As Economy Suffers, Economic Theory Flourishes
Two academic economists prove the public is hungry for answers to wage stagnation
French economist Thomas Piketty took the U.S. by storm in 2014 with "Capital in the Twenty-First Century," a pessimistic study of rising inequality in Western society. Now the American economist Robert Gordon follows with "The Rise and Fall of American Growth," an equally dour take on the future of living standards.
The two books have a lot in common, starting with their sheer heft: the first runs 685 pages, the second 762. And both have been surprise public hits: Mr. Piketty's book reached No. 1 on Amazon, and Mr. Gordon's has cracked the top 50.
From John Maynard Keynes and Friedrich Hayek to Milton Friedman and Paul Krugman,leading academic economists have long found a ready reception with the reading public.
But economic best sellers have typically been aimed explicitly at the general public, often with a streak of political advocacy. What sets the books by Mr. Piketty, Mr. Gordon and several other academics apart is that with their technical language, charts, tables and occasional formula, they are aimed as much at other economists as at the lay public. That makes their popularity all the more remarkable—and for those who worry about the quality of public discourse, encouraging.
Such works once circulated primarily to libraries and a small audience of like-minded specialists. In 1963, Princeton University Press published Mr. Friedman's and Anna Schwartz's "A Monetary History of the United States." It became one of the most influential works in economics, yet in half a century has sold just 50,000 copies. By contrast, Carmen Reinhart's and Kenneth Rogoff's "This Time Is Different," an 800-year analysis of financial crises published in 2009 by the same imprint, has sold roughly five times as many copies.
The financial crisis has clearly helped. Sales of economics books surged from 2009 to 2011 before falling back below precrisis levels, according to market-research firm Nielsen. The media have also been a boon to academic economists with literary aspirations. "If it weren't for the Internet, a lot of these people, certainly myself, would sell fewer books," says Tyler Cowen of George Mason University, whose popular blog helped turn his e-book, "The Great Stagnation," into a best seller.
The impact of Mr. Piketty's and Mr. Gordon's books reflects the fact both were the culmination of 15 years' work, much of which had appeared in academic journals, notesSeth Ditchik, executive editor at Princeton University Press. Other economists knew the books would be important even before they were published.
Mr. Piketty timed his book impeccably, as the debate over inequality reached fever pitch. With more than two centuries of data on income and wealth across Europe, the U.S. and Japan, and ample literary references, Mr. Piketty argued that as long as the return on capital exceeds the economic growth rate, capitalism tends to ever more inequality. The consequences, he writes, "are potentially terrifying."
Mr. Gordon's timing is equally auspicious. Productivity growth, the long-run determinant of a country's standard of living, has been dismal since 2010, undermining wages and unsettling the public.
Like Mr. Piketty, Mr. Gordon uses exhaustive historic data to buttress his thesis: Americans' standard of living advanced impressively during the "special century" of 1870 to 1970, thanks to a series of revolutionary innovations—from indoor plumbing, the internal-combustion engine and electricity to municipal water systems and antibiotics—that, once complete, could never be repeated.
Entrepreneurship is central to Mr. Gordon's story. Montgomery Ward's catalogs with transparent prices and money-back guarantees freed rural consumers from "tension-filled dealings with country merchants and peddlers." It wasn't the regulatory reforms spurred by Upton Sinclair's "The Jungle" that saved Americans from contaminated food but refrigerated freight cars, home ice boxes, canning technology, brand names and chain stores.
Mr. Gordon also credits government for nurturing labor unions and the eight-hour workday, which spurred rapid growth in wages and productivity after the 1930s. He attributes rising inequality not to the inexorable workings of capitalism but societal shifts: the growing wage premium for skills, single parenthood and incarceration that prevent poor children from acquiring jobs and skills, and declining unions.
Whose story is more compelling? It depends on what you consider society's greatest challenge. Mr. Piketty's preoccupation is with the distribution of income, Mr. Gordon's with its growth.
Mr. Gordon's thesis is less revolutionary than Mr. Piketty's, but more intuitive, more plainly provable and thus a bigger challenge to the prevailing economic wisdom. "Economic growth is not a steady process that creates economic advance at a regular pace, century after century," Mr. Gordon notes. Annual per-capita growth from AD 1 to 1820, he notes, was close to zero.
Economists are thus wrong to assume productivity growth will eventually revert to the more rapid mean of the special century, even if smartphones, artificial intelligence and robotics deliver everything their advocates promise. Mr. Gordon predicts productivity will grow a little over 1% per year through 2040, better than the past five years but less than half the rate from 1948 to 1970. If inequality continues to rise, that implies almost no growth in the typical family's income.
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