The Bullish Case for Growth

A pretty good counterargument to Jeremy Grantham’s prediction for slow growth via Laurence Siegel:

“Consumption cannot grow forever.  Some consumption is of physical, nonrenewable resources, and the volume of cumulative nonrenewable resources consumed cannot exceed the volume that exists on Earth.  Even at a zero growth rate, resources continue to be consumed, subject to physical limits.  Thus, a worldwide slowing of growth at some point in human history is inevitable.

We are, however, nowhere near that point.

The physical environment is in pretty good shape.  It is cleaner in developed countries than it was in those same countries when they were developing, and the same potential exists in countries that are still developing today.  While some resources have been depleted so that the easiest-to-obtain supplies are gone and what remains is costly and difficult to obtain (oil being the most prominent example), that very cost makes the discovery and development of substitutes possible, necessary, and likely.  We have barely breached the surface of nuclear, solar, geothermal, wind, and tidal power.  Recent fossil fuel discoveries have been a pleasant and unforeseen surprise (though we’d be foolish to rely on more such good fortune). People have been finding cheaper substitutes for existing resources since the beginning of human history, and there is no sign that we will stop any time soon.

We have heard concerns about the permanent slowing or stopping of global growth after every depression or severe recession.  In the 1890s, the idea was circulated that everything worth inventing had already been invented.  In the 1930s, it was popular to say that capitalism had created the mechanism of its own destruction.  In the 1970s, concerns focused on foreign competition and resource constraints, and some people forecast mass starvation. Today’s concerns are no different in principle, and they are no more realistic.

The problems we face are real, but they are hardly insurmountable.

Economic growth does not come from discoveries of natural resources (although those help), but from innovations that permit us to do more with less.  That is the economist’s definition of an improvement in technology, and it is the definition we should always bear in mind.  Thus economic growth comes from people trying to better their own lives and those of their children, and it comes from the dissemination of information on how to do so across time and space.  If we can avoid the plagues of war and disease that kept economic growth from catching fire before the 1700s, we can rely on the natural desire to improve one’s lot in life as the engine of economic growth in the future, and we can expect it to continue.”

Read the full piece here.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. There’s a difference between assuming above average growth will continue, like what we had in the 20th century in the U.S. (3%+ RGDP) and assuming that we will return to a more historically normal rate of growth (0-2% RGDP). So both Grantham and Siegel are probably right here. Grantham is looking merely at labor force growth and productivity and saying we’re not going to have the wind at our back anymore. Siegel is saying mankind still has plenty of room to continue to innovate and grow. These statements are not inconsistent.

  2. Improving our standard of living through greater efficiencies is what has always propelled us forward and provided growth, this time shouldn’t be too terribly different.

    As products have gotten better and we are able to do so much more with less and less resources (people included) I wander how we are going to be able to employ and improve our society at large. It’s almost a double edged sword.

    Durable goods orders today surprised to the upside while the trajectory still looks pretty dismal. Could it be that a lot of the products that are counted in the number are just better now and last longer? So there is no need to replace them as frequently as you used to. Boeing’s planes and Cat’s excavators aren’t getting worse, there are constantly improving them to be more effective machines. It doesn’t seem like this will be much of a positive for growth going forward.

  3. I think we do a lot of wasteful things with real resources that will could me mitigated with smarter and more integrated automation. There are still tremendous developments to be made in software and programming which do not require a huge amount of inputs. Once programmers successfully create languages at a higher level, most other programmers rarely have to go back to the lower level languages. Technology builds on itself in pretty remarkable ways.

    • That is certainly what I learned in Econ 101. Real growth comes from two sources: population and productivity increases. Of course, much of what I learned in Econ 101 turned out to be bogus, so who knows?

  4. There are a huge amount of untapped potentials of all the human beings alive on this planet as an individual or as a country, from how everybody improves themselves to how people collaborate at a small scale as a group or at a large scale as across countries. The global economy has been at the clogged stage in last few years after a few decades of rapid growth first in developed countries and then in developing countries. After some of those get cleaned, the growth will resume.

  5. I don’t necessarily agree with the “innnovation will save us” mantra. USSR had a lot of innovation, a lot of scientists ( it was a job that paid well comparatively). But it was all wasted on military and geopolitical misadventures.
    How is US different? It is harder and harder to make money in the US, so much of the productive output is wasted by various levels of the government.
    US is now very different from the country it used to be in the 90s.
    Unless innnovation can be channeled into productive uses on which the growth builds within the country itself ( not in India or China or other asian countries), it is not very helpful to the welfare of the country as a whole.

  6. The only reason we are obsessed with GDP growth is not because it allows us a better standard of living but because it measures the pace at which we are monetizing our resources so that we can pay our debts. The resources are real and kind of finate, the debts are artificial, made-up, and infinite because of compounding. All these inventions etc. that actually do improve our standard of living do not even register in GDP or at a much later stage. From a pure intellectual big picture point of view mixing GDP with human progress and standard of living is kind of pointless. Anyone who has been or studied Japan closely in the last 10 years or so should be able to ascertain that.

  7. There are no substitutes for potassium (potash) and phosphorus, which are critical to feeding the world, and both are rapidly depleting, though the situation won’t be dire for about 100 years or so.

    The methods, costs, energy costs of attempting to extract and concentrate potassium and phosphorus from see water are unknown, and undoubtedly excessive.

    It will likely take a biotech miracle to solve this problem. And this is probably the biggest problem the world faces.

  8. Gross and El-Erian take a different view……….and so do i:

    “Now Bill Gross and Mohamed El-Erian, the co-CEOs at the $2 trillion Pimco money managers, are citing the warning to jar investors awake and prepare for the coming lean years of slow, low growth and austerity. Except in Pimco’s new warning, the future just got much, much darker for investors — no recovery until 2022.”

  9. Great read. However, you neglect to include the ignorance of politicians in your case for growth. Higher deficits = higher taxes. Tax increases at federal, state/province and municipal levels will continue to be a drag on growth.