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The Role of Ideas in the Great Stagnation

If you have not read Peter Boettke’s review of Tyler Cowen’s The Great Stagnation, I suggest doing so. I have not yet read Cowen’s book, so I cannot personally attest to how accurately Boettke interprets Cowen’s message, but I think there is a lot to agree with in what Boettke himself writes in his examination. Certainly, that government spending can cause economic stagnation if its consumption overtakes the private sector’s productive capabilities should not be controversial. Boettke’s review highlights Cowen’s underlying thesis, which is really an attack on the interventionist policies that so many academic and professional economist support.

Cowen’s book has not gone without its fair share of criticism, including from the libertarian blogosphere. Have the past three or four decades really represented a “great stagnation”? David Henderson, in “Tyler Cowen’s Unpersuasive Case” (Regulation [Summer 2011], pp. 51–53), disagrees with Cowen. His detractors point to falling prices, increases in the quality of various products, and generally rising standards of living. It is true, there is little question that the American of the 21st Century is better off than the American of the 20th Century, broadly speaking. At best, Cowen’s critics argue, the use of “stagnation” is clearly misleading.

Boettke, though, suggests that Cowen’s critics “miss the mark”. In his book, Cowen argues that these advancements are the product of picking “low level fruit”, where government inefficiencies have made impossible the attainment of greater advancement. To some extent, I agree with Boettke and Cowen. It is difficult to imagine how advanced our society may have been had it not been for an ever expanding government (or if there had been no government at all, even). Capital consumption and stagnation have become all too relevant of topics, no less, as discussion on the United States’ debt ceiling ensues. At what point will American political expansion lead to a loss in general productivity?

Despite all of this, I cannot help but feel that Boettke’s and Cowen’s outlook places too much emphasis on the role of government in consumption and focuses too little on the market’s ability to produce wealth. That Cowen suggests that any technological advancement which has occurred to date is the product of plucking “low level fruit” reaffirms what I think is an overly pessimistic attitude. I think the market is stronger than either of them suggests and that society’s entrepreneurs and researchers deserve more merit than The Great Stagnation affords them.

Two of the great technological breakthroughs that will mark the 20th Century are computer technology and, its corollary, the internet. What these advances have made possible is the collection, storage, and distribution of ideas; and, ideas are absolutely pivotal for economic progress. So, I would argue that our economic advancement has not been in the shape of “low level fruit”, rather the consequence of advances in data collection and information technology.

According to an article in Muy Interesante (“Llega la Era del Petabyte”), a popular Spanish magazine, the past three decades have witnessed a greater production of ideas than the previous 5,000 years. The author estimates that this knowledge is the equivalent of 281,000 petabytes of storage (294 billion gigabytes), or roughly 45 gigabytes per capita. This is absolutely amazing. The market, of course, has been the most efficient at collecting this data. For example, Wal-Mart’s consumer database contains roughly 43 terabytes of data (44,000 gigabytes), which is larger than the Internal Revenue Service’s (Michael J. Shaw, et. al., “Knowledge Management and Data Mining for Marketing”, Decision Support Systems 31 [2007]) — and, unlike the IRS, Wal-Mart uses this data to make your life more satisfactory.

In The Transformation of the American Economy (I review this book in a forthcoming article), Robert Higgs writes that one of the important phenomena of the late 19th Century was the impact of urbanization on the sharing of ideas. As cities grew in size, so did the amount of ideas that bounced back and forth. Previously, due to different kinds of barriers, the sharing and spreading of ideas was much more limited and difficult. Cities made sharing ideas easier, which meant that innovators could build on each other’s knowledge to create an even more superior pool of information.

Modern computer technology has broken down informational barriers to an even greater extent. It is difficult to measure, but the impact of computer technology has been the greatest out of any previous technology or social phenomenon, at least when concerning the dissemination of knowledge. I say that in some ways Cowen confuses “low hanging fruit” with the fact that progress has simply been made easier thanks to the greater accumulation of knowledge.

The implications of computer technology on the efficiency of production are both broad and profound. Imagine a data mining system integrated into a general knowledge management system (KMS) that is designed to share information between first order retailers (consumer good sellers) and subsequent order (capital goods) industries, making the production process far more efficient and far more flexible. Not only are we discussing a vast network of consumer preference data, but also a networked apparatus of ideas and techniques exchange. For an example of such a system already in use, see Jeffrey H. Dyre and Kentaro Nobeoka, “Creating and Managing a High-Performance Knowledge-Sharing Network: The Toyota Case”, Strategic Management Journal 21, no. 3 (2000) — they discuss knowledge management and sharing between Toyota, Honda, and their suppliers, and the incentives that exist for said sharing (and methods implemented to reduce free-rider problems).

On top of the possibilities that we can imagine we have to add those that we cannot. Advancement is limited only by the extent of individual creativity. A decade or two from now you will enjoy the fruits of someone else’s idea, that you yourself simply could not have imagined prior to its development.

So, while the future is not necessarily picturesque, neither is it as dark as some people suggest it may be. We live in an age that places a premium on knowledge. This represents a giant step forward. I think we should all have a little bit more faith in the market process, and by extension in human creativity and capability. With technology giving us the means of accumulating knowledge in volumes never before imagined, it will be these ideas that will propel us into the future. I have not only “low hanging fruit” in mind, but a much vaster assortment of potential technological advances.

 

P.S. For all of you who remain paranoid about data mining and the collection of information, you are free to live in isolation from society. But, while you remain secluded, I will happily share my preferences with my local grocery store so that they can more efficiently provide me with the goods that I demand. So far, it has only made my life better.

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