Tag Archives: innovation case

The golden age of immigration and innovation

Tyler Cowen writes, in The Great Stagnation:

The period from 1880 to 1940 brought numerous major technological advances into our lives. The long list of new developments includes electricity, electric lights, powerful motors, automobiles, airplanes, household appliances, the telephone, indoor plumbing, pharmaceuticals, mass production, the typewriter, the tape recorder, the phonograph, and radio, to name just a few, with television coming at the end of that period. The railroad and fast international ships were not completely new, but they expanded rapidly during this period, tying together the world economy. Within a somewhat longer time frame, agriculture saw the introduction of the harvester, the reaper, and the mowing machine, and the development of highly effective fertilizers. A lot of these gains resulted from playing out the idea of advanced machines combined with powerful fossil fuels, a mix that was fundamentally new to human history, and which we have since exploited to a remarkable degree.

Today, in contrast, apart from the seemingly magical internet, life in broad material terms isn’t so different from what it was in 1953. We still drive cars, use refrigerators, and turn on the light switch, even if dimmers are more common these days. The wonders portrayed in The Jetsons, the space-age television cartoon from the 1960s, have not come to pass. You don’t have a jet pack. You won’t live forever or visit a Mars colony. Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.

It would make my life a lot better to have a teleportation machine. It makes my life only slightly better to have a larger refrigerator that makes ice in cubed or crushed form. We all understand that difference from a personal point of view, yet somehow we are reluctant to apply it to the economy writ large. But that’s the truth behind our crisis today– the low-hanging fruit has been mostly plucked, at least for the time being.

It’s worth noting that the period Cowen designates as the high-water mark of technological change has a very large overlap with the heyday of open borders, which extended roughly from the Civil War to World War I. (Prior to the Civil War, the borders were just as open, but transportation was a bigger barrier.) If you figure that open borders affect the rate of technological change / economic growth with a lag, the overlap is even more impressive.  And it makes sense that it would. After all, new ideas are like yeast: they take time to leaven the loaf of the economy. The automobile was invented in the 1890s and mass produced before World War I, but its economic growth payoff may have peaked in the 1930s and continued for decades after. The airplane was invented in 1903, but only in the past thirty years has long-distance plane travel become commonplace for the middle class. Flush toilets were still a novelty for many people in the 1930s: Steinbeck has a touching scene where two Joad children flush a toilet and are frightened, thinking they’ve broken it. Electrification was far from universal in the 1930s. It seems plausible to say that the technological momentum that carried the US forward through the first half of the 20th century was the legacy of the age of open borders.

From this list of inventors at Wikipedia, it doesn’t stand out that there are particularly a lot of immigrants: Nikola Tesla (and more recently, Sergey Brin) are the most important, and Andrew Carnegie is the outstanding example of an immigrant captain of industry. But the contribution of open borders to booming innovation may be more indirect. Henry Ford’s innovation in manufacturing was, it is too rarely observed, a human capital saving technology change: it allowed unskilled workers to make cars, and for that matter, to buy them, too. The car, actually, is among other things a human capital saving technology: it’s easier to drive a car than to ride a horse. Mass manufacture tended to aim at cheapness, at bringing things within reach of the masses, who in those days were just out in the streets. If you’re an innovator, your incentives to develop cheap vs. expensive innovations are much influenced by the volume of low-income people. If there’s a huge mass market of impoverished day laborers, cheap pays. Nowadays, we associate frugal innovation with India. But US firms could probably do it if they had the right kind of domestic market. Indeed, they could probably do it much better, since the US is a lot more productive, in general, than India.

Tyler Cowen isn’t the only economist to see a big historical slowdown in technological progress: Paul Krugman has been saying so since the 1990s; and there’s Robert Gordon’s well-publicized paper “Is US Economic Growth Over?” which includes the following intriguing suggestion:

Much more controversial is the question of unskilled immigration, which suggests a provocative question. Why was unlimited immigration into the US so successful throughout the 19th century, until it was stopped by restrictive legislation in the 1920s, yet could not be considered as a plausible public policy today? Unlimited immigration before 1913 did not cause mass unemployment. Immigrants were extremely well-informed about the availability of employment in the US economy. They arrived when the economy was strong and postponed their arrival (or returned to their home countries) when the economy was weak.16

This is one of the suggestions under the heading “What to do about it?” and Gordon, who is strongly of the opinion that the Second Industrial Revolution of the late 19th century was the golden age of growth, seems to be suggesting that we might revive the golden age success in technological progress if we revived the immigration policies of the golden age. A very crude model of this is that you’re much likely to find the right man for the job if you can recruit from the whole world than if you can recruit from the, say, 20% of humanity that probably has real access to the US. But as I say, it doesn’t seem that the inventors themselves are particularly likely to be immigrants.

Just what moves the economic frontier forward is a vexed question. But past economic growth has consisted in large measure of making the goods enjoyed by privileged classes cheaper and available to the poor, and also, in destroying the jobs of the moderately-skilled through human-capital-saving machinery that allows the hardly-skilled-at-all to take their jobs. This suggests it might be technologically stultifying to have a society where everyone is middle class, so that there’s no further democratization of luxury to be done, nor any cheap unskilled labor to substitute for skilled middle-class workers by empowering them with the right gadgets. Open borders, if it could be combined with the euthanasia of the territorialist social safety net, might be just what is needed to launch a new golden age of immigration and innovation.

Innovation and open borders

It has sometimes been argued that mass immigration slows technological progress, by reducing pressure to automate and mechanize production process. I agree that open borders would probably result in less automation, and the substitution of labor for capital for many functions. But I highly doubt that there would be a slowdown in technological progress.

First of all, the argument that (a) immigration leads to (b) labor abundance and (c) less automation applies to rich countries only. In poor countries, the opposite would apply. Open borders would make labor scarcer there. So if high labor costs drive technological change, then open borders should slow technological change in rich countries while accelerating it in poor countries. At a global level, the effect would be ambiguous.

Second, the notion that we should deliberately make labor scarce in order to accelerate technological change has some strange implications. It’s not just through migration that companies take advantage of cheap labor. They also outsource production to poor countries and import the goods they make there. That also reduces the incentive to automate. If we want to promote technological change through artificial labor scarcity, we should not only restrict migration, but also trade. Indeed, we ought to regard generous welfare programs that induce cultures of dependency on the government as a good thing, because they reduce the supply of labor and thus motivate automation.

More fundamentally, the argument misunderstands the nature of technological change. Mark Krikorian writes (as quoted in the link above): “The entire history of economic development— starting with the first ape-man to pick up a stick—is a story of increasing the productivity of labor, so each worker is able to create more and more output. But capital will be substituted for labor only when the price of labor rises…” Not exactly. Krikorian is conflating capital-intensiveness with technological progress. They are not the same.

Technological progress involves creating useful new ideas about how to capture natural phenomena for human ends. Expansion of the stock of such ideas is technological progress in the pure sense. For any given state of technology, that is, for any given stock of technological ideas, there will be many methods of satisfying various human needs, some more labor-intensive, some more capital-intensive. Technological progress is presumptively good as long as peace is maintained. There is no downside to having more options about what to do and how to do it. Capital-intensiveness, by contrast, is costly. To adopt more capital-intensive production methods requires a permanently higher investment rate, which cuts into consumption.

Nor does technological progress always involve replacing labor with capital. Sometimes technology progresses precisely by economizing on human capital. Henry Ford’s assembly line did make auto production more capital-intensive, but more importantly, it allowed auto production to be carried out by unskilled workers and even untrustworthy workers. A worker on an assembly line needs to learn only one very simple skill, has no opportunity to shirk, and is in effect supervised by his fellow employees. This is such an important example that it almost suffices by itself to prove the point, that technology may create ways to economize on human capital. Still, I’ll provide a few more. Calculators and computers make it possible for people to do rather advanced math who don’t understand the principles of advanced math. Automatic is easier to drive than manual/stickshift. It takes less skill to drive a car than to ride a horse. Google Navigation reduces the map knowledge needed to be a taxi driver. Cheap mass-produced clothing makes the skill of sewing largely dispensable. Rice makers, bread makers, microwave meals and so on reduce the skills needed to cook for oneself.

Krikorian is right that a rising price of labor and technological progress have been correlated, but the causation runs mainly the other way: new technology drives up wages. Whether there is an important causal link the other way, from a rising price of labor to new technology as opposed to merely greater reliance on capital, is open to doubt.

