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Cowen’s Stagnation Muddle

from Peter Radford

Tyler Cowen created quite a stir earlier this year with his depressingly entitled “Great Stagnation”. He issued it as an electronic book, but such was the fuss that it was later published in the old fashioned way. I am ashamed to say I bought it only when the paper version was available. In a way I am glad I waited: I ended up writing all over it as my temper rose along the way. Somehow I find it therapeutic to scribble in ink.

He suckers us all in with a very sensible sounding argument: a significant reason for the slowdown in growth over the last four decades, and a very significant contributor to our current inability to break free from stagnation, is that the marginal return on most recent innovation is much lower than similar returns from earlier innovation. He calls it the low hanging fruit argument. Think of it this way: the impact of electricity was way more profound than the vaunted impact of the internet – which was, itself, facilitated by electricity. His list is impressive. He mentions not just electricity, but also railroads, washing machines, automobiles and all the well known panoply of industrial era breakthroughs that changed our way of life and made fortunes for the likes of Henry Ford as well. The key point being that those early innovations had a vast material impact on society as a whole, literally changing the way we lived, created millions of jobs, and so lifted wealth for swathes of workers; and propelled growth forward at a hitherto unknown pace.

Indeed the inflection point in growth is well documented and endlessly discussed.

Cowen’s points out that the change in pace, noticeable from the mid to late 1800′s through until about 1970, was never going to be sustainable. Our ability to repeat those kinds of high reward innovations was bound to sputter to a halt. It takes a great deal more effort to innovate nowadays simply because the more accessible parts of science have been thoroughly mined out. We have now moved onto to more difficult stuff, which is not only more costly to exploit, but tends to have less widespread impact. The benefits to wealth tend to stick with the innovator and do not leak more broadly into society.

He applies this marginal argument to two other sources of economic growth: education and land. In education we face the same problem: after expanding high school education to most kids, we cannot go further. The burst in our wealth producing capacity from getting  generally better educated population cannot be repeated without extraordinary effort, thus lowering the incremental impact of that effort. Nor can we educate more than 100% of our children. Likewise our reservoir of fertile, but unused, land is now depleted. Expanding our use of land forces us onto less productive acreage thus reducing the incremental impact as well.

So far so good.

I can buy this argument. The easy stuff is done. The hard stuff lies ahead. And, because it is harder to squeeze wealth from that harder stuff the rate of growth will inevitably flatten out. So our ability to reach escape velocity whenever we get stuck in recession is made more difficult. We should, Cowen suggests, get used to less growth and more limited opportunity. This is contentious, but let’s run with it.

I nearly flunked a course in business school for making this exact argument. When I tried to argue that much of US twentieth century growth rested on its inventory of easily deployed material and human resources together with a common language and large population, rather than on exceptionalism or special skills, my professor blew a fuse. Those were the days of US superiority. To argue that it might all have been an easy play and not the result of genius was counter cultural and, well, almost socialist. Those were the days of Reagan after all. I was told to shut up and get with the program. The capitalist program, at the apex of which stood the army of MBA’s being minted at that very school.

Unfortunately Cowen and I diverge at this point.

He goes on to explain, or try to explain, that quite a bit of recent growth was an illusion anyway and that we could have diagnosed the decline in marginal returns had it not been for the illusion of the Reagan years.

Only, of course, Cowen doesn’t blame Reagan the way I do. He, predictably being an orthodox kind of guy, blames government.

Here he gets sneaky.

He couches his argument in the ever so balanced language of someone chiding children for making elementary mistakes. Silly dears, he says, surely you all know that government is just not very efficient. Yes, he admits, government can be quite useful: he mentions, in true libertarian style, our need for police forces. It’s all that other stuff that clutters things up and weighs down on the economy. He doesn’t make his argument overtly political, his ideological skirts reveal only somewhat, but he attempts to be scientific.

Now, being scientific is something right wing economists pride themselves on. Elsewhere, on National Public Radio, another of my favorite non-ideological right wing economists – the much vexed Greg Mankiw – made this startling statement with respect to possible economic solutions to income inequality:

“I think the liberal position is more to try to address the outcomes through a progressive income tax, and I think the conservative point of view is to try to address the causes.”

Think about that.

Conservatives try to address the causes. Liberals dither about in the frothy and unscientific world of redistribution. Conservatives face up to the hard issues and apply serious thought. Liberals get all emotional and tinker with things. Conservatives get to the root of problems and recognize the limits that nature throws in our way. Liberals are always denying the stern realities that prevent all their dreams from coming true.


And this isn’t paternalistic or ideological.

Not at all.

Cowen wanders down the same path.

