- Since the 1970s the average rate of growth in the world’s income per person has fallen from nearly 3% a year to under 1%.
- Economists scratch their heads at this ‘productivity puzzle’.
- It is possible, however, that the root of the problem lies in humans’ natural response to the unprecedented comforts of modern life in the developed world.
- After all, an earlier experiment with mice colonies reveals that rodents also have trouble coping with prosperity.
- In the late 1960s the American ethologist John B. Calhoun ran an experiment in which he placed four breeding pairs of mice in a large enclosure containing ample quantities of food, water, and nesting material.
- Initially, the mouse population took off.
- Within 10 months, however, growth started to drop off.
- There followed what Calhoun dubbed a “behavioural sink” as the male mice became solitary, and the females stopped breeding.
- Within 30 months the last mouse had expired.
- Some scientists believe this colony’s extinction occurred because the mice no longer faced the usual threats from predators and resource scarcity for which they were adapted by evolution.
- What has this to do with collapsing productivity growth among humans?
- Well, consider how capitalism has changed over the centuries:
- At the outset of the industrial revolution, economic life was brutal: severe downturns were frequent, competition among businesses was fierce, defaulting debtors were thrown into prison and government provided minimal support for those suffering economic hardship.
- On the other hand, economic recoveries were usually rapid and productivity growth remained robust over long periods.
- For contemporaries, this torrid boom-bust cycle was a source of economic vitality.
- Modern developed governments now constantly intervene to alleviate economic hardship.
- American businesses are swathed in red tape.
- Businesses have responded by becoming more bureaucratic – in the United States, there is now one manager for every five workers.
- After the global financial crisis of 2008, central banks turned to ultralow interest rates and large-scale purchases of financial assets to boost employment and revive the markets.
- Bailouts were extended to various sectors, from Wall Street to Detroit automakers.
- Ultralow rates distorted the allocation of capital and kept zombie companies on life support.
- Joseph Schumpeter’s process of “creative destruction”, which the Austrian-born economist saw as the essential feature of capitalism, was arrested.
- The rate at which jobs are created and destroyed has also declined.
- Easy money made it easier for large companies to gobble up smaller ones.
- Excessive regulations benefitted incumbent firms by creating barriers to entry for potential competitors.
- Corporate lobbying has abounded.
- The result is that corporate profits have become bloated.
- Since the turn of the century, we have no longer witnessed the return of profitability to a long-term average level that is the hallmark of a truly competitive economy.
- Fiscal profligacy reached its apogee during the pandemic year of 2020, when stimulus by the government and the central bank topped a combined 35% of GDP.
- The U.S. national debt has returned to levels last seen at the end of World War Two.
- And this excludes vast contingent public liabilities such as pension and healthcare commitments, as well as state guarantees for bank deposits, residential mortgages and the like.
CONCLUSIONS:
- As the government’s direct and indirect involvement in economic affairs has expanded, productivity growth has declined.
- More and more government debt is needed to generate growth
- By 2022 it took $3 of debt to produce an extra $1 of GDP – three times the level of the 1970s.
- A change of culture is required.
- We need to accept that some degree of economic suffering is inevitable.
- If we continue to evade pain at any cost, our fate may be as grim as Calhoun’s unfortunate mice.
- And there’s no financial trade to hedge against that outcome.