Mile High View,  Return on Investment

A New Era For Investors

Robert Gordon of Northwestern University is getting a lot of press for his publications predicting we are entering a new age of slow innovation, slow productivity growth and eventually slow to stagnant GDP growth. To that I disagree. It reminds me of Thomas Robert Malthus. Malthus (1766-1834) was an English scholar who wrote about economics and population growth. He believed that, in his lifetime, improvements in agricultural productivity had reached a pinnacle and improvements would be limited or non-existent. Malthus postulated that wages would sink as demand increased for food but food supplies would be limited. Additionally, that food prices would increase with demand rising faster than supply. In turn, the business owners would reduce wages so they would have enough for food. Malthus felt famines, epidemics, and wars were all good things that reduced the population which in turn reduced demand for food. Malthus argued against the so-called “poor laws” (similar to our unemployment insurance, food stamps, welfare, etc.) He wanted people to die to reduce demand for food. He argued for celibacy and forcing later in life marriages. In 1850 not long after Malthus died the US population stood at 23 million and of those 23 million people, 11 million were employed on the farms– almost 50% of the US population. Today we produce nearly 60 times the amount of food as we did in 1850 and we are doing that with only 1.6 million people employed on the farms. The average worker produces 600 times what the average worker did in 1850!

Gordon, in my opinion, is the new Malthus. He claims we have gone through three growth cycles and are at a time when growth will be moderate at best. Gordon designates the first cycle lasting from 1750-1830 and growth was driven by the invention of the steam engine, cotton spinning, and railroads. All three contributed to a significant growth in the world economy. Gordon’s second cycle from 1870-1900 was driven by electricity, the internal combustion engine and running water. Running water was, in his opinion, the most important of the three. The third cycle from the 1960s to the 1990s has been the cycle driven by the computer. Since the 1990s ,according to Gordon, we have significant innovation but little growth in productivity. Gordon extrapolates to say we are entering the time when innovation slows and productivity slows to a crawl.

Negativity sells. We have just come through the Great Recession and the memory of seeing portfolio losses and net worth values dramatically drop seems fresh in our memory. So when a Gordon comes along that predicts a slow growth and little gain in productivity he gains a considerable following. But we don’t have to go back as far as Malthus to see others who gained national or international prominence by predicting slow growth.

One of the popular books of the 1950s was John Kenneth Galbraith’s book “The Affluent Society”. Galbraith stated the US population had reached a peak in affluence. After all, almost every family had one car and the average size of houses had grown to 1,100 square feet. It was unlikely, according to Galbraith, that there would be much more growth in affluence. That was as good as it would get. Large companies were 2/3 of the output in key sectors and they controlled technology. Small companies did not have the capital to compete. Large companies would innovate but taking few risks. Large companies were not looking to maximize profits, but instead focused on maintaining their organization. Large organizations like the labor unions wanted control over suppliers and political influence. There was just no room for small companies.

Galbraith missed seeing a little hamburger place would change American’s eating habits. A year before publishing his book, “The New Industrial State” MacDonald’s came public. Two years before that book was published Watson and Crick published their work on the DNA which was to lead small companies like Genentech and Amgen and a whole new field of biotechnology companies from small to fairly large. Galbraith never foresaw little software companies like Microsoft and Oracle would become huge big companies.

It is hard to look into the future and see what the changes will be. We can get an idea from history. I don’t believe history repeats, but it rhymes. Gordon, like Malthus and Galbraith, looked at the present day and sees a leveling out. But if we look back at history, we can see a pattern that is far more optimistic. Until the Industrial Revolution, GDP grew at the same rate as the population grew. But with the Industrial Revolution, GDP grew at 0.3%, and the people began to gain some wealth. In the steam age of the 1800s, production and GDP grew at 1% per year, significantly higher than population growth and wealth accumulation increased. In the age of petroleum GDP growth averaged 2.4% creating an accelerating wealth. In the information age we are living in GDP growth which is likely to be in the 4%+ range. Nobel Prize winner Robert Lucas states it is the: “First time in history the living standards of the masses of ordinary people have begun to undergo sustained growth.”

I believe Gordon, like Malthus and Galbraith before him is wrong and instead we are entering a time of sustained growth with businesses and industries that have the possibility of creating wealth for those who are involved and those who invest.
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Until Next Time,


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