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Page added on February 19, 2015
How short-term thinking hampers long-term economic growth
An alarming take on global economic growth was issued last month by McKinsey. In the past 50 years, according to a report by the management consultancy, the world has enjoyed a heady expansion, with the global economy expanding sixfold. But growth will slow dramatically, as the world’s population ages.
“Even if productivity were to grow at the rapid 1.8 per cent annual rate of the past 50 years, the rate of [gross domestic product] growth would decline by 40 per cent over the next 50 years,” McKinsey said, noting that this trajectory would make it hard for governments to meet “debt and social obligations”.
But there was a bright spot: if the world would only embrace integrated, pro-market reforms, alongside wild technological innovation, growth might accelerate again. So, if we want to see a 21st century economic boom, we need to unleash the creative juices in Silicon Valley, Shoreditch and Mumbai. Innovation is the answer.
It is a popular line for consultants and politicians to promote, particularly comforting in a world of inventions such as self-driving cars and 3D printing. But, if you want a different perspective on the growth debate, look at this week’s speech by Andy Haldane, chief economist at the Bank of England.
Mr Haldane has earned a reputation as a maverick among financial bureaucrats but he is influential in policy circles, particularly in the UK. And he thinks that central bankers — along with consultants — need to rethink their views on innovation.
He starts by echoing the point made by McKinsey: that the world has just enjoyed a boom. Until 1750, average annual economic expansion was so slow that it took 6,000 years for living standards to double. Since then, growth has accelerated, on the back of the industrial revolution, with a dramatic burst in the 20th century. Living standards doubled every 50 years.
There are reasons to hope this will happen again; the digital revolution is, after all, unprecedented. But there is a catch. When Mr Haldane looks at the past two centuries of growth, he concludes it was driven not just by innovation but also by rising levels of human capital (so, educated people) and social capital (trust). And he lights on something else: a shift in cultural attitudes towards the future.
Most notably, the industrial revolutions after 1750 occurred alongside a shift in people’s time horizons. Instead of living in a reactive, short-term way, humans amassed the confidence (and wealth) to plan proactively and patiently for the long term. That cultural change then created the all-important long-term capital and investment flows to finance innovation and growth.
But this may be changing, says Mr Haldane. The digital revolution is undermining social cohesion by widening income inequality. Meanwhile, our hyper-connected technology may be inadvertently shortening our time horizons. We are becoming less “patient”, less able to plan and invest long term.
“Technology, by itself, was arguably insufficient to explain growth in the past. It may also be insufficient to secure growth in the future,” Mr Haldane observes. To understand today’s feeble growth rates do not look just at debt or demographics; think about how the (mis)use of Twitter affects our brains or how investment managers (and their algorithms) keep churning stocks.
Now, orthodox economists might find this argument irritating. The problem with “soft” issues such as social cohesion or cultural time horizons is that they are nebulous. They cannot be plugged in to computer spreadsheets.
Nevertheless, Mr Haldane’s ideas deserve wider debate. We all know that humans are not as rational as economists or management consultants hope. On the contrary, as psychologist Daniel Kahneman observed, our brains have “fast” and “slow” modes of thought. And, as anthropologists know, cultural attitudes towards time vary. Modern western investors (and management consultants) might consider it “normal” to make 50-year projections about growth or to buy bonds on that basis; most societies do not.
Mr Haldane reminds us that economic history does not always proceed in a straight line. Today’s feeble growth and low interest rates may be a temporary, post-crisis pattern — but it could also mark the start of a new era. Either way, the debate about the long-term impact of technology and the wider social context of growth is one that urgently needs to be heard. Even (or especially) at a time when the market debate about central bank policy grows ever-more frenetic and skittish — and lamentably short term.
17 Comments on "How short-term thinking hampers long-term economic growth"
Plantagenet on Thu, 19th Feb 2015 3:14 pm
The whole idea that the digital revolution is undermining the ability to think and plan for the longterm is ridiculous. Look at this website—its full of people who are very interested in the long term state of the world and its economy, and who mostly share an interest in peak oil—-resulting in a mindset that sees severe problems coming as we approach limits to growth in the very near future.
dave thompson on Thu, 19th Feb 2015 3:38 pm
Yes plant I agree we are in the very near future.
Plantagenet on Thu, 19th Feb 2015 3:53 pm
You are in the very near future, Dave?
What’s it like in the very near future? Can you see what’s going to happen tomorrow in the stock market by any chance?
Makati1 on Thu, 19th Feb 2015 7:58 pm
First, “long term growth” is over, if you are talking about the world economy. Any growth is also sputtering to a halt. If you are talking about growth in energy per capita, it stopped growing in the 70s. If you talk about real incomes/purchasing power in the Us for the 99%, they stopped growing about the same time. Conventional oil peaked at least 10 years ago. Etc.
