So here is a thought experiment. You have to choose between two options. The first option allows you to keep all the electronic technology invented up to 2002 which includes your laptop with a Windows 98 operating system loaded on it and an internet connection that allows you to log onto the internet to access websites. You are also allowed running water and access to indoor toilets as a part of this option, but you can’t use anything invented since 2002.
The second option allows you to keep everything invented in the last 10 years which means you can have access to Gmail, Facebook and Twitter through your iPad or iPhone or even a Samsung Galaxy or Blackberry for that matter. But you do not have access to running water and an indoor toilet. This means that every time you need water you will have to haul it up from your neighbourhood well. And going to toilet on a rainy night would mean going through a muddy pathway to the outhouse or a field near where you live.
Which option would you choose? This is a real no brainer. Everyone in their right minds would choose the first option and willingly give up on all the technology that has been developed in the last 10 years.
This thought experiment has been developed by Robert J Gordon, an American economist. And what is the point that he is trying to make? “I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for Option A is so obvious. The audience realizes that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent,” writes Gordon in a recent research paper titled Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. (You can access the research paper here).
The broader point that Gordon is trying to make is that today’s so called “information revolution” looks rather puny and small, when you compare it to the game changing technologies that were invented over the last few centuries. And it is the invention and the subsequent exploitation of these technologies that have driven economic growth over the last few centuries.
As Martin Wolf writes in the Financial Times “The future is unknowable. But the past is revealing. The core of Prof Gordon’s argument is that growth is driven by the discovery and subsequent exploitation of specific technologies and – above all – by “general purpose technologies”, which transform life in ways both deep and broad.”
Gordon divides the invention and discovery of these technologies into three eras. As he writes “The first centered in 1750-1830 from the inventions of the steam engine and cotton gin through the early railroads and steamships, but much of the impact of railroads on the American economy came later between 1850 and 1900. At a minimum it took 150 years… to have its full range of effects.”
The second era was between 1870 and 1900 and according Gordon had the most impact. “Electric light and a workable internal combustion engine were invented in a three-month period in late 1879…The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits…included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,” writes Gordon.
The third era started when electronic mainframe computers began to replace routine and repetitive clerical work as early as 1960 and peaked with the advent of the internet in the mid 1990s.
Gordon argues that the second era had a higher impact on economy and society than the other two eras. “Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared,” writes Wolf in theFinancial Times.
These developments also liberated women from a lot of things that they had to previously do. As Gordon writes “The biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water.5 Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.”
These developments that happened in the late eighteenth and the early nineteenth century essentially changed the way the Western world lived. They have gradually been percolating to other parts of the world as well.
More than anything these development increased economic productivity leading to faster economic growth. The increase in per capita income in Great Britain was almost flat at 0.2% per year between 1300 and 1700. After this it marginally jumped but it was only after 1850 that this rate crossed 0.5% per year. And it crossed 1% a few years after 1900.
So the entire concept of economic growth is a fairly recent trend if we look through history. As bestselling author and economist Tim Harford put it in a recent column “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.” (You can read the complete here).
The economic impact of these inventions was so huge that it led to the assumption that economic growth will continue forever. As Gordon puts it “Economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
And it might very well come out to be true. The core of Gordon’s argument is that modern inventions are less impressive than those that happened more than 100 years back. “Attention in the past decade has focused not on labor-saving innovation, but rather on a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,” writes Gordon.
The phenomenon is not limited only to the last ten years. As Tim Harford told me in an interview I did for the Economic Times a little over one year back “If I wanted to fly to India, I would probably fly on the Boeing 747. The 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn’t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.”
The same seems to be true for medicines. “Look at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven’t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn’t be worried about antibiotic resistance if we thought we could create new antibiotics at will,” Harford added. (You can read the complete interview here).
So the basic point is that growth of economic productivity has petered out over the last few years because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
William J Bonner, an economist and a bestselling author made a very interesting point in an interview I did with him a couple of years back. “It seems normal to us that a person born in Houston earns 10 times or 20 times as much per hour as a person born in Bombay. It has been that way for a long time. We have known nothing else in our lifetimes…in our parents’ lifetimes…or in the lives of our grandparents. But go back a bit further and you will find that through most of the time the human race was the human race, the fellow born in Bombay was just as rich…or even richer…than the fellow born in other places. A man’s labor produced about the same output, whether then man was in Tennessee or Timbuktu. We’re only aware of a single exception – the space of time beginning in the 18th century to the present…or a period of less than 0.2% of the human experience. During this time, and this time only, people in what we now call ‘developed’ countries spurted ahead.”
And why did they spurt ahead? “The biggest leap forward of all came in the 18th century, when Europeans found that they could get a lot more energy. Great advances in living standards have been driven by big increases in energy use. The really big boom came in the 19th century when we learned how to use the earth’s stored-up energy – in coal…and then in oil. GDP growth rates – which had been negligible for thousands of years – soared above 5%. Human population bulged too. European countries – and their colonies – were on the case first. The use of stored energy allowed them to spurt ahead of their competitors in Asia. Over the course of the 19th and 20th centuries, Europeans came to dominate the world,” said Bonner.
