From Ideas on Liberty
Originally posted: June 6, 2000
America is now in the middle of an unparalleled economic expansion. In the fourth quarter of 1999, the economy grew at the frenetic rate of 6.9 percent. The Dow has climbed upward. Even some so-called "serious people" have started to wonder if the business cycle, as we have known and loved, has been abolished.
I think we'll manage to have a recession sometime in the future. Maybe sooner than we would like. Of course, no one "wants" a recession, but it is necessary in order to bring order to the economy.
But, barring a major war for the United States or unforeseen catastrophe, the future, meaning the next 20, 50, or 100 years, looks very bright for not just the United States, but for the world.
The source of that optimism is the inexhaustible front of human creativity and innovation channeled by a mostly free-market system. Yes, I said, "mostly free." And the system is fueled by a capital market that is richer and more flexible than it has ever been.
All of this is encouraging, but in the modern era, every silver cloud has a dark lining. One of the new concerns of the day can be found in a recent headline in the New York Times: "Nothing Left to Buy?"
That is a frightening headline to the core.
The theme of the article was that with the new riches people are accumulating via the Internet and high-tech go-go stocks, people are running out of things to buy. All the extravagances have been exhausted.
People are getting bored, and that is not good news for innovation, which has slowed in comparison to the gains of recent years.
This is not the first story I've read with this theme. The usual example is a Manhattan or Silicon Valley party where the host can't find enough incredible items to awe the guests.
There's the ice-carved centerpiece, the rock star hired to entertain the guests, the rented Picassos on the walls, and so on. In the Times piece, one older rich guy, worth a mere $890 million, bemoans having to deal with having his own plane. The new guys, the dot-com kids, have fleets of planes. Ah, the vicissitudes of life.
I remember as a young man asking my father what Jackie Kennedy would find of interest about Aristotle Onassis. One factor he mentioned was that Onassis had a lot of money. But doesn't she already have a great deal of it? I asked. Yes, he explained patiently, but more is preferred to less. A giant diamond ring is nice. Two are better. Jetting to an island paradise on a whim is nice. Owning one is better. Or two or three.
It is endless.
This seminal truth about human nature is the central tenet of economics, along with there being "no free lunch." Economics is the study of infinite wants clashing with finite resources. Not just very big wants.
But some people have raised the possibility that even the rest of us, the great unwashed, may find our wants sated by our wealth. At a 3 percent growth rate, income doubles every 24 years. In a mere century, if the economy can grow at the fairly modest rate of 3 percent annually, we'll be 16 times richer than we are now.
Let that sink in.
Over the past century, real per capita GDP has grown about sevenfold. If we could have avoided the Great Depression and a few other economic potholes, we could have managed that 16-fold increase over the past 100 years. Surely, claim the pundits, if we were 16 times wealthier than we are now, we'd all be left trying to figure out what way-out chic décor we could add to our parties. We'd have solved the economic problem of infinite wants and finite resources. We'd have everything we could possibly want. Food, clothing, and housing would take a tiny fraction of our income, and we'd spend the rest on empty toys and impressing our guests with our decadence.
Every Man a Gates, That is, Bill Gates
Steven Landsburg, in his book, Fair Play, notes that at even 1.5 percent annual growth in real income, in 600 years the average American family will live as well as Bill Gates, on about $2 million a year. And that's $2 million in today's dollars, not inflated ones. Most folks find this calculation absurd, but as Landsburg points out, the average family of today lives better than the richest king of the year 1400.
Kings didn't have coin shops, delis, taxis, internet, cable, NetFlix, pizza delivery, and Smart Phones.
The king's meals may have been served on gold plates, but he didn't have the above. Those meals on the gold plates probably had more bacteria and with his arteries choked with cholesterol from all that mutton, he died young. Cardiology in those days was a bit primitive.
But if we could all live like Bill Gates, won't we be just sitting around with nothing to buy except a few wild indulgences? Will all our economic problems be solved?
To see the absurdity of this claim, go back 600 years ago to a shepherd on the land of that wealthy king. Imagine telling him that the average man in 600 years would live better than a king. Well, he'd ask, what would he spend his money on? You'd have everything. What would you buy, a gold shepherd's crook? A roof with extra thatch? Twice as many sheep? It would be impossible to spend all that money!
Today, we're in the same darkness with respect to the future as that shepherd. He couldn't possibly imagine what the world would be like in 600 years, and neither can we. What will we spend our money on when we all make $2 million per year? I don't know but it will be pretty amazing stuff. It will be whatever human creativity manages to come up in the next 600 years. New medical devices, new entertainment products, new ways to travel, to live, to share information, to sing, to dance, and to dream.
Most of us probably won't be around to enjoy it, but who knows? Maybe we'll grow faster than 1.5 percent and get there sooner. And some of those innovations will surely extend our life spans, even possibly in ways that make being old a lot more pleasant than it appears to be now. I can't wait.