I’m a latecomer to Tyler Cowen’s immensely successful book, [amazon_link id=”0525952713″ target=”_blank” ]The Great Stagnation[/amazon_link], but as the months of 2011 have rolled by, the title seems more perceptive than ever. Stagnation is a kind description of what’s happening to the western economies now. Certainly, the success of the book shows that it struck a chord.

For those who’ve not read it, let me sum up the argument. The advanced industrial economies – this is mainly about the US – have reached a technological plateau and growth is not going to regain its earlier rates for a long time. Cowen’s description is that all the ‘low-hanging fruit’ in terms of benefits from technological innovation have gone. (He focuses very much on the internet as the locus of innovation.) As evidence, he cites the failure of real median incomes to grow. Much of the online innovation we see brings only private benefits, he argues, so the super-wealthy in finance have prospered but no-one else; whereas past innovation had public benefits too. Further evidence comes from the increase in spending on government consumption, health and education without any corresponding improvement in outcomes.There is still some innovation, of course, but Cowen concludes: “The revenue-intensive sectors of our economy have been slowing down, and the big technological gains are coming in revenue-deficient sectors.” Whereas GM and Ford created hundreds of thousands of jobs, Google’s and Facebook’s employment-creation has been in the low thousands. So not only has the innovation not led to revenues and profit, neither has it led to jobs. With neither labour nor capital making any gains, the productivity effect of the internet must be illusory.

There’s much in the book to agree with. However, I’d make the following comments.

1. The observed outcomes for median incomes, or for the health of the average American, will reflect more than just technological changes. There has been an interplay between innovation and rent-seeking behaviour by powerful groups (mainly financiers but also the health care big business), played out in the US political process. Although the UK has been similar, other countries which do have the internet but not the same politics and power structures have not experienced the same stagnation of median incomes.

2. Innovation is much more than the internet. Not only do some internet/computer companies make a lot of revenue, there are also innovations in biotechnology, materials, nanotech, robotics, green tech – almost all enabled by very cheap computer processing power and communications. I don’t think there’s any doubt that some of these will be enormously profitable and create jobs (although if I knew which, I’d be running my own investment fund.)

3. The book only touches on globalisation – another internet/ICT-enabled phenomenon, but distinct from technological change. One can debate what part it has played in the absence of job creation in the US but it seems in important element in the mix.

4. Job creation comparisons are not straightforward. The mass production businesses of the previous generations of technology were centralised hierarchies, albeit with large supply chains too. Internet era businesses are decentralised and networked, so it’s possible that a reasonable comparison of business ecologies would give similar numbers – or not; I just don’t know. But there’s also a whiff of lump of labour fallacy here, of the kind that shows up in every consultancy study that claims X industry has created Y thousand jobs; we know that economies adjust to the resources and technologies available, meaning aggregate employment rates depend on labour market structures (taxes, participation rates) and the level of demand. I’d suggest low US job creation at present has more to do with weak demand than with Google.

Having said all this, I think it’s an important book and valuable contribution to the policy debate. It must be right to highlight the importance of technology, something all too often overlooked in economic policy. Cowen calls for a culture more welcoming to science, and a much greater degree of civility in politics. Who can disagree with that, looking at the extraordinary spectacle of American politicians squabbling their way over the edge of the precipice of default? I wish the book had included more about rent-seeking and power structures in the analysis as these seem to me at least as important as technological change in trying to understand the important shifts in the leading economies. The historical examples suggest that in the end it’s ordinary consumers who benefit from innovation, but the process is tempestuous and characterised by power struggles. The power struggles are being played out right now, and the median wallet is currently losing.

[amazon_image id=”0525952713″ link=”true” target=”_blank” size=”medium” ]The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better[/amazon_image]