He argues that because we include government expenditures at cost when we compile GDP we have no way of knowing whether that money is being spent efficiently. Especially at the margin. Here he vectors into a variant of Ayn Rand – whom  he praises at one point. He slyly uses marginal analysis. One of the big trends of recent years, he tells us, is the ever growing presence of government expenditure. Remember he is about to use his low hanging fruit metaphor. He goes on to argue that a major cause of our economic malaise is that all that incremental government spending must – must – be less productive than the earlier government spending we all can agree we like. This is simply a variant of marginalism. Each extra dollar spent produces a less effective outcome than the dollar immediately prior to it. Why? Because we have exploited all the easy options. Further expansion of government is, inevitably, scientifically, and absolutely, less valuable. No wonder, he says, GDP is having a hard time taking off. We are pouring cash into less and less attractive – marginally speaking – government projects, programs and so on.

How scientific. How hard nosed. How uncontroversial.


He even says: “This statement is not anti-government; it’s jut common sense.” As if economic theory was so settled. He calmly throws government under the bus, not because he is ideologically pre-disposed that way, but because hard nosed economic theory drives him – perhaps against his better judgement – that way. It is, after all, just common sense.

Oh boy.

Not at all.

First: the marginal revolution in economics was a serious attempt to fend off the Marxist critique of pre-existing classical theory. Right wing economists longed for a scientific – “objective” – rebuttal to Marxist notions of capitalism. Marginal analysis was part of that effort to establish economics as a science.  It was, naturally, convenient that this newly discovered scientific footing confirmed the efficacy of market allocation of resources, and “proved” that efforts to tinker with that allocation were as futile as spitting in the proverbial wind.

All Cowen is doing, under the guise of being tough minded and scientific, is to display his predisposition. He is neither tough minded nor sceintific.

How do we know?

Because the marginalist argument he deploys gathers its might from lumping all government spending in one giant pot. Thus an extra dollar spent, on, say, education, draws its marginal decline in value from having been added to the previous dollar which was spent, perhaps, on policing. Apples are thus mixed along with oranges and all sorts of other fruits in a not too subtle attempt to distract us. But government spending is not homogenous. Cowen makes no effort to untangle it all and apply his analysis on the lesser sums. Nor, by the way, does he once back up his marginal argument with anything resembling a fact.

This he doesn’t need to do.

Because he deploys that Swiss Army Knife of orthodox theory: the price mechanism.

We know, absolutely know, that bigger government is a burden rather than a boon, because we carry it on our books at cost. Incremental expenditure is never exposed to the harsh realities of market pricing, and so its marginal worth is opaque. Disregard that this could work to the government’s advantage. We are told firmly that the lack of market pricing means we cannot reveal the value of marginal government spending. Ergo: more government is necessarily a drag, and thus is a very bad thing.

At which point Cowen rests his case. Presumably secure in the knowledge that the science of marginalism has slain the dragon of big government.

I won’t comment, for fear of paining you further, on his attitude towards fiscal stimulus. Suffice to say that it is a rotten failure and that public debt is horrible since it doesn’t create anything.

So the story is: we have exploited all the low hanging fruit. Thus, we should expect lower growth until we come up with new spiffy ideas. Only then will we get back to those impressive marginal rates of return that drove twentieth century wealth accumulation. Until then we should limit government because we all know its marginal value is way beyond the point of marginal decline.  Oh, and we should all stop promising ourselves silly entitlements that those prospective low growth rates tell us we can no longer afford. Silly us. If only we had been tough like those conservatives, and had attacked the causes, rather than deluded ourselves like the silly little liberals that we are, we could have foreseen the collapse in marginal returns, the consequent constraint on growth, and thus the futility of trying to protect ourselves from the periodic hiccup in the historic march of capitalism towards nirvana.

His book made waves in Washington. It was the talk of the town. Perhaps they had nothing else to read this summer.

  1. Mike Meeropol
    December 8, 2011 at 2:10 pm

    Thanks so much, Peter. What Cowen totally ignores is the possibility (I would say almost near certainty) that just as one of the results of the automobile was the “creative destruction” of all aspects of living based on the horse and buggy — the REPLACEMENT if you will of one set of economic structures with another new one — so the challenges facing the 21st century world (greening our technology in order to save the planet) will REPLACE a lot of old technology with new ones —

    How’s this for low-hanging fruit? — high speed rail connecting all major population centers in the US — modern light rail urban transit systems — massive creation of decentralized solar energy collection points — and that’s just off the top of my head!

    These will create tremendous improvements in productivity — have great payoffs in terms of jobs — and in the long run health and (in the very long run) reduced costs from fixing up after increased weather-related natural disasters as global warming slows (over the next 50 years).

    What will NOT occur during this transition is outsized profits such as were made by the railroads, then the auto industry, etc.

