People often assume it’s natural for economies to have steady, long-term growth, but there’s no law of nature that requires this. In fact, when we look at nature 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 human activity do we see steady, long-term improvement – and it really is improvement. 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. And because of smartphones and GPS satellites, no one ever has to take another wrong turn. We’re a lot better off now.
It’s been said that the economy is more productive now because we’re smarter than we used to be. But that’s not really true – human nature hasn’t changed. Conflict and war are still common; political leaders try for too much and suffer; education and study are still hard work. But our living standards have risen steadily for 200 to 300 years.
Two and a half centuries of economic thought have shown that economies grow because they accumulate capital: human capital, physical capital, and financial capital. The more flexible that capital is, the more steady our economic growth will be. If you can shift a railroad from shipping coal to shipping oil to shipping bi-modal tractor-trailer rigs, the line will remain productive when the price of oil rises, falls, or demand changes.
The accumulation and use of our capital is what distinguishes human activity from the natural world. Dolphins don’t build factories, and chipmunks don’t trade with field mice. That’s why nature is such an imperfect model for understanding the economy. And the more our economy grows, the better-off we all are.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”