com. 

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