Essentially, lifestyle illusion stands in the way of productive capacity, which would otherwise extend marketplace formation and benefit millions. Instead of real innovation, most of what is now suggested in its place, adds additional options for higher income levels. Even though more product differentiation may result, little of it has proven capable of expanding economic access or greater economic viability.
There's another important aspect of meaningful innovation as well. A mature economic equilibrium requires a sufficient response to take place on multiple dimensions, i.e. a series of interlinking networks. Unfortunately, meaningful innovation is no longer the matter of a single response to existing circumstance, but the ability to generate new sets of conditions that work in concert with each other. The lack of this kind of response thus far, helps to explain why general equilibrium is becoming fragile, as economic access is limited both by monetary tightening and structural rigidity in nations across the globe.
Stagnation is often a result of populations not knowing how to respond, when a given set of general equilibrium conditions (and resource allocation patterns) has matured. Policy makers are especially reluctant to deal with root factors which could alleviate the situation, this time. Meanwhile, as one political candidate in the U.S. pretends she'll bring more people into general equilibrium conditions, another remains convinced that it is still possible to do so. While this approach has proven effective in the past, the combination of today's regulatory environments and existing budget obligations, make it unlikely now.
Another common response: "nothing can be done, so just deal with it". However, there's a real problem with this form of resignation. No population will wait for very long, before they begin shifting resource allocations, in response to an inadvertent zero sum environment. An interesting example comes from "Medieval Households" by David Herlihy. In the early Middle Ages, existing resource allocation was fairly abundant, hence property was generally passed down to both male and female heirs. It was only as existing resource patterns gradually matured (over a period of centuries), that more groups responded by reducing property ownership for women whilst giving them stronger marriage roles.
Only consider the "new equilibrium" circumstance offered by New World settlement, which once again broadened property ownership patterns. Even so, it is today's extensive housing requirements which mean hard compromises for family heirs regardless of gender. Hence the reality of property which simply can't be divided - due to the illusion this way of life is "necessary" - means a continuing problem for asset management among family members.
Lifestyle illusion also revolves around the notion that some forms of service participation are not "desirable" (hence the struggle for high income service employment), while other sets of knowledge based services need to be protected so as to preserve income for those who now participate in them. From a recent post by Scott Sumner, Gregory Clark's review of Robert Gordon's recent book echoes this fatalism:
The core of Gordon's pessimism about future technological advance is that the modern U.S. economy is now heavily based around services, accounting for about 80 percent of output. Manufacturing, traditionally a sector with higher efficiency advance, has shrunk to 12 percent of the economy...A surprising share of the modern jobs are the timeless ones of the pre-industrial era...Even outside services, we can find jobs with no gain in productivity since the Industrial Revolution. Builders price books in eighteenth century London show the rate at which bricklayers laid bricks in house construction. In 1787 this was 75 bricks laid per hour. For modern England the rates are lower, 225 years later, at around 50-70 per hour.The last part of this quote is particularly stark. Why is anyone concerned about how fast individuals can lay bricks, given technology's ability to completely transform living accommodations and building components? The heavy resource use that populations continue to rely on for almost all development, only illustrates how lifestyle illusion has seemingly upended the possibility of bringing non tradable sector activity into the realm of reality.
When populations reason that a given lifestyle is the only one possible or desirable, they end up struggling to maintain their own position in a suddenly stagnant economic reality. Unfortunately, the innovations that were needed most, came to represent a threat to the special interests which grew rich because of the ways they themselves contributed to lifestyle illusion. And when civilizations attempt to remain in place, everyone becomes relentless in securing their own gains. Historically, time and again, civilizations have taken too many steps backward when this has happened. Like many, I grew up believing that the fact we were taught about historical atrocities was enough to prevent them happening again. Turns out that was quite false. People need economic means, so as to not repeat them. As Edmund Phelps summed up in a recent post:
It is the impediments to adaptation and innovation - not fiscal austerity - causing our stagnation. And only renewed dynamism - not more fiscal irresponsibility - offers any hope of a durable way out.