Governor Erkki Liikanen
Bank of Finland
Book review published in Finnish in Helsingin Sanomat, 1 July 2016


Robert J. Gordon: The Rise and Fall of American Growth, Princeton, USA, 2016

Has long-term economic growth come to a halt in the developed countries? This question has been at the centre of international debate among economists for the last year or so. The renowned economic historian and growth researcher Robert J. Gordon made his contribution to the debate at the beginning of the year with an over 700-page study of US growth from 1870 to the present day.

Gordon divides the period into the unprecedented “special century” 1870–1970 and into the time of slowing growth that followed it. The former was characterised by major technological breakthroughs such as electricity and the internal combustion engine, with the impact of inventions on productivity growth being highest in the years 1920–1970.

Subsequent innovations in information and communications technology were also revolutionary, but were restricted, in Gordon’s view, to a narrower field of human activity, and therefore their impact has not been so extensive. Another difference is that the fruits of the innovations of the special century were widely distributed among citizens. The period after this is characterised by a strong increase in inequality.

Gordon’s book is also a social history. It describes vividly the great impact of technological development on the nature of work in agriculture and industry. Work became safer, and real earnings rose. Roosevelt’s legislation also contributed to this.

The technological breakthrough in homes was equally impressive; indoor plumbing and refrigerators were introduced and raised the quality of life. In Finland, this change came much later. Many Finns still remember that time. Once, as a young Member of Parliament, I accompanied a British diplomat on a speaking engagement to Kangasniemi in Eastern Finland. For him, the biggest surprise of the whole trip was the fact that, in 1973, the home where the speech was made had no running water inside. The whole region, moreover, had not yet been electrified.

At the end of his book, Gordon analyses the headwinds facing US economic growth. The four most important of these are rising inequality, stagnating education, an ageing population and rising general government debt. Finland has all four challenges, but two more stark, two less serious. Finland is ageing more quickly than the USA and public indebtedness is still growing. Basic education puts us in a better position, however, and the trend with regard to inequality has not been as steep.

Growth-retarding pressures, moreover, are arising from climate change. If adjustments are made in an orderly manner, the costs will be lower. The US elections will have an important impact on the implementation of the Paris Agreement. Another problem is the decline in industrial jobs, to which globalisation and technology have contributed; this has reduced average real incomes. The issue is reflected in political debate in the USA, and in Europe, too.

Gordon recognises the revolutionary nature of information and communications technology. Why doesn’t he believe that it will bring a new wave of productivity growth? He gives explanations, bigger and smaller. Why haven’t smartphones and tablets increased productivity? Two examples of reasons: people visit entertainment websites during work time and also use time to send personal e-mail and shop online. He is also concerned that various online services greatly disturb the concentration of teenage boys in particular, adversely impacting learning outcomes.

Gordon is a respected researcher. His view that the best innovations are behind us is challenged by many. One challenger is Professor Joel Mokyr, a colleague of Gordon at Northwestern University.

Mokyr considers globalisation and speed to be a major change. If something is invented, it is immediately everywhere. He is convinced that scientific development is advancing rapidly and that change will only accelerate. Another well-known technology optimist, Professor Erik Brynjolfsson of the Massachusetts Institute of Technology, will visit Finland in August.

Gordon’s economic history is impressive. I also share his concern about the headwinds to growth. But I don’t believe that that people’s capacity to innovate is on the decline. ICT and the internet are great facilitators.