Tuesday, February 8, 2011

The Great Stagnation Hypothesis

The main argument of Tyler Cowen’s new book, The Great Stagnation, is that technological progress has been slowing down during the last 40 years or so. David Beckworth explains why he is skeptic about the hypothesis.

According to Mike Mandel the Great Stagnation started in 1998 or 2000 rather than 1973 as Tyler Cowen would have it.

I agree with Mandel because of the IT boom, which started in the mid-1970s and lasted until about 2000, brought with it many opportunities to obtain extraordinary returns on investment during the last 30 years. This is coherent with the increased stock market valuation from the 1980s on, and increased risk taking (speculation and high leverage): Schumpeter-Kondratiev innovation phases are usually correlated with financial booms (the 1920s for example). And given the excessively high leverage and uncertainty of returns in innovation phases, the financial boom was due to give way to a crash. It happened in two bouts: the first, the IT crash, in 2001, and the second, the general crash, in 2007-2008, that led to the great balance sheet recession.

I thus take the financial excesses of the recent decades as a partial evidence of a long schumpeterian innovation phase, not of a slow down of innovation.

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