TECHNOLOGY AT WORK

February 2015
Citi GPS: Global Perspectives & Solutions
9
Piketty estimates that growth has failed to
outpace the rate of return on capital
Innovation is important for growth, and some
believe the recent slowdown in economic
growth is due to a slowdown in innovation
The Future of Innovation: Slowdown or Showdown?
In Capital in the Twenty-first Century, Thomas Piketty argues that labour’s share of
GDP tends to fall when the rate of return on capital is greater than the rate of
economic growth. 8 As a result, a wealth gap will emerge between owners of capital
and those who rely on their labour. For wealth not to concentrate in the hands of the
few, it is essential that economic growth be accompanied by the creative destruction
of old wealth.
Thus, a faster rate of economic growth will reduce the importance of wealth in a
country, while sluggish growth will increase it. A key ingredient in inclusive
capitalism is therefore continuous creative destruction, giving rise to a new
generation of innovators and entrepreneurs. While the digital age has undoubtedly
witnessed the rise of a new generation of digital enterprise, growth has failed to
outpace the rate of return on capital, according to Piketty’s estimations. He shows
that the temporary inclusive capitalism of the post-war era, when the rate of
economic growth exceeded the return on capital, is over. Instead, slow growth rates
are pushing the concentration of wealth back toward Victorian levels — a tendency
Piketty proclaims to be the normal state of capitalism.
To be sure, economic growth matters, and innovation matters to economic growth.
That the rate of economic growth has recently fallen is therefore particularly
concerning. Between 1939 and 2000, average per capita output in the United States
grew at 2.7% annually; since 2000, this figure has averaged only 0.9%. While there
is ongoing disagreement about the cause of the recent decline in growth rates,
economists such as Robert Gordon 9 and Tyler Cowen 10 , as well as techentrepreneurs
like Peter Thiel, 11 have argued that this is the result of a slowdown in
innovation. In their view, the extensive type of growth that relies on adding more
capital or workers in production — a process that is subject to diminishing returns —
has come to an end. For example, over the past 50 years, some 75% of income
growth in the United States has been due to rising educational attainment and
research intensity. 12 As a much larger share of the population go to college and
work in idea-generating industries than was the case 50 years ago, and this
transformation can only happen once, there is concern that we may not be able to
repeat those gains. Furthermore, many of the benefits from the declining cost of
distance, caused by breakthrough inventions such as the railroad, the automobile,
the airplane and the telephone, cannot be repeated. The same is true of the
invention of electricity and a wide range of household appliances that are now
fundamental to our lives.
The extensive type of “catch-up” growth, stemming from adapting and improving
existing technologies on a wider scale, is thus unlikely to provide satisfactory growth
rates in the rich world. While emerging economies like India and China may help
boost the world economy by adapting innovations from previous technological
revolutions, the rich world will need to rely more on intensive growth — that is, its
capacity to innovate new technologies. The concern is thus that the current digital
revolution has not been as transformative as the invention of earlier general
purpose technologies (GPTs) like electricity and the steam engine. This concern
was raised as early as 1987, when Robert Solow remarked that “you can see the
computer age everywhere but in the productivity statistics”. After the surge in
8 Piketty (2014).
9 Gordon (2012).
10 Cowen (2011).
11 Thiel (2014).
12 Fernald and Jones (2014).
© 2015 Citigroup