The Long-Term Economic Narrative Hasn’t Changed (Mar 24th, 2020)
I find it almost too easy to get caught up with everything in the news. In the age of information, it’s virtually impossible to escape it. A constant bombardment of information can skew one’s perceptions in a drastic way when they aren’t careful, invoking fear, greed, pride, and plenty of other undesirable emotions. These emotions can be amplified with unexpected shocks like being laid-off from your job or watching your wealth decline as the stock market viciously sheds. When a “Black Swan” event like the COVID-19 epidemic emerges, you see many people react in a panicked manner, as people become conscious of the previously unforeseen risk. While this pandemic may be the largest nominal supply and demand shock the global economy has ever seen, we are still on course to enter the fourth industrial revolution and COVID-19 may be the catalyst for this transition.
In economics, productivity, and technological advances have both been constantly positive throughout history. In many economic models, these two variables are commonly positive constants. You can debate about how they should be appropriately weighted in any given equation when putting together a model, but regardless both are almost always positive. I would argue the reason these two variables remain almost constantly positive is that they are driven by natural human forces.
Productivity can be deduced to survival and betterment of lifestyle; your productivity correlates positively with your income and when you properly leverage financial instruments you can see your wealth rise exponentially. Your wealth provides you economic security and increases your chance of survival, so productivity proves to be a reliable incentive. To further the argument as to how this is a natural force outside of the human-sphere think of an Apple tree. The tree is a living organism, therefore it's subject to evolution. The tree has an innate incentive to produce more fruit thereby bearing more seeds, thus prolonging the genetic lineage of that tree. In human terms, the fruit and its seeds are the equivalents of your productive output.
On the other hand, when looking at technological advancements, this variable seems to be especially unique to humans. We are all gifted with the ability to create at some level, but a small percentage of creators shift the history of humanity. This includes architects that define eras of building designs, musicians paving the way for new genres of music, intellectuals raising awareness of flaws in a human-created system, or more simply put, innovators. You could argue our purpose is to create and improve, otherwise, why would we do such burdensome tasks? Innovation is the fuel for technological advances in our society. Some studies argue that anywhere from one to two-thirds of all economic growth comes from innovation, much more realistic than Solow’s estimate of 90%. What makes technological advancements different, is that they are not linear, they’re exponential.
Take Moore’s Law for example. Moore’s Law is the principle that the speed and capability of computers can be expected to double every two years, as a result of increases in the number of transistors a microchip can contain. Simply put, computing power has doubled every two years since 1970, exemplifying exponential growth. Many other examples of extraordinary technological growth can be found here: https://ourworldindata.org/technological-progress
“If it cannot go on forever, it will stop” — Herbert Stein
Before this pandemic, we found ourselves in the longest bull-market the world has ever seen lasting over 130 months, with over a 350% increase in the S&P 500. We’ve recently seen that bull-market ended with a 34% drawback in only 31 days. For reference, the dot com bubble lasted 2.1 years and there was roughly a 44% drawback. 31 days, trillions of dollars in terms of market capitalization virtually erased, but what has truly changed? The long term economic narrative of automation and innovation has not slowed down, and if anything, this will likely speed it up. Innovation comes down to discovering or combining new solutions from already existing toolboxes of pieces and practices. In this case, the existing “toolbox” of pieces and practices has not changed at all, despite trillions of dollars of “value” vanishing into thin air.
I believe this recovery will rather be a restructuring of certain sectors of the economy. Take the service industry for example, more specifically look at accommodation and food services that employ almost 8 million people from small businesses alone. The restaurant industry is brutal, margins are thin and consistent quality of service is critical. There is little room for error, but when properly executed the largest risk-taker, the owner, reaps the benefits. However, when times get tough and profits are squeezed, business owners have to lay off employees. Having worked in the foodservice industry myself a while back, I have a tremendous amount of empathy for those workers.
However, in this recovery period, it would be wise for owners to automate as much of the process as they can so they can have a sustainable, lower risk future. Less overhead costs is a better decision for the owner as it lowers their own personal downside risk during tough financial conditions. The restaurant owner would want to increase productivity by implementing some technological advances such as robot chefs, given low-interest rates and incentivized borrowing programs. These are all market forces, and we can quantify these actions to measure performance, but it provokes several ethical questions as a byproduct. With many local restaurants and bars being temporarily closed, we’ve seen plenty of layoffs already. Even if 1 million of those people were laid-off we would see unemployment rise 17% from where it’s at right now. The reality is that many more than 1 million people have already been laid off.
“In the short run, technology may be more efficient than man, but it will never be perfect. Every piece of equipment will eventually reveal an error code. In the long run, man will never be perfect, but prove to be more reliable than technology.” — Suzy Kassem, Rise Up and Salute the Sun: The Writings of Suzy Kassem
This is a unique time in history, we have the perfect storm: cheap capital, a Federal Reserve literally ready to print infinite money, tremendous advances in technology allowing us to make better data-driven decisions, internet access allows us to learn virtually anything we want. However, we need external forces to step in at this point. We need our legislators to guide us through this paradigm shift. We need some sort of retraining programs implemented to get as many people out of jobs oriented around the repetition of tasks and into more creative or intellectually demanding fields. The market for creativity is infinite which should give anyone hope for the future, properly navigating the change is the difficult bit.
This pandemic will undoubtedly reshape industries, likely in ways we haven't even fathomed yet, not even yet known by the brilliant innovators who will reshape the course of history. The fourth industrial revolution is still upon us, the narrative has not changed. For us to foster a healthy, capitalist economy we must treat short term problems with long term solutions. The best-case scenario is the global economy coming out of this pandemic stronger, more resilient, and more loving and empathetic towards our neighbor. And so for the decision-makers out there, from business leaders to legislators, for the sake of humanity, stay focused on the long term by treating the short term with sustainable solutions.
Disclaimer: The opinions stated in this piece are my own and do not represent those of my employer.
This was written with an optimistic mindset, looking to encourage thought leadership and action concerning the sustainability and betterment of society.
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