    Stagnation as a long run result of capitalism has been part of the economist’s scientific study since Hobson and Rosa Luxembourg (maybe going back to Rodbertus??) — obviously extended and ultimately refined by Sweezy and Baran. It is not based on the idea that HUMANITY has run out of very useful things to do with high productivity pay-offs — only that CAPITALISM has run out of ways to make those things profitable.

    I guess I’ll have to read Cowen now — hopefully some decent reviews will be written —

    It’s a shame to think that it made a stir in Washington.

  2. December 8, 2011 at 2:37 pm

    There is great potential in genetically-based medical advance, nano-technology, and applying quantum physics. There have been in the past several claims about the end of progress and growth, and they have all been proven false by progress. Moreover, the availability of information in the world wide web is quite significant, in my judgment. Plus there have been recent discoveries of vast amounts of oil and natural gas. Also, if conservatives really sought to confront causes rather than symptoms, they would not be pushing nonsense such as a “fair” national sales tax or the war on drugs..

  3. Robert R Locke
    December 8, 2011 at 3:49 pm

    Rheingold wrote in 1991: “If necessity is the mother of invention, it must be added that the Defense Department is the father of technology; from the Army’s first digital computer in the 1940s to the Air Force research on head-mounted displays in the 1980s, the US military has always been the prime contractor for the most significant innovations in computer technology.’ So much for the contention that spending by government bureaucrats cannot be creative. On the contrary, it could be argued that if the Defense Department had been eliminated from the equation, private industry, with its eye on the bottom line, would not have funded the projects needed to advance the technology.

  4. December 8, 2011 at 5:12 pm

    Linda McQuaig and Neil Brooks make the argument in their book The Trouble With Billionaires that inequality in society is what is contributing hugely to the lack of innovation. They also note that all gains and so-called innovation rest on the shoulders of earlier giants and we reward contemporary marketeers inordinately.

    Others might want to look at the Cult of Efficiency by Stein.

  5. david glover
    December 8, 2011 at 10:38 pm

    population growth and / or growth in the rates of consumption of resources cannot be sustained

    dr. Albert Bartlett

  6. December 8, 2011 at 11:39 pm

    “He argues that because we include government expenditures at cost when we compile GDP we have no way of knowing whether that money is being spent efficiently.”

    I had exactly your argument with him. My version, in my words:

    “You say the value of government services can’t be measured, because they’re not paid for. We don’t know what they’re worth.”


    “So they could be worth more than we spend on them.”

    “No. They’re worth less.”

    “But *you just said* that we don’t know what they’re worth. So how do you know whether they’re worth more or less?”

    — No reply —

  7. Edward Allen
    December 9, 2011 at 12:54 am

    The Equality Trust, launched by Kate Pickett and Richard Wilkinson (co-authors of _The Spirit Level_), contends that “[f]urther economic growth will not improve our health or well-being. For a better quality of life we need greater income equality.” The Trust presents a substantial amount of evidence at its website ( http://www.equalitytrust.org.uk ).

    David Glover’s comment above fits here. In the words of investor Jeremy Grantham:

    “The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.”

    Many students of “the commons” (the subject of Nobel Economics laureate Elinor Ostrom’s work) argue that the “predistribution” of wealth is badly skewed.

    For instance, Gar Alperovitz (co-author of _Unjust Deserts_) notes that “most of what we have today is attributable to knowledge advances that we all inherit in common,” and asks, “why, specifically, should this gift of our collective history not more generously benefit all members of society?”

    And David Bollier (author of _Silent Theft_) observes:

    “Rather than seizing the rightful property of the successful, as right-wingers see it, commoners are actually seeking to control and own something that belongs to them in the first place. They are seeking a predistribution of benefits from assets belonging to them, rather than a redistribution of wealth generated by markets.”

    Such thinkers pose a challenge to both “conservative” and “liberal,” a challenge that requires serious consideration by every honest economist. They are opening the door to a paradigm that may better explain reality.

  8. Ken Zimmerman
    December 9, 2011 at 3:34 am

    Cowen argues and makes his claims from within a single paradigm. All paradigms are temporary. All fail. Some more quickly and disastrously than others. Marginalist capitalism has reached it failure point. In fact, it reached it some time ago. From within the safety of this now failed paradigm Cowen’s arguments are rock solid. But since the entire paradigm is now defunct that has little significance. What paradigm or paradigms will replace current capitalism is still up in the air. But there is little chance the kind of capitalism that Cowen praises from the US industrial revolution or the marginalist or financial capitalism of more recent times will play that role. And if the argument here is about innovation, not profits and power for one particular group or another it seems the opportunity to pursue innovation has never been greater in the history of the Country. But the new paradigm, whatever it is will also fail. Failure and re-building is a part of the process. It does not end. Cowen’s arguments to the contrary perfection in any sense is not within the grasp of the actors involved in economic transactions.

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