Lecture 10: Third Industrial

Revolution, Secular Stagnation

and Future of Work
Kerstin Enflo
Exam instructions
• Write two short essays, based on your reading of the course literature and with due
references, on two of the questions below – choose one of 1-2 and one of 3-4. Maximum
1000 words per question. (2000 words in total). The bibliography is not included in the
word count.
1. Discuss globalization backlash and intra-country winners and losers from trade by
comparing 19th century globalization with today.
2. Did trade harm the non-industrialized world? Compare 19th century dynamics with 20th
century.
3. Discuss the lessons from the Great Depression and how they impacted on post-war
economic development. Compare with crises of the 1970s, and the 2010s.
4. Discuss the spread of industrialization and the technological catch-up hypothesis.
Compare different countries and time periods.

Deadline 21st October at 23:59

Seminar 27th October: Smaller and larger group discussions.
Literature for today

• Neal, Larry and Rondo Cameron: 'Overview of the World economy ',
Chapter 16.
• R.J. Gordon (2015), ‘Secular stagnation: a supply-side view’, American
Economic Review, 105, 54-9.
• Brynjolfsson, Erik, Daniel Rock, and Chad Syverson (2018) Artificial
intelligence and the modern productivity paradox: A clash of
expectations and statistics’. In The economics of artificial intelligence:
An agenda. University of Chicago Press, 23-57.
• Big Trends since 1970s and the global
economy in the 21st Century: ’Secular
stagnation’ vs. ’a new innovation wave’ 14th Chairman of the Federal Reserve

(Gordon 2015; Brynjolfson 2018). In office February 1, 2006 – January 31, 2014.
Ben Bernanke was awarded the 2022 Nobel

• The Neal Cameron Book- last chapter

Memorial Prize in Economic Sciences, jointly with
Douglas Diamond and Philip H. Dybvig, “for research

focus on 2014: on banks and financial crises”

• Collapse of Soviet bloc

• Era of globalization
• From 1991 “policy makers in each country,
regardless of political ideology, have had to
come to terms with market forces that have
swept around the Earth” (Neal & Cameron:
2016 p. 390)
• How the response to the crisis 2008 was
influenced by lessons from history and
how it impacts on current events.

Council of Economic Advisers Chair Christina Romer and Cecilia Rouse, a member of the Council of
Economic Advisers, watch as President Barack Obama signs the Economic Report of the President in the
Oval Office, Feb. 11, 2010. (Official White House Photo by Pete Souza)
A basic periodisation: Implementation of Second
Industrial Revolution at large scale

• 1950-1973 Bretton Woods, western

integration, cold war, import substitution
policies in Third World. Golden Age.
• 1973-1990 Oil crisis, capital market
deregulations; liberalization, sclerosis,
stagflation. Post Golden Age.
• 1990-(2010) major breakthrough of the Third industrial
IT-revolution; increased globalization, Revolution
capitalist advance. Post-post Golden
Age?
Post-war catch-up
• Market integration provided scope
for growth through exports
(increased scale)
• High levels of investment
• The social contract: wage moderation
thanks to organised workers allowed
for more growth.
Post-war catch-up
• Market integration provided scope
for growth through exports
(increased scale)
• High levels of investment
• The social contract: wage moderation
thanks to organised workers allowed
for more growth.
• A stronger role for the state:
• Nationalisation of key sectors in the
economy (transport, post etc).
• Growing public. Welfare states.
• Debate between market forces and
centralised planning.
• Hayek (1944) vs. Keynes(1936) .
1970s crisis
• August 1971: USA terminated
the convertibility of the US dollar to gold.
• Floating currencies. Came in handy.
Inflation adjusted price of oil (West Texas Intermediate) 1946-2022.
• Organization of Arab Petroleum Exporting https://www.macrotrends.net/1369/crude-oil-price-history-chart

Countries (OAPEC), led by Saudi Arabia,

proclaimed an oil embargo targeted at
nations that had supported Israel during
the Yom Kippur War.
• Oil exports from the Middle East to the
West were down by 60%-70% by
November 1973. 300 % price increase by
1974. Second Oil shock in 1979.
• 1973-82 Stagflation in major market
economies. End of Keynes paradigm?

'https://www.macrotrends.net/1369/crude-oil-price-history-
 Eurosklerosis?

Blanchard, Olivier, et al. “European Unemployment: The Evolution of Facts and Ideas.” Economic Policy, vol.
21, no. 45, 2006, pp. 7–59. JSTOR, http://www.jstor.org/stable/3601042. Accessed 6 Oct. 2022.
 Margaret Thatcher in office
4 May 1979 – 28 November 1990

Ronald Reagan in office

January 20, 1981 –
January 20, 1989
 • The Great Depression in the • The Stagflation of the Oil
Shift of 1930s: Crisis and 1970/80s:
paradigms in • Markets are the
problem.
• Governments are the
problem.
• De-regulate markets.
economic • Correct markets with
government • Privatize State-Owned-

theory and intervention.

Entreprises (airways, post,
telecom etc).
• Keynesianism. • Marketization of public
policy services.
• Monetarism (Milton
Friedman).

