From Cody Finke's substack, October 12:
US growth and stagnation:
In the US, the period from 1870 to 1970 saw massive economic growth. Known as the “special century,” real GDP per capita grew about 2.0% per year. After 1970, growth stagnated and real GDP per capita has only grown about 1.8% per year since.[1]
Researchers noticed that total factor productivity (TFP, a measure of how efficiently we use resources) correlates well with this difference.1 The usual story is that the special century’s growth came from a handful of great inventions: electricity, the internal combustion engine, running water and indoor plumbing, the telephone, and chemicals which all improved productivity.1
However, since 1970 jet air travel, personal computers, cell phones, and the internet have all either been invented or deeply penetrated the US economy leaving researchers to wonder why they did not impact growth or TFP.[2] No explanation is given for why certain productivity inventions cause growth, but others do not.
A simple theory for US growth and stagnation:
My proposed explanation is that in order to impact growth, the innovation must impact a market large enough to matter or a set of markets large enough to matter. While it is statistically possible for hundreds or even millions of innovations to add up to high growth (and for indoor plumbing to lead to millions of innovations), it is much more likely that a smaller number of innovations impacting very large markets occurred. I argue that 7 times in the special century, innovations dramatically cut cost for products that, by themselves, were more than 1% of economic growth. This has never happened since 1970.
One way to drive economic growth is to reduce the cost of things the economy needs. When something gets cheaper, the economy can produce the same amount of it and still have resources left over to make other things. Spending the excess money from cost reductions pulls freed resources into new uses, and, via Jevons paradox, we also, often, end up buying more of the thing that got cheaper.[3] Standard economic growth is really the sum of all the innovations that save us money and make us richer, causing us to spend more which is directly proportional to growth at nearly 1:1[4]. Some of the money from cost reductions could be saved and therefore invested with a different economics return, but for commodities I assume that little of these cost reductions went to savings because they usually represent a small fraction of the final product’s value.
There are many ways to create large cost reductions in the economies, either many innovations can create cost reductions across dozens or even thousands of products adding up to massive economic growth, or a single innovation on a huge product can drive economic growth. A single innovation is much more likely than multiple innovations.
So, if we look at which single products made up more than 1% of the US economy between 1870 and 1970 there were eight: general-purpose concrete, mild steel, gasoline, diesel, electricity, coal, field corn, and upland cotton.[5],[6],[7],[8],[9] Wheat, coal, and hay also topped 1% at times briefly, but not in a sustained way.[10],[11],[12]
Adjusted for inflation, seven out of these eight products got A LOT cheaper during the special century:[13],[14],[15],[16],[17],[18],[19],[20],[21],[22],[23],[24]
Multiplying each product’s share of GDP by its price decline on a decade basis estimates the GDP growth each year:[25]
The average growth of the special century was about +0.2% per capita, which is nearly entirely explained by the cost reduction in these 7 products which account for +0.17%.[26]
However, by 1970, each of these materials had reached a steady state price, and in the 1970s some started to rise in price due to shocks like the oil crisis.[27] Thus, after 1970, no product that is worth more than 1% of the US economy has reduced in price.
How do we repeat high growth?
....MUCH MORE
We're going to need some big ideas. All of which brings mind one of my favorite Warren Buffett stories (they are legion).
....a couple snips from Warren Buffett's Letters to the Shareholders of Berkshire Hathaway
The '85 Berkshire letter continues one of my favorite BRK stories.
First the background, from the 1984 Chairman's Letter:
"...Using my academic voice, I have told you in the past of the drag that a mushrooming capital base exerts upon rates of return. Unfortunately, my academic voice is now giving way to a reportorial voice. Our historical 22% rate is just that - history. To earn even 15% annually over the next decade (assuming we continue to follow our present dividend policy, about which more will be said later in this letter) we would need profits aggregating about $3.9 billion. Accomplishing this will require a few big ideas - small ones just won’t do. Charlie Munger, my partner in general management, and I do not have any such ideas at present, but our experience has been that they pop up occasionally. (How’s that for a strategic plan?)..."And then, the dénouement in the paragraph which immediately preceded the Halley's bit in the 1985 letter:
...You may remember the wildly upbeat message of last year’s report: nothing much was in the works but our experience had been that something big popped up occasionally. This carefully- crafted corporate strategy paid off in 1985. Later sections of this report discuss (a) our purchase of a major position in Capital Cities/ABC, (b) our acquisition of Scott & Fetzer, (c) our entry into a large, extended term participation in the insurance business of Fireman’s Fund, and (d) our sale of our stock in General Foods....
As seen in January 2018's "In 2016 We Had the #1 Stock In the S&P 500, In 2017 We Had the Top-Performing Commodity, In 2018 We've Got...."
Nuthin'.
So here's a little victory dance 'til we figure something out.
And after that, a pretty good Warren Buffett story....
