Haldane, Fast and Slow

Andrew Haldane, chief economist of the Bank of England and, apparently, one of TIME magazine’s 100 most influential people in the world, gave a provoking presentation on the past and future of economic growth at the University of East Anglia a week ago, entitled ‘Growing, Fast and Slow’.

In it, - as the title suggests - he mobilized Kahneman’s framework of ‘Thinking, Fast and Slow’  to help approach the topical, or perhaps just millenarian, question of whether the world is about to lapse back into a pre-growth stupor out of which it struggled about 300 years ago.  Since I am interested in economic growth, and  have also found Kahneman's work interesting, I want to make some observations on it.

(And before I start, let me acknowledge that those of us who have not yet been named one of TIME’s 100 most influential people . . . . we do feel the lash of disappointment keenly. )

I do not think it simply professional resentment which drives my conclusion that Haldane’s delivers an  intellectual sugar-rush of covering a lot a ground quickly, which quickly dissipates when you start to digest his his thesis. Haldane fast is fun, Haldane slow is not so  good.

The Argument

Haldane wants to take on ‘one of the key issues of our time’, namely, whether the post-crisis slower rates of growth are a temporary or a longer-lasting valley in our economic fortunes. The way he wants to do this is by looking at long histories, since ‘some growth epochs have seen secular stagnation, others secular innovation.’  If we can understand the sociological and technical determinants of those growth phases, we’ll have a better idea of what’s going on today.

So he contrasts the period of secular innovation and growth  since 1750 with the three millennia prior to the Industrial Revolution, during which, apparently, global per capita GDP averaged only 0.01% a year. The conclusion is important: current growth levels are exceptional, and secular stagnation is far more common than secular innovation.  Having made this distinction, he sharpens it: ‘The short history (the Golden era) and the long history (the Malthusian era) of growth could not be more different.’

He then asks the question: ‘what caused this shift in growth?’  He characterises two possible explanations, claiming they are supported by the common theme of patience. In what he characterises as the the neo-classical explanation, patience supports saving, which in turn finances investment, and today’s investment is tomorrow’s growth.  The model is exogenous, supported by a) the patience of individuals, and b) technological progress, the ‘manna from heaven, a surprise gift which keeps on giving’.

Haldane admits this theory ‘does a decent job of explaining the phase shift in growth after the Industrial Revolution’, but identifies two problems. First, he mistrusts the exogenous role of technology, fretting there may be nothing we can do to encourage the next big wave of technological advance. Second, he is keen to develop an ‘endogenous’ growth theory in which in the key factors are as much sociological as technological - skills and education, culture and cooperation, institutions and infrastructure all work together building in a cumulative evolution fashion, rather than spontaneously combusting.

A fair portion of the paper assembles evidence supporting this second approach. For his argument, this evidence really matters because it supports what is actually his central thesis, that ‘the technological seeds of the Industrial Revolution were sown well before Hargreaves Arkwright and Watt arrived on the scene.’  And this proves that ‘innovation is more earthly endeavour than heavenly intervention’.

Still, even if you accept all this, the question still remains, why did societies suddenly being accumulating capital at particular points in history?  This is where he makes an interesting jump, arguing that ‘those technological and sociological trends may, in turn, have caused a re-wiring of our brains’.

His answer is to propose a mash-up between Kahneman and the history of interest rates. He suggests that the fall in interest rates (and return on capital) prior Industrial Revolution reflected society’s ‘evolving time preferences’ (ie, patience). Partly this reflected the possibility that income and wealth had growth enough to indulge the luxury of for more patient thinking. But also the post-Gutenberg proliferation of books may have ‘re-wired our brains’ in such a way to stimulate the slow-thinking, reflective, patient part of the brain (ie, Kahneman’s Type II thinking).  And in turn that would have supported the accmulation of intellectual capital, and consequently technology. So slow thought will have made for fast growth.

The Implications

Having constructed this framework, he then deploys it to draw implications for our own time. First, he wonders about the fall in real interest rates over the past 30 years, suggesting that perhaps this does mean our patience - capacity for Type II thought, technical innovation and growth - has grown. Perhaps, after all, technology will go on being the gift that keeps giving.

But his heart doesn’t seem in it: the last and most minatory part of the paper gloomily logs evidence that the key inputs to the endogenous growth theory are in decline: specifically, he worries that the rise in inequality (as measured by the Gini coefficient) will slow growth. Rising inequality, he fears, is leading to a deterioration in human capital. ‘Inequality may retard growth because it damps investment in education’.

And from there it is but a short step to worrying about short-termism, and proposing that the ability of the internet to cause a neurological re-wiring like that he proposed for the impact of Gutenberg.  ‘But this time technology’s impact may be less benign.’  He speculates that this time ‘an information-rich society may be attention-poor’. ‘It may cause fast-thinking, reflexive, impatient part of the brain to expand its influence. If so, that would tend to raise societal levels of impatience and slow the accumulation of all types of capital.  Fast thought could make for slow growth.’

Hence, it is not unreasonable to worry about a relapse back into pre-Industrial Revolution economic stupor.

