Technological Progress Isn't GDP Growth

Moneybox
A blog about business and economics.
Feb. 19 2014 11:24 AM

Technological Progress Isn't GDP Growth  

Tying together two recent posts, once you understand that GDP growth isn't all there is to human progress you can see another problem with Robert Gordon's techno-pessimism namely that he bounces back and forth between pessimism about economic growth and pessimism about technological progress.

In this, he is working in a longstanding tradition in the economics profession that happens to make no sense. If you decompose the source of GDP growth you have labor force growth (more workers) plus growth in the capital stock (more equipment) plus something else. This something else is sometimes called the "Solow Residual," which emphasizes that it is a mathematical artifact. It is sometimes called "total factor productivity," which emphasizes why it matters. And it is sometimes called "technology" because economists enjoy butchering the English language and engaging in wild flights of epistemological fancy.

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But this last option is phlogiston economics.

The printing press was a major technological innovation. It was not an enormous boost to GDP because the market for books is not and never has been particularly large or economically significant. But there's more to life than economic output, and the market for books has always been very culturally significant thing. So an innovation that dramatically alters the cultural landscape is a major technological breakthrough. If it's not a big deal for total factor productivity or economic output, then that's just one of those things.

Which brings me to a way that I think Gordon could easily strengthen his argument. It seems entirely conceivable to me that future technological progress simply won't lead to that much economic growth. If we become much more efficient at building houses, that will increase GDP, because the output of the housing sector is selling housing. But the output of the health care sector is selling health care services, not curing illnesses, and sick people already buy a lot of health care services. People with cancer tend to buy cancer treatments. If those treatments become more effective at curing cancer, that'd be great for patients and their families, but it's not obvious that it would raise "productivity" in the economic sense.

Suppose someone invented a pill that cost $500 and if you took it once you'd enjoy perfect health until the age of 100 at which point you drop dead. That would be a pretty amazing invention. But it's impact on GDP is surprisingly ambiguous. In the short term, it would be a kind of catastrophe. Presumably in the long run the economics would all work themselves out. But in raw human terms, the gains would start right away. Being sick is incredibly annoying. Having a loved one die is awful.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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