The End Of Growth

Over55s.jpgBy John Richardson

OUR e-book, Boom Gloom & The New Normal, is a set of ideas meant to challenge conventional wisdom.

Some of our ideas will need to be adapted and discarded.

But our essential point is that the New Normal represents a way of thinking as much as a set of ideas, because the world has changed irrevocably. All the evidence indicates that we will continue to inhabit a VUCA world.

The New Normal is collaborative effort, open to challenge and adaptation as there is, of course, no such thing as a “know it all” (and everyone hates anybody who pretends to be a “know it all”).

Still, though, at the risk of appearing smug, we were right on China. In late 2011, we began to warn that there was likely to be litte, or no, recovery in the country’s chemicals demand growth this year. We wish we had been wrong.

A good example of how ideas need to keep evolving, one of many that we plan to add to the debate over the coming weeks and months, is this Financial Times article from Martin Wolf.

Wolf, quoting a paper by Robert Gordon of Northwestern University, raises the question of whether economic growth in the West might be coming to an end.

The article argues that for most of history, next to no measurable growth in output per person occurred. The growth that did happen was the result of rising populations.

Then, from the middle of the 18th century, output per head, first in the UK and next the US, began to accelerate. Growth in productivity reached a peak in the two-and-a-half decades after the Second World War.

Thereafter, growth began to decline again despite a blip between 1996-2004 (we believe this blip was partly the result of the Babyboomer-driven Supercycle). In 2011, according to the US Conference Board’s data base, US output per hour was a third lower than it would have been if the 1950-1972 trend had continued.

Why? Professor Gordon’s explanation is based on the belief that growth is driven by the discovery and subsequent exploitation of technologies, particularly what he calls “general purpose technologies”.

In the 19th century, for instance, the development of the internal combustion engine, domestic running water and sewerage, communications (radio and the telephone), chemicals and petroleum led to the mid-20th century productivity explosion.

Today, we are living in the age of information technology. But the professor contends that while IT is, of course, important through providing everyone with much wider access to information (which is different from knowledge!), previous waves of innovation were far more significant.

For example, running water and sewerage treatment saved countless lives and electric appliances revolutionised communications, entertainment and domestic labour.

Life expectancy soared (see above chart). Professor Gordon writes: “Little known is the fact that the annual rate of improvement in life expectancy in the first half of the 20th century was twice as fast as in the last half”.

He makes the point that running water etc were “one-off” innovations in terms of their impact on Western growth. Everybody, just about, in the Western world has running water, for example, and no longer has to worry about cholera. As Wolf points out, if you had a choice, would you rather give up Facebook or running water?

In the developing world, there is obviously still huge potential for further economic growth from, for instance, connecting villages to electricity and water.

But we would add that there are two other issues to consider here:

*The relative poverty of the developing world needs to be taken into account in order to qualify the broad-brush, crude description of the “rise of the middle classes” in countries such as China and India.

*The developing world needs to rapidly develop a new growth model, based on domestic consumption, to compensate for weakness in exports to Western economies. Western economies are weak as a result of both the innovation slowdown described by Professor Gordon, and because of ageing populations.

In addition, the developed world has to find a new source of prosperity, based on creating products and services for the over-55s.

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