The End of Affluence?

Is growth over?

Recently Robert J. Gordon, a professor at Northwestern University, created a stir by asking whether the remarkable growth in living standards that the world has enjoyed from 1750 until the present is slowing to a crawl. He argues that the world—and the US in particular—is facing long-term economic headwinds: demographics, education, inequality, globalization, energy/environment, and an overhang of consumer and government debt.

To some extent these headwinds have always been with us. We’ve been an aging society ever since public health initiatives started extending our lifespans. Globalization has also been an issue since 1492, as has environmental degradation and energy prices. 150 years ago New England was 90% deforested due to the appetite for firewood. Coal and heating oil have allowed our forests to grow back.

Over against these headwinds Gordon admits there have been three waves of productivity growth that have allowed the economy to expand dramatically: the industrial revolution that began in England in the 18th century; electrification and the internal combustion engine that took hold in the US around the start of the 20th century; and the information technology boom that started in the ‘60s and ‘70s and is ongoing. He makes the point that the inventions from these periods were not all created equal, and that the gains from electricity and the engine were far more important than anything that came before or since.

In essence, he’s saying that the easy, most productive discoveries have already been made. This is a point that economic pessimists have been making ever since Thomas Malthus drew his graph lines in 1798 and predicted mass starvation. It’s why economics is called the “dismal science.” And it ignores the innovation that England bequeathed on the world that made the industrial revolution possible: private property.

In the late 1600s John Locke discussed how life, liberty, and property were the unalienable rights of mankind. He did this in a political document that justified the loyal opposition to a tyrannical king. A few decades later Adam Smith noted how private property and personal interest could enhance the wealth of nations. And an American author re-worked Locke’s thoughts into a different kind of political manifesto—one that established a new nation, conceived in liberty—personal and economic.

Our economy will always face headwinds—it’s why growth is called progress. But asserting that growth will slow because we don’t know how productive future inventions will be isn’t just pessimistic, it foolishly ignores the greatest resource: the human mind.

Douglas R. Tengdin, CFA

Chief Investment Officer

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