Predatory Capitalism requires economic “growth” to exist. Living a good life does not. Civilization existed at least 5,000 years without significant economic “growth”. Only the hydrocarbon legacy, and specifically oil, allowed the mold in the petri dish to explode. We are now reaching the limits and everything will contract to a sustainable size, one way or another.
keith on Thu, 19th Feb 2015 11:33 pm
Once you accept reality is not a Hollywood movie, then you see the evidence around you.
GregT on Fri, 20th Feb 2015 12:57 am
“You are in the very near future, Dave?
What’s it like in the very near future? Can you see what’s going to happen tomorrow in the stock market by any chance?”
Can you not see what a total jerk off you are plant? Grow up already.
Perk Earl on Fri, 20th Feb 2015 1:51 am
While we discuss these topics regarding peak oil and all that surrounds that topic, take a gander at this football stadium that’s being considered to be built in Carson, CA for both the Chargers and Raiders.
1.7 billion dollars!
Perk Earl on Fri, 20th Feb 2015 1:52 am
http://www.sfgate.com/raiders/article/Raiders-Chargers-ponder-L-A-move-6091167.php
Oops, forgot to include the link.
the_ultravixens on Fri, 20th Feb 2015 2:06 am
Any attempt to explain the history of economic growth which neglects energy usage and how that feeds back into the overall picture is missing a big part of the picture. Thinking which is constrained by a Cobb Douglas production function is of no use to active
Davy on Fri, 20th Feb 2015 6:54 am
Perk, Stan the dumbass Cronky, a Walmart relation, wants to move the STL Rams out of St Louis unless STL builds another dome. The other dome is a recent construction. It is this type of BAU behavior that ensures we will be unprepared for what is ahead. The huge mal-investment of useless BAU development is the last thing we need now. I am trying to think what function a dome will have in collapse BAU. It is much the same in Asia with the ghost cities and highways to nowhere.
rockman on Fri, 20th Feb 2015 7:12 am
Earl – A valid point. But there could also be a post titled “How long-term thinking hampers short-term growth”. Designing a plan for a new business, like a restaurant, by focusing on its market in 10 to 20 years is fine. But ignoring the necessity of immediately establishing a credit line sufficient to function for the next 12 months could make those long term plans meaningless.
As it most aspects of life there’s no perfect solution…some balance needs to be established. Let’s use our Eagle Ford Shale playing pubcos as an example. They have to present Wall Street with a continuous growth profile (if not quarterly then at least yearly) to not only establish an increasing market value but also to develop a credit rating sufficient to function. That develops a base for long term growth. OTOH if that effort ignores the longer term possibility of an oil price collapse as has just happened then growth could be severely crippled if not complete destroyed if debt has grown too large. So maybe there were a few pubco EFS players that took the middle road: limited expansion by borrowing just enough to drill into modest growth but not bury themselves into such deep debt they are unable to handle the debt load should there be a price collapse. Such a company today might see their stock take a deep dip but they’re still solvent and will survive until a better pricing period evolves.
But there’s always different agendas. Much of the managements of the EFS pubcos are old farts like the Rockman. Their end game time frame isn’t 10 – 20 years…more on the order of 5+ years. Thus their focus is rapid expansion which generates high salaries and nice cash outs on their stock options… in the short term.
On those rare occasions when the Rockman been asked to evaluate the viability of a pubco his first step was to ask the potential investor if they plan for a long term proposition or just jump in on the hype and jump out before it hits a brick wall. One can look at a company’s management’s age, board of directors and compensation plans to develop a guess. And the vast majority of time it’s not difficulty to see the potential for a slash and burn scenario. But that’s fine with most investors. Which is why I have little sympathy for those that invest according, get greedy, stay at the party too long and get slaughtered as many have in the last few months.
Many love those high returns on high risk investments…until they miss the exit window.
cOcOxxNuSS on Fri, 20th Feb 2015 7:27 am
Makati I agree with your comment. I just want to add that the term predatory capitalsim is redundant ;-). As one Cabaret Artist said: Capitalsim and predatory capitalsim is like water and WET water.
oilystuff on Fri, 20th Feb 2015 7:30 am
“Thus their focus is rapid expansion which generates high salaries and nice cash outs on their stock options… in the short term.”
That is correct, and precisely the reason that WTI oil prices have fallen 50%, the WTI to LLS spread has dwindled, there is not a 5 gallon bucket left in TX or LA to put oil, that it is going to be even harder for me, and your company, to sell oil in S. Texas until the surplus is used up, why drilling and completion costs increased 85% the past 6 years, and why it is impossible to lease land, anywhere, for less than a thousand dollars an acre anymore. The shale oil industry shot itself in the foot and me, and other producers in the US, in the back.
“The” Rockman may have little sympathy for this kind of short term, free for all spending spree the shale oil industry has been on, with borrowed money no less…I have no sympathy for it. It is dying a slow, miserable death right now and I say adios.
