It’s a funny thing, but if you were to step back from the daily troubles of the economy to take something of a helicopter view, and try to take in the broad sweep of history, all the woe, all the abject economic misery is transformed. Substitute despair for hope. Replace gloom with optimism. Strap yourself in, because the next two decades are going to be astonishing, and this is why.
Alex Tabarrok is an economist who is different. As you know economics is often known as the dismal science. Well I have been watching a talk on ‘Ted’, and I am pleased to say that Mr Tabarrok practises a version of economics that is just about the precise opposite of gloomy. And it just so happens, I pretty much agree with him. See: Alex Tabarrok on how ideas trump crisis
So why is that?
Well let’s look at the data. Imagine you were an economist before the crash in 1929, when expectations of the 1930s were still rosy. What would you have expected global GDP to be by the year 2000?If you had based your forecast on past trends and made your extrapolation, you would have been wrong because your prediction would have been way too pessimistic.
The truth is that despite two world wars, a Great Depression, and the rise of the Soviet Union, the 20th century saw living standards rise at an extraordinary pace. The truth is that any government that held substantial debts in 1950, but which saw tax revenue rise in tandem with global GDP, would have seen those debts paid off many times over the following half a century.
And change is accelerating. As Mr Tabarrok pointed out, from the dawn of man to 1500 economic growth was zero. From 1500 to 1800 it rose marginally, but even so the growth that occurred over the course of a century was no greater than what is sometimes achieved in a single year these days. Annual growth in the 19th Century was about 1 per cent, in the last century it was 2 per cent, and in this one, predicts Tabarrok, it will be 3 per cent. He forecast that by 2100 global GDP per capita will be $200,000 in today’s prices. As for the last few decades, he says never before in the history of the world have so many people been lifted from poverty as happened in China.
Part of the growth comes from demand, part from inventions.
Tabarrok says that the technology that is propelling the world forward typically has high R&D but low manufacturing costs. This is the kind of technology that becomes more viable as globalisation leads to more demand. He gives an example saying: “If India and China were as big as the US is today, the demand for cancer drugs would be eight times bigger.”
As for the second impetus for growth – inventions – he sees this lying with greater education around the world. He says: “If the world as a whole were as wealthy as the United States is now, there would be more than five times as many scientists and engineers worldwide.”
The thing about Mr Tabarrok’s talk is that in a way I think he understates the potential. Ideas come from cooperation. No great idea was developed in isolation; rather it builds on others. The Internet is the greatest medium ever invented for facilitating cooperation. Some say that globalisation is leading to pressures on scarce commodities, and that the growth we have seen is nothing more than a bubble. For reasons I have explained here before, I reject that idea.
But Tabarrok fails to talk about the dangers. I don’t think it is a coincidence that we are seeing an unprecedented global crisis at a time of such promise. I think that in many ways the changes that are occurring are also causing the underlying problems that have led to this crisis. As for investors, there is plenty of opportunity.
Tomorrow I will focus on the dangers and the opportunities.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees