Ed Lotterman: Innovation, productivity growth make our lives better

On Thanksgiving some people, especially Midwestern farmers, probably gave thanks for this year’s bountiful harvest. But I doubt many prayers included “and we give special thanks, dear Lord, for the increase in ‘total factor productivity’ over the past year.”

Yet increases in economic efficiency are something we should appreciate. Having more total goods and services to meet people’s needs and wants may not be as important as health or family, but we shouldn’t scorn such plenty either.

Our nation has a long history of rising living standards due both to greater use of economic resources — land, labor and capital — and to increases in the efficiency with which basic resources are combined. Yes, the current rate of increase of levels of living is less than it was in such high-growth periods as the last third of the 1800s, the 1920s, the three decades immediately after World War II — or even the 1990s. It is better, however, to have some economic growth than none at all.

Let’s review some history of our nation with an eye toward Econ 101.

After the first European settlement some 400 years ago, labor and capital were very scarce, but “land,” as economists apply the term to all natural resources, seemed almost unlimited. All one had to do was take it from the native peoples. So over the first two centuries, most economic growth came from expansion of the settled land area by a population that was growing both from voluntary immigration from Europe and violent involuntary immigration in the slave trade from Africa.

Capital grew more slowly, and there was little technological change for at least 150 years.

Growth of the population and expansion of land under non-native control continued unabated. But in the late 1700s, with the application of water power to more tasks, development of the steam engine and the mechanization of textile manufacturing, technological change began to play an increasingly important role.

As tools and machines became more sophisticated, capital also played a bigger role. There was a high savings rate in the young nation, but more financial capital was needed and much came from England. Many U.S. canals, mills, railroads and mines were financed with British money. The big bank now known as JPMorgan Chase got its start with Junius Morgan, an American who grew rich selling U.S. bonds, private and government, in London.

As we’ve seen with Japan and later China, early on in the American growth process, technology was imported. But soon domestic technology development took off. Much of this was Yankee ingenuity, but some was government. Musket manufacturing at the Springfield Armory in Massachusetts made it the birthplace of “the American system of manufactures,” and workers trained in “armory practice” spread these methods and machines widely.

Our country was not alone in technological advances in the 1800s. England remained a leader in the era of “steel and steam,” and Germany by itself led almost all the advances in industrial chemistry.

Nor was all roses. Between 1865 and the mid-1890s, a highly restrictive monetary policy imposed grindingly hard economic conditions on many households, particularly those in agriculture, forestry and mining. But the overall economy grew from huge increases in the classic economic factors of land, labor and capital and from the new factor of technological advances.

This process continued into the 20th century. The First World War ended large-scale immigration for nearly a century, but demand for better explosives, naval armor plate and steam turbines and anything related to aviation induced technical innovation. And that took place in spades during and after World War II. The Manhattan Project to develop the atomic bomb and work on radar and the proximity fuse in labs at MIT and Johns Hopkins vaulted knowledge in physics, chemistry and electronics forward.

The “military Keynesianism” of the Cold War and “space race” during the 1950s and 1960s kept up a high level of federal spending on R&D that has translated into new materials, integrated circuits, the Internet and GPS, among many other innovations we now take for granted.

So where are we now? Have we reached a stopping point or will there be continuing advances?

My home state of Minnesota is a good case study in economic growth. Like the rest of the country, we grew largely from immigration and the utilization of new farmland, mines and forest in the initial several decades of our existence. The water power for sawmills and flour milling at St. Anthony Falls, the seed for what now is Minneapolis, was not new technology. And there was little technological change at first, except in machinery. Labor was scarce, so agriculture and mining mechanized quickly.

Other than for machinery, however, there was little technological change. For example, there was no increase in annual corn yields of about 30 bushels per acre between 1870 to 1930. (These are five-year averages to smooth out year-to-year variations due to weather). There were increases in production per farmer due to mechanization.

But hybrid corn and increasing use of synthetic fertilizer and other farm chemicals boosted yields 50 percent from 1930 to 1950, then doubled them from 1950 to 1970 and doubled them again by 2010. For 2015, the state average is about 187 bushels per acre, six times what it was in the 1930s.

That is an example of incremental improvements in technology, some private sector, some public, that incremented land and labor productivity upwards. Similar things took place in forestry, mining, manufacturing and retailing. Medical technology is an example of an entirely new industry springing from technological advances.

Productivity changes are disruptive. At one time it took over 20,000 workers to produce 40 million tons of iron ore per year. Now it takes a tenth that. A family friend farmed 320 acres with four sons. Now one son and one grandson farm 1,500 acres.

Moreover, while the income growth springing from technological innovation was widely distributed to most levels of the population in the first four postwar decades, over the last 20 years, nearly all the increase in national income from all sources has gone to a small fraction of already high-income households.

Nobel laureate Robert Lucas was wrong when he said income distribution was of negligible importance compared to growth of output. But as we finally face distribution questions, we should not forget output. The argument that says skewed income distribution hinders output growth seems increasingly strong. And it is politically and economically easier to restructure things to reduce inequality during a time of growth rather than during stagnation.

We have gone through a lot in the last eight years. Many households continue to struggle. But technological innovation and productivity growth remain a gift for which we should be grateful.

This story was originally published December 4, 2015 at 11:20 PM with the headline "Ed Lotterman: Innovation, productivity growth make our lives better."