Davy on Fri, 20th Feb 2015 7:44 am
Having owned 2 small businesses one a bar restaurant the other a 1200 acre corn and soy farm I have a small business perspective. I was also an owner in a medium size family corporation so I have a view of that side of business. Our family business is a 4 generation business with long term planning. You must do the usual short term operations but we planned for long into the future and always did.
I left to comfort and security of the strong corporate family business 12 years ago. I entered the insecure difficult environment of small business. I found I was struggling day to day just to stay solvent. When you are small and on your own the system does not support you. This is because the government regulations focus on big and the corporate lobbies shape those regulations and business environment.
I spent 4 years in each business and somehow swam out of difficult financial situations in both. Small businesses are a struggle and long term planning a luxury of a few. The big corporations that are in a sense TBTF don’t have that problem. Many still practice short term planning. They are usually the ones that are buy and sell move on.
I am now a very small hobby farm engaged in doom and prep. I am going to work my way up to 20 cow calf pairs. I have a small garden, orchard, and grape vines. I am not interested in making money just getting by. My view now is long term but with the view BAU may end tomorrow.
rockman on Fri, 20th Feb 2015 11:06 am
Oily – Which is exactly why the Rockman left the pubcos 5 years ago and began working with a family owned privco. We’ve spent almost $300 million our share and not one penny was borrowed. Since there’s no stock play a very simple biz plan: drill wells that make an acceptable profit. And today the company is barely hanging on by shear stubbornness. I’ve had hundreds of $million at my disposal and finding suitable drill projects was very difficult – at $100/bbl so you can imagine what a struggle it is with current prices.
So now the Rockman will focus on EOR and ENGR. And that won’t be easy either since such approaches have been heavily pursued for over 40 years in thousands of fields in Texas. Thus the Rockman is trying develop new approaches that are way outside the box. How far outside the box: pumping air into buried volcanoes on the Texas coast that contain hundreds of millions of bbl of residual oils. Buried volcanoes??? Actually this was a very hot (pun intended) trend that was being developed about 100 years ago. And the Rockman is one of the very few “experts” that understands this EOR process. Not that he’s that smart but because nearly all the real experts have died of old age. LOL. But that is true. Most in Texas aren’t even aware these field ever existed let alone some individual ones have produced 10+ million bbl of oil.
Is the Rockman scrapping the bottom of the bbl? Hell, the Rockman has to use a ladder to just reach the bottom of the bbl. LOL.
oilystuff on Fri, 20th Feb 2015 6:24 pm
Rockman, good for you; I imagine spending someone’s money does have its advantages. I wouldn’t know.
The point I was trying to make is that anyone with skin in the game of actually producing hydrocarbons should be pretty pissed off at the shale guys; in the pursuit of the quick buck they have raised costs, made it more difficult to operate for everyone and made greatly abated the recent reduction in product prices that has hurt us all. They bought into their own bullshit and could not control themselves. In my opinion the shale industry needs to be regulated. I suspect they will be now, for lack of funding. That tickles me plumb to death.
I have drilled thru, on top of and around many serpentine plugs in South and Central Texas. Hilbig has had gazillions of gas circulated thru it. I worked on one the first fire flood attempts in Texas and when it would not combust we kept injecting air into it for years. There are no “experts” in the oilfield, Rockman. Only people who think they are.
rockman on Fri, 20th Feb 2015 10:21 pm
Oily – The shale players don’t irritate me as much as the Canadians with their oil sands. The US gov’t wouldn’t allow China, Japan etc to dump cheap steel into the US market and hurt domestic producers. But it’s OK for the Canadians to drive down domestic oil prices.
Firefloods are very complex. And I agree: many have tried it not really understanding that complexity. Check Amoco’s air injection project in S La.
http://www.ogj.com/articles/print/volume-94/issue-21/in-this-issue/production/technology-field-tests-assess-novel-air-injection-eor-processes.html
They actually induced a fireflood without meaning to do it. I spoke with an Amoco engineer who co-authored the publication: they thought they we’re just going to repressure the reservoir with air. They didn’t understand A) there was residual oil in the gas cap that would combust and B) the reservoir temp was high enough that spontaneous combustion would occurs. He told me about other planning f*ck ups that weren’t included in the publication. Much of what I’ve learned is from other people’s screw ups.
At Texas A&M they have the Ramey Thermal Recovery Lab in the PetEng department. Do you know why “Ramey”? I’ve yet to find a single geologist or engineer that knows. I know who he was and what he accomplished 55 years ago in a S Texas fireflood. It’s not so much that I’m an expert as that the dynamics are too complex for many to absorb.
And just what: a smaller promoter began an effort to repressure a serp plug in 2012. And guess what? Fell flat on their ass because they don’t understand the process either. I’m going to try to wrestle it away from them on the cheap and do it right. That is if I can convince my owner I know what the f*ck I’m talking about. LOL.