Tech and the Wealth of Nations – Paul Krugman

Last week’s primer was about the European economy. In it I took aim at the conventional wisdom that the European economy is moribund and turning into a museum of past glories. While I argued that reports of its slide into economic oblivion are exaggerated, I also acknowledged that Europe is lagging far behind both the United States and China in tech. That lag is central to the warnings issued by Mario Draghi in his influential report about lagging overall European productivity.

But even though I agree with Draghi’s diagnosis, there’s still a question that is nagging at me: How much does lagging in tech matter?

It’s important to understand that I’m not being sloppy or informal by saying “tech” rather than “technology.” For economists, technology is basically everything that makes the use of labor and capital more efficient. For example, there has been immense progress in recent decades in the technologies of solar and wind power. But electricity generation isn’t normally considered part of the tech sector.

Instead, “tech” usually refers to digital industries — roughly speaking, industries that have directly benefited from Moore’s Law, which predicted the incredibly rapid decline in the cost of computation over time. Europe has clearly been marginalized in digital industries. There’s no European equivalent of Silicon Valley.

The thing is that there’s no American equivalent of Silicon Valley either, other than, you know, Silicon Valley. The Draghi report laments the absence of large technology clusters in Europe, but there aren’t big U.S. technology clusters outside the San Francisco Bay area and, to a lesser extent, Seattle. And as we’ll see, this has implications for differences in productivity growth within the United States. Growth is much faster in the West (which includes the SF Bay area and Seattle), than in the rest of the country. Overall, there are large regional differences in the rate of productivity growth within the United Sates. Indeed, interregional productivity gaps within the U.S. are comparable to the gap between Europe and the U.S.

Why don’t we make a big deal out of these productivity gaps across regions of the U.S.? Probably because we imagine that the benefits of Silicon Valley’s innovation are diffused to the rest of the country. Is the same true internationally? That is, do the benefits of Silicon Valley diffuse to other countries as well?

I’d say that the answer is a definite maybe. If so, we may be thinking about tech and the wealth of nations all wrong.

Before you read further, let me issue two warnings.

First, wonk alert. This primer doesn’t involve any hard math, but it is quite economistic. Furthermore, my purpose in writing it was very professorial: I’ve been feeling an intellectual itch I just had to scratch, and I don’t know how many readers will feel the same way.

Second, this primer is to an important extent aimed at Europeans, telling them not obsess about their lag in tech. I guess the message for Americans is the reverse: Don’t engage in triumphalism. Furthermore, as I’ll explain at the end, our lead in tech creates social and political problems that Europe may be better able to avoid.

OK, warning delivered. Beyond the paywall I will cover the following:

1. How economists normally think about technology and economic growth

2. International and interregional technology gaps, and their effects

3. Is Europe really losing? Is America really winning?