Excessive wealth inequality, spiraling CO2 levels, the rise of the precariat, and public opprobrium across Europe and America defined the foreboding tone of Davos. The health of the world economy is plagued by slowing growth, global societal tensions, rising debt levels, quantitative easing, and a cooling Chinese economy (which is far more fragile and broken than most realize). The transformative impact of Globalization 4.0 on production was presented. But the cry for “inclusive and sustainable growth” was far louder: “this is about saving capitalism.”
Today’s events are symptomatic of Karl Polanyi’s “double movement,” which characterizes the antagonism between the expansionary logic of neoliberalism and the ascriptive values embedded in a ‘gemeinschaftlich’ community. Since 2008, there has been renewed interest in ‘décroissance,’ (degrowth) by French Intellectual André Gorz. He argues the world should insulate social capital and ecological capital at the expense of GDP growth.
The utopian dream of living in a ‘gemeinschaft’ is far more dystopian. Yet, the macroeconomic policy discussed at Davos is also not the remedy to the world’s problems. Globalization is extremely unsustainable in a world with a finite amount of resources. 1 If every one of India’s households consumed as much energy as American households, it would result in an environmental catastrophe. Instead, we need to re-accelerate the rate of technological progress and overcome stagnation to save our future.
In 30 years America will be a post-industrial society. . . . There will be only four work days a week of seven hours per day. The year will be comprised of 39 work weeks and 13 weeks of vacation. With weekends and holidays this makes 147 work days a year and 218 free days a year. All this within a single generation.
– Le Défi Américain (The American Challenge) by Jean-Jacques Servan-Schreiber published in 1967.
In the American Challenge, Jean-Jacques Servan-Schreiber (JSS) warned Europe of an impending takeover by America across all aspects of life: economic, cultural, and political. JSS argued that ossified European societies would become a satellite of the American machine. Europe would be destined to suffer the inevitable fate of industrial helotry as America’s managerial talent, education, and R&D investment would increase the technological gap between the countries.
Peter Thiel notes it’s important “to resist the temptation to dismiss Servan-Schreiber’s space-age optimism.” What’s germane to Thiel’s synthesis of JSS is that progress was supposed to be represented in step-functions, not diminishing S-Curves. The average incomes in the U.S. increased by 350 percent from 1932 to 1972. But the growth of real wages and incomes since 1973 is anemic. Considering inflation by .9 percentage points yoy, the growth of mean wages and benefits is completely stagnant. 2 I recommend reading Peter Thiel’s “The End of The Future” editorial. It has spawned my interest in technological stagnation. Many of the examples here were first brought to my attention in the essay.
Many point to the progress of computers as the indicator of technological progress. However, computers haven’t produced the revolutionary improvements in production and consumption that most think it has. In “Technological Revolutions Should Make Our Future Better,” I argued that the paradigm of mass production and planned-obsolescence business model has yet to atrophy in the Information Age.
Moore’s Law is the symbol of the exponential rate of technological innovation. With “When Moore’s Law Ends: the Computing Resurgence,” I expressed that Moore’s Law has bred homogeneity in computing design. Computers rely on the same general-purpose architecture first invented by John von Neumann in 1945.
But Moore’s Law is an economic principle, not a law of physics. If anything, the semiconductor industry’s incessant optimizations of the Von Neumann architecture characterizes the Thielian indefinite optimism that defines a Globalized future. An unsustainable pseudo-innovative world that engages in entrepreneurial arbitrage.
There remains saturated activity in bits, but not nearly enough activity in the world of atoms: biology, supersonic travel, space, and energy. Rene Girard’s ideas around mimesis is a reason. It also may be a lot easier to innovate in bits since it’s a lower touch market and there’s been less regulation. Regardless, Robert Solow’s observation in 1987 is appropriate: “You can see the computer age everywhere but in the productivity statistics.”
