Growth and Natural Cycles

Why does the economy grow?

When we look at the natural world we see cycles of growth and decline. Gardens sprout in the spring, bear fruit in the summer, and die back in the fall. Populations of rabbits and deer grow until they’re everywhere and then collapse. Rivers go into flood, then slow to a trickle. Only with economies do we see steady, long-term growth. A generation ago cars only went 100 thousand miles or so, and you had to wait for weeks to get parts to repair them. Several generations ago people were just getting indoor plumbing. We’re a lot better off now. Why is this?

It’s been said that the economy is more productive now because we’re smarter than we used to be. That’s not exactly true–human nature hasn’t changed. Conflict and war is still common; leaders are still felled by hubris and overreach; education and study are still hard work. But living standards have been rising steadily for 200 to 300 years. Why?

Two centuries of economic research have shown that economies grow because they accumulate capital– human, physical, or financial–and the more flexible that capital is, the more steady that growth will be. That is, if you can shift a railroad from shipping coal to shipping oil, the line won’t go unused (and jobs lost) when the price of oil declines dramatically. Dolphins don’t build factories, and chipmunks don’t trade with field mice.

That’s why the natural world is an imperfect model for understanding the economy. And the faster the economy grows, the better-off everyone is.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-08-30T10:09:55+00:00August 30th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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