And perhaps now that boom phase is now behind them. As Bonner put it “Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations. The Internet did nothing to change that. It was not a ‘game changer.’ The game is the same as it has been since the steam engine was first developed.” (You can read the complete interview here).
To conclude, let me quote Martin Wolf “This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up fast. The elites of the high-income countries quite like this new world. The rest of their population likes it vastly less. Get used to this. It will not change.”
The piece originally appeared on www.firstpost.com on October 4, 2012. http://www.firstpost.com/economy/ipad-or-running-water-todays-tech-is-no-patch-on-the-past-478789.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong.
I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 presidential elections in the United States. (you can read about it here).
Bernanke announced late last night that the Federal Reserve would buy mortgage backed securities worth $40billion every month. This will continue till the job scenario in the United States improves substantially. The Federal Reserve will print money to buy the mortgage back securities.
I concluded that the Federal Reserve wouldn’t announce any QE till November 6, primarily on account of the fact that Mitt Romney, the Republican nominee for the Presidential elections, has been against any sort of QE to revive the economy.
“I don’t think QE-II was terribly effective. I think a QE-III and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on 23 August. This had held back the Federal Reserve from initiating QE III.
But from the looks of it Bernanke doesn’t feel that Romney has a chance at winning and that he is more likely than not going to continue working with Barack Obama, the current American President.
This round of quantitative easing is going to help Obama and hurt Romney. Let me explain. The theory behind quantitative easing is that when the Federal Reserve buys mortgage backed securities (in this case) by printing dollars, it pumps in more money into the economy. With more money in the economy, banks and financial institutions it is felt will lend that money and businesses and consumers will borrow. This will mean that spending by both businesses and consumers will start to up. Once that happens the economic scenario will start improving, which will lead to more jobs being created.
But as I said this is the theoretical part. And theory and practice do not always go together. Both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock and commodity markets around the world.
As more money enters the stock market, stock prices go up and this creates the “wealth effect”. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
As Gary Dorsch, an investment newsletter writer, said in a recent column, “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.””
When this happens, the economy is likely to grow faster and hence, people are more likely to vote for the incumbent President. As Dorsch explains “Incumbent presidents are always hard to beat. The powers of the presidency go a long way…In the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election.”
Bernanke is looking to do the same, even though he has denied it completely. “We have tried very, very hard, and I think we’ve been successful, at the Federal Reserve to be non-partisan and apolitical…We make our decisions based entirely on the state of the economy,” the Financial Times quoted Bernanke as saying. Given this, Romney has been a vocal critic of quantitative easing knowing that another round of money printing will clearly benefit Obama.
Other than Obama and the stock markets, the other big beneficiary of QE III will be gold. The yellow metal has gone up by around 2.2% to $1768 per ounce, since the announcement for QE III was made. In fact the expectation of QE III has been on since the beginning of September after Ben Bernanke dropped hints in a speech. Gold has risen by 7.3% since the beginning of this month.
This is primarily because any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
But that’s just one part of the story. The governments and central banks around the world, led by the Federal Reserve of United States and the European Central Bank, are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn increases the threat of inflation which would mean that the price of gold is likely to keep going up. “Gold tends to benefit from easy-money policies as investors utilize the precious metal as a hedge against potential inflation that could ultimately result from the Fed’s policies,” Steven Russolillo, wrote on WSJ Blogs.
Market watchers have also started to believe that the Federal Reserve is now only bothered about economic growth and has abandoned the goal of keeping inflation under control. Growth and inflation control are typically the twin goals of any central bank.
“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” Axel Merk, chief investment officer at Merk Funds, told Reuters. “The price of gold will do very well in the years to come,”he added.
Something that Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, agrees with. “The Fed’s inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market,” he told Reuters.
Also unlike previous two rounds of money printing there are no upper limits on this QE, although at $40billion a month it’s much smaller in size. QE II, the second round of money printing, was $600billion in size.
Something that can bring down the returns on gold in rupee terms is the appreciation of the rupee against the dollar. Yesterday the rupee appreciated against the dollar by nearly 2%. This is happening primarily because the UPA government has suddenly turned reformist. (To understand the complete relationship between rupee, dollar and gold, read this).
In the end let me quote William Bonner & Addison Wiggin, the authors of Empire of Debt — The Rise of an Epic Financial Crisis. As they say “There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.”
So be nice to your mother and buy gold.
Disclosure: This writer has investments in gold through the mutual fund route.
(The article originally appeared on www.firstpost.com on September 15,2012. http://www.firstpost.com/investing/why-you-should-be-nice-to-your-mom-and-buy-some-gold-456915.html)
(Vivek Kaul is a writer. He can be reached at [email protected])