Satyajit Das: The End of Growth, Part 2
Will innovation and productivity increases be enough for the world economy to continue its growth?
The era of continual global economic growth may be ending. Debt-fuelled financially engineered growth, environmental issues, and the scarcity of essential resources now threaten the world.
The problem is the economic model itself. As former Fed Chairman Paul Volcker observed on December 11, 2009: “We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export. It’s involved with the financial crisis, but in a way it’s more difficult than the financial crisis because it reflects the basic structure of the economy.”
A return to economic growth requires a return to real engineering rather than reliance on financial engineering. It must reverse the trend to a state where the real economy simply supports trading and investment in claims on underlying resources.
Traditional growth relies on increasing population, sustainable and affordable resources, and new markets, as well as improved productivity and innovation.
While the global population is increasing, much of the growth is in poorer nations. The population in more affluent developed nations is shrinking, with birth rates falling below replacement levels. In many nations, the working age population is declining as the generation born immediately after World War II reaches retirement age. However, with increased life expectancy, the size of this aged group creates demand for health and retirement income, which must be supported by a dwindling number of workers. In developed countries, the aging population will constrain growth.
Environmental and resources constraints limit the potential for large increases in population. Without significant improvements in agricultural technology, it will be increasingly difficult to feed the population of the world, which is rapidly approaching 10 billion.
Agronomists estimate that food production will need to increase by 60% to 100% by 2050 to provide sufficient food to the world; more protein in the form of meat is also needed for the rapidly increasing middle classes of the developing world. But the amount of arable land has remained relatively constant at around 3.4 billion acres for the last decade. Increases in crop yields have become more difficult to achieve.
Writing in a piece titled "Welcome to Dystopia," Jeremy Grantham, founder of asset manager GMO, observed: “We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth.... Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce.”
Sustainable falls in the price of energy and other scarce resources are also unlikely. The quality of the world’s oil resources is declining. Easier to extract and therefore cheaper fields are being exhausted, requiring a shift to more difficult and expensive sources. Given its central role in transportation, the rising prices of gasoline and related products is troubling.
New energy sources are expensive and may create new problems. Production of the biofuel to fill one 25-gallon SUV tank requires the corn sufficient to feed a single person for a year.
Financial policy measures -- quantitative easing and competitive currency devaluations -- are also driving up commodity prices. The loss of faith in paper money is feeding the demand for real assets, including commodities, as investors try to preserve purchasing power.
The scope for new markets is limited. Since 1989, most economies, with the exception of North Korea, have integrated into the global trading system. In fact, gains from globalization may reverse. Nation states increasingly favor domestic activity and maximizing the share of limited demand using beggar-thy-neighbor strategies, such as industry policy, trade restrictions, currency manipulation, and controls on free movement of capital.
Major technological change and innovations, at least on the scale of the industrial or computing revolutions, are not on the horizon.
Economist Robert Gordon argues that the rapid growth and improvements in living standards achieved since 1750 were driven by three different phases on industrial revolution: steam engines (industrial revolution 1); electricity, internal combustion engines, modern communication, entertainment, petroleum and chemical (industrial revolution 2); and computing (industrial revolution 3).
He finds that Industrial Revolution 2 was the most significant in its impact on productivity and improvements in living standards. To the consternation of the I-generation, Gordon argues that Industrial Revolution 3, while important, was less important than originally thought, creating only short-lived improvement in productivity.
The replacement of repetitive low value tasks by technology was undertaken primarily in the 1970s and 1980s. Industrial Revolution 3 did not fundamentally revolutionize productivity, focusing on improving existing technologies, enhancing capability, power and also miniaturization. Many recent innovations also centered on entertainment and communication devices.
The economic contribution -- revenue, profits, and employment -- of many recent innovations are difficult to gauge. Some technologies merely displace existing products. Apple’s (NASDAQ:AAPL) iPhones have cannibalized BlackBerry's (NASDAQ:BRRY) portable music players and personal digital assistants. Google (NASDAQ:GOOG) and blogs cannibalize existing industries, such as newspapers. Whatever their cultural impact, Facebook (NASDAQ:FB) and Twitter may not have viable economic models.
Gordon argues that many innovations are non-repeatable. These include improvements in life expectancy, urbanization, improvements in food production, clean water, sanitation, faster transportation, increased female participation in the workforce, temperature control to facilitate productive activities in climatically challenging regions, and more.
In recent times, productivity increases (especially the change in output per unit of combined capital and labor) have slowed. Easy productivity gains from outsourcing production to lower cost jurisdictions or reductions in workforce levels have been achieved.
Many new products and productivity measures reduce the number of workers needed. While creators capture large benefits, employment and income levels are not significantly boosted, limiting the benefit to the wider economy. Given the fact that consumption makes up 60-70% of economic activity in developed economies, this limits the impact on growth.
The prospect for innovation is also affected by educational levels and funding for research. Social activist Jane Jacobs identified the shift from "educating" to "credentialing," where educational establishments now serve to merely prepare students for employment. The increasing cost of education has also increasingly placed it beyond the reach of many or forced graduates to start their working lives with significant debts.
Scientific research funding has declined in real terms in many nations. This has affected the amount as well as the approach to research, shifting focus to safer proposals likely to receive funding rather than uncertain but potentially groundbreaking areas.
Large scale investment in pure research and development in basic science, such as that undertaken by the Bell Labs, is less prevalent today. Researchers working at Bell Labs helped develop radio astronomy, the transistor, the laser, the charge-coupled device (CCD), information theory, the UNIX operating system, the C programming language, and the C++ programming language. Without such investment, quantum leaps in innovation are more difficult.
While a factor, innovation and productivity increases may not be sufficient to restore growth to the stellar levels of the twentieth century.
Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
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