A Shrinking Pie?
Movements Start Small #25
There is really only one lasting way to create material prosperity: make more with less.
To illustrate, imagine a pre-modern hunter-gatherer economy with a few dozen families.
All members of the community spend 100% of their productive time gathering and preparing food. It is a life of pure subsistence.
One day, someone comes up with a bow and arrow - a true innovation in their simple economy. Suddenly, the food supply is met with half the effort. There is now spare time and energy to work on other things. Some members can work on food storage to help protect from periods of low yield. Others can build better shelter to protect the tribe from the elements. Some can have leisure time. And so on. The pie grew bigger and the collective is wealthier.
Innovation (the bow and arrow) is the most obvious way to get more from less. But, specialization follows it and adds to the growing pie. After all, who will end up with the bows and arrows? The marksmen (or women). And from there you might only need ¼ of the clan to get the same amount of food. Then what? As your clan gets world class at producing excess meat, you might find nearby clans that have different skills - making clothes perhaps. The trade that results further grows the pie as groups take advantage of innovations and specialized talents you don’t possess.
Over time money and credit were innovations that added fuel to this system of growth. With money you don’t have to barter for goods in real time - you can delay trade for the things you need most when you find them. And credit allows resources to flow to innovators more quickly as investors can take risk in exchange for a share in the gains of new ideas.
These concepts underlie pretty much all material progress in history. And over the last 175 years, we have positively exploded the pie.
The enlightenment led to a massive increase in basic knowledge resulting in the scientific method and a surge of innovation. The industrial revolution brought specialized labor processes and the advent of machines accelerated the gains - increasing human output and revolutionizing transportation for broader trade. Humanity basically went from 200,000 years of subsistence to broad based prosperity overnight.
And most people did benefit. During this period the global poverty rate dropped from over 80% to roughly 10% today. War did not go away, but it dropped dramatically. Average life expectancy rose from the mid-30s to over 70.
As societies gained resources, problems emerged. First among these was how do we divide up the growth in the pie? Give it to the innovators so we encourage more of it? Give it to the leaders since they are in charge and have the power? Give it to the collective to build shared goods like schools or parks to advance common prosperity? Distribute it equally? Or some mix of all of them depending on the situation or political climate?
These debates can be heated for sure. And across the globe, various models are in play. But, when the pie is growing, they tend to take the form of political fights. Real trouble hits when the pie stops growing. If a pie is growing, we fight over gains. When it starts shrinking, well, someone has to lose. And that can often lead to social unrest, political upheaval and often war. The 1930s are a perfect example where a prolonged depression led to World War II.
There is nothing that says this run can’t come to an end again. Humanity created the conditions of prosperity. We can also undo them. Some suggest we are headed in that direction - and for good reason. There are a few major trends that are cause for real concern:
Pay over productivity. Labor productivity is surely one source of a growing pie. Henry Ford famously doubled worker pay - but it came on the back of massive productivity gains. As always, the growing pie really drove the wealth gains. One car went from taking 12 hours of labor to just over 1. Today, we seem to be getting the opposite effect. Four day work weeks, all-remote workforces, quiet quitting - it all means less for more. And yes, inflation adjusted wages are now falling. Why? Well, a union, for example, can get a high starting pay for a barista…but if no more coffee is served the prices will just rise to cover the wages. Without the pie growing, nothing fundamental changes. Someone must lose. When this happens across the economy you get widespread inflation that eats up real wages - exactly what is happening right now.
De-globalization. In the post WWII world, broad based peace along with innovations in shipping transport shrunk the world. A push towards increasing trade opened up access to low cost labor, new natural resources and specialized skills across the globe. After 75 years countries have become highly specialized creating low cost goods that could be shipped globally. As a result, we got cheap and plentiful food, clothing and consumer goods (and, yes, many lost their way of life as jobs shifted to new regions). Of course as we learned during Covid, we also lost resiliency. As transport lanes shut down our dependence on others was laid bare. And as global rivalries accelerated (especially with Russia and China) trade barriers have arisen causing new shortages and inflation. Tensions seem only to be accelerating, adding to dangers that the abundance of global trade could be coming to an end reversing the gains of broad based specialization and trade.
Energy Scarcity. Energy is often called the master resource because it drives gains in almost every other area. A human on their own can do many things. But a human with a computer or combine or assembly line can do 100x more. All these innovations require energy. Conflicting agendas have reduced energy investment over the last few decades. The biggest missed opportunity was nuclear, a vital and emerging technology we left to stagnate due to the Chernobyl and Fukushima incidents as well as the (overestimated) promise of renewables to adequately replace fossil fuels. We will need to make up for lost time and innovate this technology fast if we don’t want to avoid a massive energy crunch for longer than the short term (which, in Europe at least, is inevitable).
Cheap money and the debt cycle. Money is a technology that allows you to save. Savings lead to investment in new pie growing activities. But as the financial system has grown in complexity, money and debt have been created by central governments around the world to increase spending and keep interest rates low. The result is inflating asset prices (helping the rich) but also a growing dependence on handouts and a glut of capital chasing even the smallest returns. If you can borrow for almost nothing, you don’t need to innovate much to make money. We have rigged the price of the most important product in the world - capital - and the misallocations and waste are about to catch up to us. I am still with Milton Friedman in his assessment that “there is no free lunch” when it comes to money creation, and the bill is coming due.
Each of these forces are massively complex and arose for a variety of reasons, some well intentioned (let’s slow income inequality or environmental degradation) and some cynical (let’s avoid hard choices). But they are already having an impact as global recession fears loom - all while inflation continues at 40 year highs. Many will say, no problem, growth is not a noble goal in its own right. That is easy to say, especially if you live comfortably in the western world. But broad based human prosperity for the billions still in poverty depends on a pie that is growing.
Gloom and doom is easy of course - and real problems are indeed in our near future. But, humans are nothing if not resilient. Any crisis will bring a response. And many forces are already in motion that could counter these pie shrinking trends. Robotics, AI, regional alliances and supply chains, energy innovations (geothermal, hydrogen and nuclear fusion), skills based education models, new monetary innovations and many more advances could all add to our collective ability to produce more for less. Economists often say the cure for high prices is high prices. The concept simply demonstrates how humans respond to the opportunities hidden inside our problems. And the biggest ones of our lifetime appear on the horizon. They surely won’t be easy to solve. But, in the long run, my money’s still on a bigger pie.
Good Links - Related and Other
Nuclear energy is making a comeback. Bipartisan support is growing in America and many new projects have been approved around the world. Watch a great 6 min video on the long ignored potential - and relative safety - of nuclear.
“There is no example of low energy societies offering high quality of life.”
I really enjoyed Peter Zeihan’s book “The End is Just the Beginning” on the potential crises of coming de-globalization. It lays out all that could go wrong with little regard for the response, but it is a great reminder of the things we take for granted - like food and energy. Arnold Kling’s review puts it in perspective.
Yes, the rich are richer than ever…but they actually build things vs. inheriting or extracting resources as most of the rich did 50 years ago.
No one could do verbal gymnastics like the great George Carlin. Four minutes of what it means to be a modern man (2014).