2/13/14 – Why Growth Will Persist

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 13, 2014 8:11:26 AM

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I have written before about the work of Professor Robert Gordon and others, who are projecting much lower growth in the next hundred years than in the past. The rationale, briefly, is that all of the easy gains have been taken. The world will not be electrified again. Agriculture has already been largely mechanized. Labor-saving inventions, like the washing machine, have already fully penetrated the developed nations and are working their way through the emerging markets. At some point in the not-too-distant future, it will be possible to satisfy people’s material needs fully.

With population growth topping out, as it is, and with material needs on their way to being addressed, will growth even be necessary? Imagine a world with a stable population, where everyone has enough material goods—what growth would we need? What would growth even mean in that context? Even if Gordon was right, would it matter?

Of course it would. People being people, enough is never enough. Satisfaction of one need just leads to the creation of other needs. This flaw in human nature, if you want to call it that, points to how we solve the growth problem.

The physical limits of our planet place limits on how much we can grow material production. If we can meet everyone’s physical needs within those constraints, though, this shouldn’t actually be a problem.

The way I look at this is with Maslow’s hierarchy of needs, a theory that says when one set of needs is satisfied, with physical needs being the most basic, people chase higher-level needs. Those needs are mostly nonphysical, which means they can be satisfied without pushing the limitations of the planet or of physical production.

We’re already seeing this in many areas. Kids today certainly aren’t ignoring material things, but they also spend a great deal of time in virtual environments playing (and buying things for) games. Different “worlds,” like World of Warcraft or Linden Lab’s Second Life, have very active real-money marketplaces where you can buy virtual goods. The app economy is doing the same thing, in a more and more blatant way. This largely virtual marketplace will become the dominant part of the economy in years to come, allowing continued growth with minimal material impact and few, if any, limitations imposed by reality.

Sound crazy? We’ve actually seen this shift before—twice. First was the move from agriculture to manufacturing. Once upon a time, almost everyone worked on the farm, breaking their backs to get enough food for the next year. Food is the most basic need, and everyone worked for it. We went through this transition in the U.S. at the start of the last century. In China, they’ve been working their way through it for the past couple of decades.

As technology improved, we could raise more food with fewer people, so most workers moved on to manufacturing, to make things like cars that people wanted and could now afford, since they had cheap food available. This is where we were post-World War II, and where China is now.

As manufactured goods became more common and cheaper, in the same way as food, people had enough stuff. Now they wanted services—health care, education, massages, whatever. The service sector has become a much larger part of the economy than manufacturing, and manufacturing employment has declined just as agricultural employment did, and for the same reasons. Service jobs now make up the largest share of the economy. We made this transition over the past 50 years, and it is the transition China is trying to make today.

Even right now, much of our growth is virtual. Look at the business section of the paper and see how much of the discussion is about software and services. Manufacturing remains important, but with increasing efficiency and growing mechanization, the decline in employment will continue even as the service economy continues to grow. This is a tremendously hopeful sign for the future, implying that many of the limits that seem to hem us in will, in fact, only be signposts, not gateposts.

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