The schumpeterian creative destruction produced by information technologies is absolutely a net positive for society, but the delta is negligible compared to the expectations of the 1960s. Marc Andreessen divides the economy today into fast and slow sectors. Fast sectors are media and retail. Slow sectors are childcare, healthcare, education, construction, and government. The latter has demonstrated little productivity growth in an already brittle American economy.
We have taken a step backward in our optimism for the future and new technologies. In 1969, we gathered around to celebrate the first step on the moon for mankind. A year later, Congress promised victory over cancer in six years. There’s also the famous Simon-Ehrlich wager in 1980 around a basket of commodity prices that strengthens the thesis around the decelerating rate of technology progress.
Secular stagnation describes advanced economies with a long-term downtrend of economic growth and the inflation rate. The deflationary movement is indicated in the sharp declines with neutral real interest rates. These aforementioned economic concerns have been masked by abnormal monetary policy and excessive fiscal expansion.
At Davos this past year, Seth Klarman experts noted the importance of not just successful economic policy, but strong policy. This Keynesian focus on macroeconomic policy is misplaced and epitomizes the pessimism surrounding our capacity for technological and scientific progress. John Maynard Keynes himself best characterizes the pessimism in his ideas: “in the long run we are all dead.”
It’s worth mentioning that Seth Klarman’s mentor, Warren Buffet, invested $44 billion in the BNSF Railway as “an all-in wager on the economic future of the United States.” 3 I do not mean any disrespect to Seth Klarman or Warren Buffet. I consider myself a disciple and student of the Oracle of Omaha. But this was a bet against transportation and energy disruptive innovation. The Red Queen Race will continue in both technology and monetary policy if we don’t rekindle the expectations of the 1960s. We are right now running faster to stay in the same place.
Only ten years after the 2008 Financial Crisis, there is 2.8 trillion dollars worth of non-financial corporate debt. One can argue that government regulation has failed again. But maybe the more nuanced viewpoint is that there isn’t an abundance of easy progress to ride. In 2011, Peter Thiel himself noted the links between the housing crisis and the long-term development in science and technology. These comments will apply in America’s future corporate debt crisis.
“Leverage is not a substitute for scientific progress.”
– Peter Thiel in “The End of the Future.”
Private equity and non-bank entities are leveraging up companies to increase returns. Why? There aren’t many opportunities to generate unleveraged real returns. With the corporate debt crisis, multinational tech companies are less exposed to a downturn because of their balance sheet.
Healthcare and pharmaceutical businesses also have massive balance sheet to cushion themselves against a downturn. However, there has not been much advancement in those markets. This is perhaps reflective of regulatory capture; healthcare and bio are more difficult for new, software-driven entrants to disrupt because of regulation. The government is no longer a facilitator of technological and scientific progress (like with the Manhattan Project or Space Race), but an impediment.
When there is no growth, the world becomes a zero-sum game. Secular stagnation is seen as a carcinogen to our long-term future under the banal lens of Davos leaders. But it’s already a cancer. Today’s crises and pressures is an augur of what happens in a future where growth continues to slow, especially considering the job displacement that will occur via automating technologies. Luddites claim to that automation is bad. But are they wrong? It appears the world leaders have not planned adequately for our future.
The technology slowdown threatens our economic health and the world order. The ideas that our republic is founded upon is that we can create a society where most people win. Around sixty years ago, ‘Le défi américain!’ was a warning that America would exceed the world with technology and our political hegemony would be too strong. Today, ‘Le défi américain!’ is a our challenge to save our republic and way of life, which is dependent on growth. As the world is now more globalized, ‘Le défi américain!’ is the challenge heard around the world. Grow or die.
With growth, capitalism is not a zero-sum game, but without it, it absolutely is.
I’m excited about the progress being made today is not only just bits but also atoms. I admire many of the venture firms that have shown initiative to support entrepreneurs in tackling the hardest and most meaningful problems. Nonetheless, I feel there are not enough of these courageous investors. If you’re an entrepreneur who thinks that VCs are shying away from your boldness, I would love to chat and potentially back you as an investor. I know many investors that would too.