There is a popular idea that economic growth only comes from stimulus. Wrong!
This mistaken view of economics can be costly to the average investor. The US economy, and others that follow a free market approach, grow through population increases and productivity gains. Normal trend growth in the US, allowing for inflation, is a bit over 3%. Even in the absence of any stimulus, we would eventually get there as various factors reverted to mean levels.
This is difficult to explain without a full course in economics, so today I will offer an alternative approach. Any reasonable person can see the changes in societal well being, but it is easy to forget. There is a thriving industry claiming that traditional economic statistics overstate the economy.
Let us consider a simple example that we can easily understand as a starting point.
A Simple Example
I was already thinking about this subject last week because of a promotional item that I received in the mail. It reminded me of an interesting theme of progress -- the calculator.
When I was a college student, we used slide rules for calculation. I was a student engineer at Union Carbide. They had a few mechanical calculators that did rudimentary functions (with a lot of noise). The calculators were perched between two desks, shared by the engineers on either side to save on costs.
A few years later I was a quant guy in the Michigan PhD program, hoping for my own calculator. They now had electronic versions, and some could perform the basic math functions and even store a value in memory. That was my minimum spec, and I wanted one for less than $100. That would be the equivalent of over $500 today. The price point was finally met with a device about the size of a paperback book, requiring a few C batteries to power it.
Both of these devices were major improvements, increasing user productivity tremendously. Before that, we wrote down columns of figures and did the math by hand.
The same engineer could do much more work because of the improvement in technology - - a simple concept.
My alert readers have already guessed the conclusion of this little story. The promotional item in the mail was a featherweight calculator, superior in function to the model depicted above. It has a small battery that will last forever. Best of all, it was free.
And this theme does not even explore the added value of the spreadsheet or computer programs that combined the required calculations.
And Now .... Add the Internet
Thanks to Al Gore (!!) we now have a new dimension of productivity. I am astounded to discover that there are more iPhones sold each day than babies born, and I don't suppose that the 15 minutes of porn watching adds to productivity, but those are just the sidelights.
I can do work in minutes that would have taken days in a library a few years ago. Take a look at these interesting facts from MBAOnline.com and I'll provide an investment idea in the conclusion.
Created by: MBAOnline.com
All of this would have been unthinkable a few years ago -- an explosion in communications and information access.
There are several important ideas to think about.
- Economic growth is fueled by technological progress.
- Every major corporation has improved business with improved robotics, communication, planning, customer acquisition and service, logistics, supply chain, and I'm just getting started.
- These elements are part of the explanation for high profit margins, and also for the recent success of some companies in bringing jobs back from offshore.
- While it is easy to forget, the quality of life is better through progress -- better in agriculture, motor vehicles, clothing, health care.
Those with offbeat theories of economics need to explain this progress. The rest of us can enjoy investing in companies that participate in economic growth and the technology companies that help to create it.
I invite readers to weigh in with their own favorites!