Has G7 productivity peaked?

  • 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.

P.S. On a happier note, the above doesn’t mention the enormous potential for productivity growth that some/ many think is coming down the line with the expanding use of more and better AI

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