Piketty For Futurists #1: Slow Change in the 21st Century

23 August, 2014

I’m sitting on the corner stool of the best coffee shop in Cambridge looking out at a weird office park greenspace which occasionally explodes with disco boxing or charity bean bag tosses. I’m listening to Hot Chip’s excellent cover of Sexual Healing. This is a $4,000 crowd-funded scientific project that’s using vitamins to extend human vision into the near infrared through the formation of a protein found in freshwater fish. They were just successful. It’s Saturday morning.

Piketty For Futurists

You’ve probably heard people talking about French economist Thomas Piketty’s Capital in the Twenty-First Century. But you’ve also probably not read it. The book is both a massive best seller and the approximate dimensions and weight of a gold brick.

It’s also filled with data and ideas that are invaluable for imagining life in the next hundred years. I’m about a third of the way through it at the moment. While reading, I’ve tried to carve some nuggets off the integral brick, pieces of Piketty’s picture of the future that can be taken away without having to lift the whole heavy bar.

This will be the first of a series, then: Piketty For Futurists. Here, I’ll gloss Piketty’s Big Picture. Future episodes will follow with additional important pieces and some of my own extrapolations.

THE SHORT VERSION: Declining population growth, slowing increases in productivity, and approaching global economic equality mean that the rate of change in the 21st century will be significantly less than the 20th. We’re transitioning from over 100% generation-over-generation growth to about 35%. This will have wide consequences. The future is not what it seems.

Growth and Change in the Weird 20th Century

Despite its title’s explicit reference to the 21st Century, Piketty’s chief achievement is an epic act of historical data gathering. Along with a team of economic historians, he’s gathered comprehensive income tax records from all over the world. Since income taxes were only widely adopted in the 1910s, they’ve also collected land and property records from the previous 200 years, creating the first detailed picture of trends in income, capital, and economic growth from 1700 to the present.

The immediate lesson is that the 20th Century was a total outlier in world history. The 3% growth rate in economic output we’ve come to see as normal is totally unprecedented in previous world history. Here’s a chart Piketty presents with the data.

Look at the bottom line in this chart. Over the 20th century, growth was split almost evenly between population growth and increases in “per capita output”. This second category, of course, is how economists refer to technology.

What does 3% of economic growth per year mean in human terms? How much change is that? Piketty translates the compound growth rate into a convenient generational figure:

Over the course of 30 years, a 3% annual growth rate translated into more than 100% of economic growth. In other words, half of the economic activity – the cumulative value of jobs worked, products sold, things made, etc. – is brand new each generation. This growth is split about evenly between a greater number of people existing and all people everywhere doing new things with new technology that produces more from less.

Now, look again at the first chart. This time take a look at the top line representing world growth before 1700. Up until the industrial revolution world population barely grew and technology brought nearly no increases in per capita output. If you look up the 0.1% growth rate in this period on the second chart, you can see it corresponds to a 3% change each generation. Each generation during this period saw about as much change as each year of the 20th century.

The Slow 21st Century: Population Growth

So, what should we expect for the 21st Century? I think the common wisdom is that if anything, we’d expect this growth rate to increase. Technological developments build on previous developments after all, don’t they? Exponential curves continue on exponentiating, right, launching us up into the far upper right of the graph? People who work with and think about technology are even more likely to believe this than the general population in my experience.

Let’s look at what Piketty predicts. First, take population growth.

World population growth is rapidly declining. Piketty cites UN projections (seen above) that show we’ve already fallen to about half of the average rate of population growth in the 20th Century and that we’re heading for a state of no growth by the later part of the 21st century.

The Slow 21st Century: Technological Development and Catch-Up

That decline eliminates about half of the 3% growth rate of the 20th Century. But what about technology?

It turns out that growth in per capita output is falling as well. In Western Europe and North America, productivity growth reached a peak in about 1970 and has been in decline ever since.

One striking feature of that graph is the incredibly rapid growth of Western Europe in the post-War period. This is due to a phenomenon Piketty calls “Catch-Up”. The countries that experience the fastest economic growth due to technology are not those at the forefront of technological development, but rather those who fall behind and then rapidly adopt many years worth of technology in a short period. Countries at the forefront of technology can only grow at the rate at which new things can be discovered and invented, a rate Piketty estimates at between 0.5%-1.5% per year.

This is an absolutely critical point and one I’ll return to in a future episode.

The last two decades have seen much of the rest of the world undergo a similar Catch-Up process with significant parts of Asia, Eastern Europe, and South America quickly adopting the technological developments of the previous century to achieve incredibly rapid growth, reaching as high as 9% in China in the last 15 years.

The Catch-Up process is now almost complete for much of the world (though, importantly, not for Africa about which I’ll also have more to say in a future episode).

The result is that global GDP growth peaked around 2012 and is projected to decline throughout the next century.

Piketty reports that economists estimate that global productivity growth will stabilize at around 1%. If we look back at our chart of inter-generational change, this translates into about 35% growth over a 30 year period. While radically less than the over 100% rate of inter-generational change of the 20th Century, this is still a significant amount of new people, jobs, industries, products, etc. between adjacent generations. It’s still equivalent to a decade worth of pre-1700 change every year.

In addition to calibrating our expectations relative to the 20th Century, Piketty is deeply concerned with how this slower rate of inter-generational change will affect inequality. This is yet another issue I’ll revisit more deeply in a future episode. Suffice it to say, for now, that having half the world’s wealth be new every generation is a great bulwark against the concentration of wealth and a great limit on the ability of existing capital to capture new industries and opportunities.

Objection: Isn’t The Rate of Technological Development Increasing?

One objection to this story that will inevitably come up for the technologically minded will be something like: Doesn’t this fail to account for all technological wonders we’ll invent that will make people so productive that it more than makes up for the decline in population growth?

Piketty also addresses this point. He shows that, in fact, each technological “revolution” since the beginning of the Industrial Age has had less effect on productivity than the previous one. And if you think about it, this makes a certain amount of logical sense. Electricity and information technology both increase the efficiency of industrial processes, but not more than inventing those processes in the first place. Their leverage is always limited to a percentage of the process that they augment.

Piketty leaves open the prospect of some kind of change coming along that breaks this trend. He specifically mentions the prospect of an explosion of new goods purchased and consumed digitally that could outstrip the physical economy of the Industrial Revolution. You could also imagine some kind of “moon shot” – like Neal Stephenson and Jeff Bezos’s plans for asteroid mining – succeeding and playing a similar role.

I don’t think anyone has a good way of making realistic odds on the arrival of a new Industrial Revolution-style change, though. And, in the absence of such odds, I don’t think that assuming its inevitability is the right stance.

Consequences: Catch-Up, Here Comes Africa, Competing for Immigrants, the Future of Inequality

So that’s Piketty’s framework for looking at long-term economic changes. I’ve only hinted at some of the cultural and technological consequences we’re likely to see in the 21st century. As I mentioned, I’m planning to address these as the series continues, building on this explanation to talk about some of the intriguing specifics. I’ll cover the consequences of Catch-Up, what this might mean for Africa, why these changes will make immigration all the more important, and the future of inequality.