Noah and Alan on growth

I tried to restrain myself from responding to Alan’s latest post on growth because the last time he did I unleashed what I have to say was a big honking rant. Then Noah responded.

Noah’s post, characteristically, is very smart, very eloquent, and makes a lot of good points. And yet it’s mistaken, in a subtle, but serious and deep way.

Let’s start with the things Noah gets right:

- “Growth” is actually hard to measure.

- Not all kinds of growth are equal. Growth that comes from productivity gains is much more desirable than growth that simply comes from longer hours worked.

- Growth is a moral imperative insofar as it helps people in truly bad living circumstances raise their conditions of living.

And yet Noah makes errors on growth because he misunderstands it in some key ways.

As we’ve said, growth is hard to define, and economists have a hard time understanding where it comes from. And as we said, not all kinds of growth are equal.

So to better understand growth, then, we had better understand value. The “growth” that we want is a growth of the value of the things we produce and consume.

Now “value” is also a fuzzy concept so let me try to explain what I mean.

If Apple (or Dell) produces a better computer that costs less, that might not register as “growth” on the national statistics, and yet we understand it as essential to growth, at least in the long term (I hope), because it creates more value for society—value for Dell (or Apple) but more importantly value for consumers in terms of consumer surplus. And even more importantly value for society in terms of how this computer helps me do things better, more effectively, etc.

To think about things differently: society gets value out of Google because Google generates profits for its shareholders and jobs for its employees (jobs that then go on to generate more economic activity). That’s how we generally understand the benefits of “growth.” Society actually gets a lot more value out of Google (orders of magnitude) out of the consumer surplus that Google generates—that is to say, the difference between what consumers of Google would be willing to pay for the service, and what they actually pay. That’s how many economists generally understand the benefits of “growth.”

But actually Google generates even more value. It generates value in the sense that it makes our lives easier and better. This is what is actually meant by “consumer surplus” but of course if I am willing to pay X for something it means I am getting something more than X of value out of it. And in the case of Google it is very high. Here the example would be the time I save by doing Google searches instead of looking things up in books or hard-to-use and disparate databases. That would be the types of “productivity improvements” that would lead to “growth” that we would crave. But that is actually a minuscule amount of the value that Google creates.

Thanks to Google (and the internet more generally, I am here talking about “Google” in abstract) I have read many things that I would never otherwise have read. I have met people that I wouldn’t otherwise have met. I met the investor in my first company through Twitter. Business Insider gave me a job because I got in touch with people who worked there over the internet. Again, the point isn’t that I generated $X dollars of economic activity thanks to the internet—I probably would have earned more money by going to work at Goldman Sachs rather than Business Insider—the point is that I got to experience things, and meet people, and collaborate with people on things, in a way that simply wouldn’t have been possible otherwise. And that this is a tremendous amount of value in any sense of the word that makes sense (economic or not).

Or think about the car revolution. The car revolution created value not because it created big car companies that made a lot of people rich and gave even more people jobs, although that’s nice. The car revolution created value because it gave people a profound autonomy that they didn’t otherwise have, it transformed the culture (drive-in cinemas) etc. etc. etc.

This type of value seems incredibly hard to quantify and is certainly impossible to integrate in macroeconomic statistics in any meaningful way, and yet it is without a doubt the much bigger quantity of value and the more precious one.

If we define tautologically value as what we value, things like cars and the internet (and penicillin, and electricity, and…) have value not just because people can put a dollar amount on them, they have value because they allow them to do things or to experience things that they find valuable.

Why carp on this?

Because once you understand what value is and how it’s created, you understand not just why it’s precious but how to get more of it.

As Noah notes, to be vague about it economic growth (at least the good kind) comes from some combination of the use of energy and productivity, that is, more output per unit of energy. And meanwhile, “productivity” is this mysterious black box that probably includes things like technology, but also other things like better know-how—skilled labor, but also production processes and so forth.

But once you’ve said this, you have to realize that all value comes from cooperation. Energy must be extracted (whether from the ground or from the sun or from uranium). Technology must be invented, and then tested, and then built, and then marketed, and then market-tested, and refined, and iterated upon—all things which are done by people working together, whether as members of firms, or as firms collaborating together, or as participants in marketplaces (literal or metaphorical, e.g. the “marketplace of ideas”).

Coase describes how economies of information make it better for us to collaborate as firms or not to accomplish some things. Schumpeter and Christensen describe how how some innovations lead some firms or industries to be destroyed and yet simultaneously lead to more value creation. Hayek describes how our poor handling of information makes central planning destroy value while bottom-up collaboration creates value. Bhidé describes how the interplay of departments within a firm (R&D, manufacturing, sales, marketing) and the interplay of actors within a marketplace (venturesome consumers, market feedback) create innovation through an iterative, decentralized process.

Value, then, is what happens when you allow people to cooperate. Economic value, but also culture, communities, all the things that make the good life. Now, the details on how to accomplish that are fiendishly complicated, and there’s good reason (though not always) why economic policy is so complex and, at times, so powerless.

But once you understand what makes value you can’t make some of the errors that Noah makes, and that are all-too common. That is to say, the error of thinking that growth comes from stuff. If there’s enough oil, then there will be growth. If there’s not enough oil, then there won’t be growth. If we have super-duper computers (or robots or Big Data or spaceships to Mars or whatever) then there will be growth, and if we don’t, we won’t. (True enough on the latter, but it only begs the question of who builds the robots or the supercomputers.)

So Noah writes “of course, once resources are exploited beyond a certain degree, population growth just means sharing those resources across more people – a decline in per-capita wealth” as if “resources” was some finite concrete thing even though human ingenuity and industry is the only resource that creates value.

And Noah writes that we have to “limit the costs of growth” by “restraining population growth.” That makes sense if you think growth comes from stuff, from a fixed pie that we have to share. But that’s simply not how value creation works.

There is nothing to indicate that there is any resource constraint on humanity. We are producing a lot more food than we need, and that is by exploiting only a tiny amount of land and “resources.” If you took just Iowa and replaced all the corn field by vertical farms, you would have enough food to feed ten planet Earths.

Same thing about energy. Just build enough pebble-bed reactors. They’re safe, plus they also generate lots of hydrogen which is great if you want to build fuel cell cars.

Earth is not densely inhabited at all.

We’re just not running out of anything.

And yet this inexplicable fear is there. It comes, most of all, from a failure of imagination. For example, Noah wonders whether if we achieved Star Trek-like cold fusion, it would even register as economic growth. Um, yes? Like, if you dramatically lower the cost of a unit of energy for a unit of production, you will get more units of production?

And yet, while all of this is true, it is also true that growth is slowing, and that it is at least worth asking whether this will continue forever and what to do about it.

First of all, there is little question that given how “growth-oriented” our societies are, if we don’t reignite growth we are headed for societal collapse.

But second of all, it is also true that once you realize where value comes from, it also becomes a lot easier to see how we might get more of it. First, since people cooperating is what creates value, the more people cooperate the more value we get, so we should really get more people, not less. (And it becomes obvious that a civilization that adopted a neo-Malthusian frame and decided to lower its population growth rate in fear of lower economic growth would trap itself in a self-fulfilling prophecy.) Second, it also becomes clear that there are lots of avenues for cooperation that have been blocked. One example is immigration. Another example is the numerous regulations that hold back many sectors of the economy, particularly the most promising (pharma, transportation, space, etc.).

But that’s not even the point. The point is that, to go back to the beginning, once you really understand value and how it’s created, you understand how it’s precious, and you at least understand what you must not do.