And if Krikorian can claim that labor scarcity is a driver of technological change, I have just as good grounds for asserting that mass markets are a driver of technological change. Much of the history of economic development consists of things that were once luxuries for the rich being made much cheaper so that they become commodities for the masses. Cars, airplane travel, climate control, artificial illumination, comfortable cotton clothing, and cell phones, just to name a few, were once expensive luxuries for the rich, but capitalism delivered them to everyman. Ford’s business model depended on having a huge market whose needs couldn’t be served by the expensive modes of production that were previously available.

And so it doesn’t surprise me that the golden age of US productivity growth seems to have followed peak immigration with a lag, accelerating in the late 19th century and peaking in the 1920s and 1930s, before a long, gradual slowdown as the task of absorbing immigrants waned. For the same reason, I would look for benefits from open borders as a mass market of relatively poor people spurred a new wave of mass production and frugal innovation. An influx of 150 million poor immigrants to the United States, assuming they could be excluded from the welfare state, would lead to companies falling over each other in their rush to deliver health care, education, housing, food, transportation, and entertainment to these teeming masses in novel ways and at knock-down prices.

Finally, as Matt Ridley says, “ideas have sex.” (Actually, I have arcane philosophical objections to that catchphrase, but never mind them for now). Immigrants are disproportionately entrepreneurial, as this book stresses.) One reason for that, I think, is that coming from somewhere else, they start with a stock of ideas that natives don’t have. These combine with what they learn upon arrival to yield new ideas, some of them commercially fruitful. Cuisine is only the most obvious example of how cross-cultural hybridization of ideas raises living standards: one can dine better in a place where many immigrant chefs have opened restaurants. Aside from the benefits of new ideas, immigrants who expand their opportunities by moving to more prosperous and institutionally developed countries will frequently be able to implement good ideas they couldn’t have implemented at home even if they had been able to think of them there. For all these reasons, I see a strong case that open borders will foster innovation.

Did Border Closure Cause the Productivity Slowdown?

By “the productivity slowdown,” economists have generally meant the slowdown in GDP per capita growth rates that occurred after 1973 (e.g., see here). Note that the word “slowdown” is a bit misleading: it doesn’t mean that we’re getting poorer, just that we’re not getting richer as fast. Still, it’s an unwelcome change, and calls for an explanation. There was then a productivity acceleration in the 1990s, but not a return to the “halcyon days” of the 1950s and 1960s.That productivity slowdown can’t have been caused by closed borders, because the borders were already closed in the 1950s and 1960s.

However, Alexander Field’s A Great Leap Forward: 1930s Depression and US Economic Growth casts a different light on things. Field’s most surprising finding is that the 1930s actually experienced the highest rates of productivity growth in the 20th century. Manufacturing, whose productivity rose at its highest-ever pace in the 1920s, slowed down a bit in the 1930s, but fast productivity growth spread to other sectors. The fast productivity growth of the 1950s and 1960s was actually a decline relative to the 1930s, and the post-1973 productivity slowdown a further decline.

I am not always convinced by Field’s analysis. He often seems insufficiently suspicious of aggregate numbers that have to be calculated on the basis of market prices which change over time and can’t easily be adjusted for quality changes. Still, Field altered my view of 20th-century economic history, and my tentative best guess would now be to defer to him. Let me now tentatively and speculatively extend his analysis a bit. The post-1973 productivity slowdown that attracted so much attention was something of an accident, in the sense that the oil price spike and macroeconomic conditions created a kind of “joint” in the path of GDP, but the lasting productivity slowdown had to do with long-run trends and not really with anything that happened in 1973 per se. In the “halcyon days” of the 1950s and 1960s, two non-technological factors masked an ongoing slowdown in the pace of technological innovation. First, demographically, the US population was quite young, and it’s characteristic of young people to learn and become more productive at a faster rate than their elders. Second, competent monetary policy and much reduced political uncertainty relative to the 1930s contributed to investment and capital formation, enabling the macroeconomy to exploit much more fully the space of technological possibilities that had already been opened up by the innovative 1920s and 1930s. Productivity growth slowed down in the 1970s because the exploitation of the technological backlog from the Depression and war years, as well as the demographic boost from the youthful post-WWII population, had played themselves out. Continue reading “Did Border Closure Cause the Productivity Slowdown?” »