My Review of Tyler Cowen’s New Book

Tyler Cowen’s new book, The Great Stagnation, is terrific. If you want to understand what’s going on with the economy, you should buy it right now. In fact, buy two.

Oh, oh, I’m supposed to write more? Ok.

I should start by saying that if I was still writing for BusinessWeek, I would never be allowed to review Tyler’s book, because he cites me copiously and even graciously dedicates it to “Michael Mandel  and Peter Theil, who have blazed the way.”  (Thank you!) But the fact is, The Great Stagnation is so important and so readable that I’m going to violate every possible  conflict of interest rule.

Since 2009, I’ve been arguing that there’s an innovation slowdown which is the root cause of many of our current economics ills (See here for the  June 2009 BusinessWeek cover story, “Innovation Interrupted”)*.  Since then I’ve been writing and blogging about the  innovation shortfall thesis. (For example, in March 2010 I wrote a policy memo for the Progressive Policy Institute titled “Why the Jobs Crisis is Actually an Innovation Crisis”)

That’s why I was so pleased to see Tyler’s new book. He incorporates my original innovation shortfall thesis–which mainly focuses on technological change over the past decade–into a much broader argument that stretches back forty years. What’s more, he does a great job of making his case in clear terms (readable!). Tyler argues:

…the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That’s it that is what has gone wrong….there are periodic technological plateaus, and right now we are sitting on top of one, waiting for the next major growth revolution.

Why is Tyler’s “technological plateau”  so important? It gives you a coherent explanation of how we got into this mess. Tyler writes:

In essence, we’ve been making plans—whether consciously or not—as if we would have ongoing productivity growth of 3 percent or more, along with the asset prices that would accompany such a boom. When you combine plans based on 3 percent gains with a reality of much inferior performance, sooner or later you get a crash.

In other words, it was a collective misperception of current growth rates.

We were all, more or less, overconfident. It gets increasingly harder for me to escape the conclusion that many millions of people were complicit, whether intentionally or not.

Going forward, Tyler raises several important questions.  How do we encourage technological progress? How do we manage slow growth? And if and when we get a new round of technological breakthroughs, how do we manage those?  These are his suggestions

  • Raise the social status of scientists
  • Be part of the solution to the current rancor, not part of the problem. Don’t demonize those you disagree with.
  • Have realistic expectations.
  • Be ready for when more low-hanging fruit actually arrives because sometimes low-hanging fruit is dangerous
  • Be prepared for a recession that could last longer than we are used to.

Let me comment on two of these. First, the point about raising the social status of scientists. In his state of the union address, President Obama made a big deal about innovation. But he did not highlight a single current scientist. Instead, he featured two brothers,  Robert and Gary Allen, who own a  Michigan roofing company.  Good politics–but perhaps not the right message to kids.  

Second, don’t demonize those you disagree with. The point Tyler is making that politics becomes a lot harder in a slow-growth economy, where expectations have to be ratcheted down.  The center has a real purpose.

Finally, Tyler wrote this book in a short Kindle e-book format. It’s worth getting a Kindle just to read his book –I did!

Book Review: “From Poverty to Prosperity”

One thing that I intend to do on this blog is highlight interesting books on innovation and growth. Let’s start with From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph over Scarcity by Arnold Kling and Nick Schulz (Encounter Books, 2009)

I like this book a lot. But first, let me say a word about Arnold.  I first came across his online essays a few years ago (one that I remember in particular was “You Call This Health Insurance?”). I was very impressed–here was someone who both understood his economics better than most academic economists and could also write more clearly than most journalists).

Kling, who today is one of the main  writers on the terrific blog EconLog,  continues to write very interesting and original stuff.  In this book, Kling and his co-author  Nick Schulz of the American Enterprise Institute,  do two things. First, they have chapter-long interviews with many of the big-name thinkers in the economics of innovation: Robert Fogel, Robert Solow, Paul Romer, Joel Mokyr, Douglass North, William Easterly, Edmund Phelps, Amar Bhide, William Lewis, William Baumol. Great stuff that you can’t get anywhere else  (though I think they should have also interviewed Daron Acemoğlu of MIT and Rob Atkinson of the Information Technology and Innovation Foundation).

Kling and Schulz also make a case for what they call ‘Economics 2.0’ .    Here what they say in the book :

“Economics 1.0 is about scarcity….Economics 2.0 is about abundance, which arises from technical progress.”

“Economics 2.0 says, ‘Markets often fail. That is why we need markets….In Economics 2.0, the market is a mechanism for stimulating and filtering innovation”

I think Kling and Schulz are on the right track. What they call Economics 2.0 is similar to what I and others have called “innovation economics,”  which stresses knowledge and intangible assets . Way back in 2008, I wrote a cover story for BusinessWeek (remember that magazine?) called 

Can America Invent Its Way Back?

The subhead was

“Innovation economics” shows how smart ideas can turn into jobs and growth—and keep the U.S. competitive

It’s good to see a book which focuses on this topic,  whether the authors call it innovation economics or Economics 2.0 or something else. We need more of this kind of thinking.