Stony Brook finance professor Noah Smith briefly critiques Northwestern University professor Robert Gordon’s argument that “the golden days of growth are over” in a recent BloombergView post. Smith summarizes Gordon’s recent book as arguing that a few key technological inventions catapulted growth from 1870 to 1970, but that the low-hanging fruit is now gone and so growth has necessarily slowed. Smith makes two arguments and one additional background point in response. The background point is that the future of technology is, by its very nature, unknowable – there may or may not be great inventions around the corner. That aside, Smith argues that Gordon’s pessimism should be viewed in light of the difference between growth and life satisfaction, and with recognition that governance and other matters are also major contributors to growth (“technology isn’t the only thing that makes society better”). Due to the “decreasing marginal utility of wealth” and a corollary principle applicable to technology, we may have “the illusion of stagnation,” Smith suggests. That is, “inventions that take us from the brink of starvation to prosperity and security will seem more important than what comes after, even if both add the same to GDP.” Secondly, Smith highlights the importance of governance improvements, noting the contrast between North Korea and South Korea. He suggests that in developed countries the “quality of government . . . improved dramatically in the 19th and early 20th century,” which “was responsible for a significant amount of the growth” from 1870 to 1970. He suggests that, in evaluating Gordon’s argument, “we should consider the possibility that government quality, as much as technology, is what has stopped improving,” if only because key improvements have now become standard.
Validea's Guru Investor Blog
Thoughts, ideas and insight from the top minds in the investment world