Criticisms

There are many things unsatisfactory about this paper. I won’t even begin to list the number of questions I have about the historical data he relies upon. Similarly, there are a number of points at which he reaches for conclusions which, upon reflection, seem unnecessary and even arbitrary. But there are three areas which are central to his thesis, and which seem to me to be extremely contentious - eventually to the point of culpability.  In ascending orders difficulty, with the least-difficult first, they are:

The Role of Interest Rates. First, it is quite remarkable that he wishes to interpret interest rates, even real interest rates, solely and merely as an indicator of ‘patience’. It is remarkable, for example, that he does not acknowledge the role of inflation expectations, and their rate of formation, in the decline of bond yields over the past 30 years. It is remarkable, too, that he has nothing to say on the impact (or otherwise) of monetary policy and monetary institutions throughout the ages.  How is this possible? Surely he does not envisage monetary institutions and policies as merely far derivatives of underlying changes in neurological structures affecting our degree of patience?

Technological Teleology. Second, underlying his entire paper is a search for a technological teleology. Offering a theory of that teleology derived from an underlying stipulation of, or assumption of, increasingly broad and unquantifiable categories of ‘capital’  lies at the heart of the ‘endogenous’ growth theories he proposes. These attempts to categorise and quantify these purported types of capital are, I think, inherently implausible. (Two reasons: i) they can’t be counted and ii) even if they could, they’d suffer the same catastrophic problems with ‘real prices’ as all other capital stock estimates do.)  But much more dramatically, they dismiss the quite plausible possibility that technology has its own teleological aims and trajectories.  Haldane writes: ‘innovation was an earthly creation, not manna from heaven’, but that hardly exhausts the list of possibilities of what’s going on with technology. It seems quite likely that technological innovation implies and develops its own trajectory, and that that internal logic has a more powerful causative impact on the development and distribution of various types of capital, than vice versa.

The book I’d recommend for this is Kevin Kelly’s ‘What Technology Wants’. One of the ironies of Haldane’s presentation is that at some stages, he comes awfully close to acknowledging the possibility that technology in fact has its own teleology independent of human intention. He admits, for example, that ‘empirical evidence suggests a high degree of history-dependence, or hysterisis, in technological transfer’.  But not, apparently, in technological development itself, only its transfer. Really?

The Rise of China and Asia. But the worst fault, the most glaring absence, is the way Haldane has wiped the rise of China and Asia over the last 30 years from his assessment of the world’s current situation. This surfaces at every argument he advances for the worries about the state of the conditions allowing for ‘endogenous’ growth. For example, he worries about the decline of social capital, specifically that the rise in inequality (as measured by the Gini coefficient in the US) will slow growth.  He also worries that this will get worse as middle-class jobs continue to be ‘hollowed out’ by technology.

But you cannot exclude China from any argument about inequality and growth.  All analysis agrees that China’s historically-unprecedented growth has been accompanied by a large rise in inequality (so maybe a rising Gini coefficient doesn't automatically result in a lower growth rate, as claimed elsewhere?). Conversely, the rise of China’s working masses has also led to an unprecedented reduction in global poverty. It seems very likely that, when measured in global rather than national terms, the last 30 years has seen a narrowing of inequality rather than its accentuation.

Simply  noting the that the Gini coefficient in the US has risen at the same time as its growth rate has slowed hardly even classifies as argument, let alone as demonstration.

Similarly, Haldane worries about a possible decline in human capital. Why? The evidence he offers is that ‘the US is slipping down the international league tables of education attainment’ and ‘the UK could be following suit’. So what? Tell it to the Chinese!  On a global scale, you cannot conclude that human capital is eroding simply by noting that US and UK students no longer always rule the roost.

And finally, he frets about infrastructural capital where, it is said, ‘investment trends are not encouraging’. Really? First, he equates infrastuctural capital with the size of public sector investment to GDP - can he really believe this to be a useful proxy? Second, of course, once  again, the only relevant data is taken to be from the West. It’s not as if there’s been any significant infrastructural investment in Asia over the last 30 years, is it?

To be frank, this sort of cherry-picking of the data, this consistent willingness to edit from the picture that part of the global economy which is not based in the US or Western Europe, ruins the latter part of his paper. Maybe 20 or 30 years ago, the omission of more than half of humanity from the story might have been overlooked, or at least excused as an inevitable result of a lack of data. But not now - extrapolating global growth trajectories from the narrow and difficult recent experience of the Western middle classes is simply dumb.

My Conclusions

Having made these criticisms, I feel duty bound to offer my own conclusions on the future of economic growth. I have three.  First, any competent interpreter of Solow growth models will recognize that the underlying assumption is that there is no reason why with sufficient capital back-up an Asian (say) cannot be as productive as (say) a European or American.  So if capital flows are truly global, the ineluctable tendency will be for the world to become less unequal, and, specifically, that the unusually privileged position enjoyed by Europeans and Americans will be constantly under threat. Second, that in these circumstances, the immediate response will be for those privileged to seek to entrench their privileges by securing monopolistic or oligopolistic market positions in any way they can. In this scenario,  widening national inequality measures in the West will almost certainly reflect rising  economic rents, and usually market failure. Third, technology has its own teleology; it is infinitely more likely to surprise and amaze us than to sputter out because of our own ‘lack of social capital’.