Confusion still reigns

6 01 2014

John Mauldin

For a few years now, I have been receiving John Mauldin‘s “Thoughts from the Frontline” newsletter by email.  Mauldin is a financial adviser, and not someone anyone following my blog would think I could possibly bother reading.  Don’t get me wrong, it’s not like I agree with 100% of what he has to say (which is what this entry is about..) but at least he does think outside the box especially when compared to other people in his field of work!  I do delete most of these newsletters, but occasionally something unusual gets published that gives me hope maybe some people in the financial sector are at least thinking about our looming predicaments.

This week’s effort, “Forecast 2014: The Human Transformation Revolution” has a fair bit about “The End of Growth”…..  Some of what Mauldin writes is good, like this link to a paper called “Is US Economic Growth Over?”  the work of Dr. Robert Gordon, who is a professor of economics at Northwestern University and a Nobel laureate.

Mauldin starts off well with “There is a school of thought that sees the first and second industrial revolutions as having been driven by specific innovations that are so unique and so fundamental that they are unlikely to be repeated. Where will we find any future innovation that is likely to have as much impact as the combustion engine or electricity or (pick your favorite)?”

Dr Robert Gordon

Mauldin then suggests that Dr. Robert Gordon and “other matriculants in his school of thought” confuse the products of industrial revolutions with their causes, and thus despair over the prospects for future growth…

Mauldin then continues by quoting an article by Benjamin Wallace-Wells which he cited in Outside the Box last June. He explains Robert Gordon’s views thus…….

Gordon offers us two key predictions, both discomfiting. The first pertains to the near future, when, he says, our economy will grow at less than half its average rate over the last century because of a whole raft of structural headwinds.

His second prediction is even more unsettling. He thinks the forces that drove the second industrial revolution (beginning in 1870 and created largely in the US) were so powerful and so unique that they cannot be repeated.

(A corollary view of Gordon’s, mentioned only indirectly in this article, is that computers and the internet and robotics and nanotech and biotech are no great shakes, compared to the electric grid and internal combustion engine, as forces for economic change. Which is where he and I part company.)

“[T]he scope of his [Gordon’s] bleakness has given him, over the past year, a newfound public profile,” Wallace-Wells notes. Gordon offers us two key predictions, both discomfiting. The first pertains to the near future, when, he says, our economy will grow at less than half its average rate over the last century because of a whole raft of structural headwinds.

His second prediction is even more unsettling. He thinks the forces that drove the second industrial revolution (beginning in 1870 and originating largely in the US) were so powerful and so unique that they cannot be equalled in the future.

(A corollary view of Gordon’s, mentioned only indirectly in Wallace-Wells’s article, is that computers and the internet and robotics and nanotech and biotech are no great shakes compared to the electric grid and internal combustion engine, as forces for economic change. Which is where he and I part company.)

And that’s where Mauldin and I part company too.

Mauldin obviously has no idea about how lucky we have been, nor does he comprehend how desperately difficult our future is going to be. Quoting from Wallace-Wells:

What if everything we’ve come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?

Mauldin then asks the reader to “picture this, arranged along a time line”….

For all of measurable human history up until the year 1750, nothing happened that mattered. This isn’t to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theatre of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were little better than they had been two millennia earlier, in ancient Rome.

Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward – which contains, not coincidentally, the full life span of the United States – human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents’ standard of living. In the space of a single generation, for most everybody, life was getting twice as good.

At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.  

AND this is where Mauldin stops understanding what happened.  1970 was the USA’s Peak Oil moment, and at the time, the US was the biggest oil producer in the world, the world changed, and turned to money shortly thereafter to fuel the world….  even when he states “and the second industrial revolution, beginning around 1870 and created mostly in this country”, there’s no mention of the fact that that was when oil started being produced in the US

Some things, Gordon says, and he says it often enough that it has become both a battle cry and a mantra, “can happen only once.

And he STILL doesn’t get it………..

Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the ageing of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality.

Gordon’s second prediction is almost literary in its scope. The forces of the second industrial revolution, he believes, were so powerful and so unique that they will not be repeated. The consequences of that breakthrough took a century to be fully realized, and as the internal combustion engine gave rise to the car and eventually the airplane, and electricity to radio and the telephone and then mass media, they came to rearrange social forces and transform everyday lives. Mechanized farm equipment permitted people to stay in school longer and to leave rural areas and move to cities. Electrical appliances allowed women of all social classes to leave behind housework for more fulfilling and productive jobs. Air-conditioning moved work indoors. The introduction of public sewers and sanitation reduced illness and infant mortality, improving health and extending lives. The car, mass media, and commercial aircraft led to a liberation from the narrow confines of geography and an introduction to a far broader and richer world. Education beyond high school was made accessible, in the aftermath of World War II, to the middle and working classes. These are all consequences of the second industrial revolution, and it is hard to imagine how those improvements might be extended: Women cannot be liberated from housework to join the labour force again, travel is not getting faster, cities are unlikely to get much more dense, and educational attainment has plateaued. The classic example of the scale of these transformations is Paul Krugman’s description of his kitchen: The modern kitchen, absent a few surface improvements, is the same one that existed half a century ago. But go back half a century before that, and you are talking about no refrigeration, just huge blocks of ice in a box, and no gas-fired stove, just piles of wood. If you take this perspective, it is no wonder that the productivity gains have diminished since the early seventies. The social transformations brought by computers and the Internet cannot match any of this.

But even if they could, that would not be enough. “The growth rate is a heavy taskmaster,” Gordon says. The math is punishing. The American population is far larger than it was in 1870, and far wealthier to begin with, which means that the innovations will need to be more transformative to have the same economic effect. “I like to think of it this way,” he says. “We need innovations that are eight times as important as those we had before.” [emphasis Mauldin’s]

It is hard not to nod your head as you peruse Gordon’s work, as it is well-written and speaks to many of our prejudices thinks Mauldin.  And not least…….  because he’s right!!

Mauldin believes we will not need innovations that are eight times as important. We just need eight times as many innovations. And he thinks he brings hope, because “we will see many times that number.”

Then Mauldin says “Let’s go back to James Watt and the steam engine. When Watt was tinkering with the power of steam, there were maybe a dozen scientists in all of Europe who could understand what he was doing and fewer who had access to his tools.”  What about the coal John…….?

“The real sources of intellectual fuel and entrepreneurial oxygen that fired the Industrial Revolution” continues Mauldin, “were the cumulative mass of information available to scientists and inventors and the ability of entrepreneurs to profit from their own risk-taking ventures.”

No John…….  we’ve been very astute at harnessing fossil fuels.  That’s all.  High quality, high density fuel, cheap as chips, and abundant to boot.  Until now.  I’m with the Nobel laureate.

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One response

6 01 2014
wanderer1954

just hope for the cumulative mass of knowledge to deliver the fusion reactor in time ….. watch out for heat waves in Tasmania … south NZ may be better option

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