Where Does Growth Come From

Robert Gordon famously argued that a few key industries are the source of most growth. Right now we have information and communications technology. But, it offers a pittance in comparison to the growth sectors of the second industrial revolution – here, we are thinking 1890-1941 – which were electricity, the internal combustion engine(ICE), chemical/pharmaceuticals, and entertainment.

Now I am with Gordon on engines generally, though I am not as taken with the ICE per se as is. The idea, though, that electricity changed the world, long seemed to me to be suspect. To be clear, we are not talking about electronics, but electric power.

Why?

It’s not clear what you get with electricity that you didn’t have otherwise. Gaslights, gas stoves, and gas refrigeration all existed prior to electrification. Economic historians have made a big deal of the fact that electricity allows for small unit-drive machinery, but so does pneumatics.

Fortunately, a new paper by Bakker, Crafts and Woltjer (BCW) backs me up.

Finally, it should be noted that, even including spillover effects, electricity does not dominate TFP growth in the 1920s, the period when it is supposed to have exercised a pervasive effect. Based on Tables 5 and 12, we estimate that the direct effects (0.029 + 0.042) plus spillovers in manufacturing (0.16) add up to a TFP growth contribution for electricals of 0.23 percentage points per year, about 14 percent of the 1.63 annual growth of TFP

Even this is likely to be an overstatement given that in the absence of electricity other power systems would have advanced more rapidly. Indeed, Thomas Edison marketed electrification to investors, not on the grounds that he could not only undercut gaslight industry, but candle makers as well.

Indeed, I think its precisely the overturning whole industries that made the second industrial revolution notable. As BCW note:

 … what underlying dynamic could account for the fact that nearly all sectors were swept along in this wave of innovation, particularly during the 1930s when growth was strikingly broad-based? In this section, we argue that it was the combination of a highly educated, flexible labor force, an effective innovation system and a penchant for creative destruction.

 

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