Professor Milton Friedman awarded the 1976 Nobel Memorial Prize in Economics for his
contribution to consumption analysis and to monetary history and theory, including his
observations of the complexity of stabilization policy.
Washington consensus 1989
• Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
• Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based
provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure
investment;
• Tax reform, broadening the tax base and adopting moderate marginal tax rates;
• Interest rates that are market determined and positive (but moderate) in real terms;
• Competitive exchange rates;
• Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative
restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
• Liberalization of inward foreign direct investment;
• Privatization of state enterprises;
• Deregulation: abolition of regulations that impede market entry or restrict competition, except for those
justified on safety, environmental and consumer protection grounds, and prudential oversight of financial
institutions;
• Legal security for property rights.
Fukuyama, Francis. “The End of History?” The National Interest, no. 16 (1989): 3–18. http://www.jstor.org/stable/24027184.
Technology

1750–1870 1970 -
First Industrial Revolution Third Industrial Revolution
Steam engine etc. Microchip and computers

Second Industrial Revolution

Electricity / Combustion engine

1870–1970
 World Gross Production per capita 1950-2009. Fluctuations in
percentages around trend.

Bee-hive:
Discuss falling growth rates in the 1980s and the
global recovery in the 1990s.
What changed?
 1980s:Global value chains turned intra-
factory flows into international commerse
THE GLOBAL FIRM
THE HISTORICAL FIRM
Early/late stages of production TIED TO dense areas
LOCATION TIED TO NATURAL RESOURCES

LOCATION A

Adapted from Baldwin, Richard (2018) "ICT and Globalization’s Second Unbundling". The Great Convergence: Information Technology and the New Globalization, Cambridge, MA and London, England: Harvard University Press.
 A new globalisation era (capital not labor)

FDI as share of world GDP

Obstfeld and Taylor 2004, figure 1.3
 Growth in emerging markets
Stagnation in ”mature economies”
 The elephant curve
“the most important chart for understanding politics today”
The Washington Post, 13 January 2016

Global income growth 1988-2008

Source: Christoph Lakner, Branko Milanovic (2016) Global Income Distribution: From the Fall of the Berlin Wall to
the Great Recession World Bank Econ Rev, Volume 30, Issue 2, 2016, Pages 203–232,
 Secular stagnation
• During late 1930s Alvin Hansen suggested a secular stagnation in the US
economy.
• Keynesian ideas were not stimulating the economy as much as expected.
Summers: https://cepr.org/voxeu/columns/reflections-new-
secular-stagnation-hypothesis • Hypothesis: Technological advances and population growth,
had been exhausted as sources of growth.
• Larry Summers (2013): Revived the hypothesis in 2013:
• declining population growth
• rapidly aging societies in advanced economies
• declining productivity growth
• rising inequality
• increasing market concentration.
• “Secular Stagnation—a prolonged period in which satisfactory growth
can only be achieved by unsustainable financial conditions—may be the
defining macro-economic challenge of our times” (Summers 2017).

Alvin Hansen Lawrence Summers

Source: King, Mervyn, and David Low. Measuring the ''world‘’ real interest rate. No. w19887. National
Bureau of Economic Research, 2014.
U.S. Home Price and Related data, for Figure 3.1 in Robert J. Shiller, Irrational Exuberance, 3rd. Edition, Princeton University Press, 2015, as updated by author
Gordon (2015)
• Slow recovery from crisis 2008/9.
• Productivity growth smaller than in the 1930s.
• Is 3rd industrial revolution over? ”Most of the economy has
already benefitted from the Internet and web revolution,
and methods of production have been little changed over
the past decade.”
• The revolutions in everyday life made possible by e-
commerce and search engines were already well
established— Amazon dates back to 1994, Google to
1998, and Wikipedia as well as iTunes to 2001.
• Choice between indoor plumbing and internet?
• Arguments:
• Supply: Diminishing returns to ICT. All performance measures peaked in
1990s.
• Demand: Slower population growth, aging population. (inequality?)
• Secular stagnation an interaction between demand and supply.
A 4th Industrial Revolution?
Like other GPTs, AI has the potential to be an
important driver of productivity.

Brynjolfsson, Erik, Daniel Rock, and Chad Syverson. "Understanding and

Addressing the Modern Productivity Paradox." (2020).
Understanding and Addressing the
Modern Productivity Paradox."

• Brynjolfsson, Erik, Daniel Rock, and Chad Syverson (2020):

“Understanding and Addressing the Modern Productivity Paradox.”
• In spite of new technologies, the rate of (US?) productivity growth is slow.
• Why?
• Today’s technology will not deliver growth.
• The technologies are delivering but we canot measure the progress
properly.
• Technologies don’t have social benefits.
• Superstar firms
• Growing inequality
• Technologies take time to diffuse to reach full potential (preferred
explanation).
 Kondratief wave?

Source:
Brynjolfsson, Erik, Daniel Rock, and Chad Syverson.
"Artificial intelligence and the modern productivity
paradox: A clash of expectations and statistics." The
economics of artificial intelligence: An agenda.
University of Chicago Press, 2018. 23-57.
Limits to growth

• The Club of Rome (1972): a

report that discussed the
possibility of exponential
economic and population
growth with finite supply of
resources.
• Limits to growth
• Earths Capability to take
care of human waste.
• Relative sustainability
• Absolute sustainablity
https://www.stockholmresilience.org/research/planetary-
boundaries.html