"The productivity debate may lean too heavily on statistics that struggle to catch much of the good news…"
“If you want a picture of the future, imagine a boot stamping on a human face – for ever” – George Orwell, 1984
Equities – a call option on future human progress
A quick browse through the major cinematic blockbusters of the last few years suggests that mankind is more obsessed than ever with fetishizing a dystopian future. Angsty teens are invariably thrust into a future world where perceived current trends in inequality or resource consumption have reached their inevitably bleak conclusion. Of course, pessimism with regards to the future is not a new phenomenon. The early 19th century British politician and historian, Thomas Babington Macaulay, famously asked “on what principal is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us…”1 We would suggest that mankind’s undiminished ability to invent, apply and get better at using new technology, an ability that is at the heart of the massive improvements in living standards seen over the millennia of recorded human history, suggests that default pessimism with regards to the future may be misplaced.
As we’ve suggested before, some exposure to equity markets represents one way to express a little of this entirely rational optimism in portfolios. A world where growth is still possible, even likely, is one where equity markets should continue to reward investors handsomely over time, much as they have done since the US railroads came cap in hand in the mid to late 19th century.
We have already discussed some of the ways in which we think the productivity debate may simply lean too heavily on statistics that struggle to capture much of the good news. Some plausibly argue that the changing nature of the economy, with its greater emphasis on the harder to measure services sector, has put an ever increasing distance between much of the data and the underlying economic reality. Others would suggest that this measurement error has remained more or less constant over time. However, even for those in the latter camp, there remains some solace to be taken from history.
Trends in productivity do not travel in a straight line. New technology is not always immediately assimilated into the wider economy; it often takes companies and consumers decades to work out how best to use it. Around 120 years ago, US factories started switching from steam power to electric power; however, productivity gains disappointed expectations for several decades after the switch. It took the next generation of factory owners to redesign manufacturing processes around this more flexible power source for the gains in productivity to be more effectively reaped.2 The same is true now. Much of today’s global workforce grew up in a world where computers were a rarity and experts were figures of fun. It seems unnecessarily pessimistic to start betting that there is no more juice to be squeezed out of the invention of the computer, just as the workforce shifts towards a generation that has been immersed in this general purpose technology from birth.
This is not our only hope of course, mankind is currently advancing into uncharted territory in materials science, robotics, artificial intelligence (AI) and genetic engineering to name just a few of the more high profile areas. Not all of it will be net progress. Some of these advances will raise questions about mankind’s role in the future – does the much debated approach of technological singularity, the moment when artificial intelligence becomes theoretically capable of recursive self-improvement, herald mankind’s obsolescence? Will our robotically enslaved descendants look back on James Cameron’s Terminator films as ludicrous prescience?!
Those who worry at what the advances being made in computing power may mean for mankind may not find much comfort in Carlson’s Curve – a genetics version of Moore’s Law. It is now estimated that making new organisms will be commonplace within a decade. The cost of reading, understanding and constructing the blueprints for life have come down dramatically. However, the potential of such developments is surely as exciting as it is terrifying.
The future remains profoundly unknowable, but investors able to look to the long term should try and keep the 1st Baron Macaulay’s words in mind when thinking about asset allocation.