A draft paper we’re working on looks at the phenomenon of positive economic growth as measured by GDP. The base assumption for almost all investment advice is that this is a continuous process that will persist tomorrow and forever. Take note of the word “assumption” – we have data to remind us that this measure is a “recent” phenomenon, occurring in only the last 250 years of human history. We know for certain that, mathematically, any exponential rate is not sustainable in the long run (and a constant positive growth rate is an exponential). Our paper will aim to:
- Clarify some concepts around economic growth
- Explore the inadequacies of GDP, specifically the characteristics of a measure that looks beyond monetary measures of income or wealth and, if we agree to settle on GDP being a not-so-perfect but largely acceptable measure, is it realistic to expect exponential growth (as opposed to linear growth) year after year as we have experienced in the recent past?
- Provide an overview of the history of economic growth in GDP terms and seek to understand the tailwinds and headwinds for growth to stay (or not) on its recent trajectory. This includes (but is not limited to) demography, society, environment, resource constraints, global financial development and technology
- Discuss potential investment implications.
Looking at Professor Robert Gordon’s work at Northwestern University, there was virtually no growth in the US before 1750. Are the past 250 years of positive growth simply a unique episode in human history? Will our third ‘industrial revolution’ (IT, the internet and TMT mobility) lead to the same level of productivity gains we saw from the second industrial revolution? Will technology ‘ride to the rescue’? What could come to replace GDP as a measure of growth and/or prosperity? Are these terms the same thing? There is a danger we will be better at asking questions than answering them, so would value your input…