We live in a growth addicted society. Growth? Everyone is happy. No Growth? Problems arise.
There are many types of economic growth. Let’s focus on the two most important: 1) Real Growth, 2) Fake Growth.
Real growth is driven by technology, innovation, science, population growth, new markets, immigration, and increases in productivity.
Fake growth is driven by debt.
Fake growth is easy. Fake growth is the alternative countries choose when they focus on the short-term and ignore real growth. Fake growth wasn’t as necessary in the past because real growth was still occurring. Fake growth covers market inefficiencies such that an asset’s price does not reflect its true value. As a result, some assets may be over- or under- valued in the market, creating opportunities for excess profits.
Somehow, we’ve forgotten what causes real growth and we’ve forgotten that this fake growth is like putting a band-aid on a fracture. Not quite effective, it could relieve pain but it doesn’t solve the core problem.
The longer we wait, the more painful the injury (debt) becomes.
What has happened to real growth? How can we incentivize real growth?
Technology is what we use to create real growth. However, over the last decades, we have not been focusing on supporting technology.
What if technology does not save us?
Technology is defined as doing more with less. As technology advances, we can do more with fewer resources, time, and energy.
Yet, we’ve been going through a period of stagnation in the world of atoms, meaning aspects such as building and creating innovation have slowed down, relative to the world of bits (computers, cloud, digital).
We have not been focusing on what’s good for us (technology) in the long-term, rather we’ve been focusing on the short term (stimulus, printing money).
We need technology because it’s the true engine of progress and the economy.
The total U.S. total national debt recently surpassed an all-time high of $25 trillion. When money is borrowed, one borrows from one’s future self. Borrowing from your future self is assuming your future will be better. What if that future does not happen?
That is why, more than ever, we need to focus on encouraging and promoting technology. Technology is the only option we have to make that future happen. Yet, many people are doing the opposite by focusing on the short-term and not realizing how important technology is to a brighter future.
From 2009 to 2019, we saw the longest bull market in history. That seems like a sign of innovation and companies providing more value, right? Why would stock prices rise otherwise?
Many people became short-term focused.
Companies bought their shares (stock buybacks) to artificially increase the price and improve the EPS (Earning Per Share)
Strong corporate earnings
A stock market president who did whatever he could to keep the markets going.
Easy monetary policy (increasing money supply by lowering interest rates)
hink about how short-term is our focus when Apple, the biggest company by market cap (1.3 Trillion), keeps selling the same phones every year. According to Apple’s Financials, they bought $67 billion of their stock and have more than $200 billion cash in hand.
I don’t blame Apple. If they have no projects or ideas on what to invest in Bezos and Gates net worths’ combined, increasing shareholder value is better than doing nothing. That is exactly the problem. Some companies are valuing shareholder returns (short-term) over creating new ideas and projects (long-term) that will give the company and its shareholders’ real growth.
Over the last forty years, economic growth and wealth relied on financialization, using debt to create demand.
Economic growth used to be driven by population growth, innovation, new markets, and increases in productivity.
These traditional drivers have progressively declined, and debt-driven consumption became the major tool to generate economic growth. This process requires accumulating excessive levels of debt. The author of Extreme Money Satyajit Das says that “By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.”
Debt isn’t intrinsically evil as it speeds up consumption today against the promise of paying back in the future. Here’s where the problem begins. The availability of cheap money leads to spending whose long-term consequences are not well thought out.
Governments have borrowed way too much money and their borrowing levels are unsustainable. Debt-engineered growth may be at an end.
Growth also heavily relied on the unstable degradation of the environment using mispriced nonrenewable natural resources such as oil and water.
Financial engineering growth, environmental issues, and the scarcity of resources are threatening the end of a period of growth and expansion like never seen before.
We’ve entered a vicious cycle of growth where we can’t stop, even if we wanted to. Our current economic, political, and social systems primarily rely on growth. If there’s growth, everyone is happy.
What happens when there isn’t growth? What happens when this fake growth stops working?
Politicians, policymakers, and ordinary people do not want to even think or imagine the possibility of low or no economic growth because we depend on growth to generate taxes, keep society stable, fund public services, improve living standards, among others.
Many authors and renowned economists suggest how a period of no-growth or low growth may be better for the environment and the conservation of scarce resources. That is an alternate that could happen, but we should not hope or want to have such a period. I don’t want that.
I want growth, real growth.
Imagine if we achieved real growth. How would society look like? Let’s imagine we are in the year 2060.
Society focused on STEM and technology to create growth. Technology allowed us to do more with less time, resources, energy, etc.
How did we do this? We did three things:
Economic system: we kept supporting capitalism and a free society where technology was valued and encouraged to make progress.
Immigration: we let in the best people from all fields come to the U.S. to work on their subject matter. Other countries became jealous of the U.S. because of the quality of the people and how diverse they were, which allowed the country to have more innovative and unique ideas.
Entrepreneurship culture: entrepreneurs and inventors were supported to create inventions. They were regarded highly and were the ones who pushed society and progress forward.
Bonus: I asked the economist Tyler Cowen about what he thought we could do to create real growth. He told me we should also debureaucratize government, private sector, and nonprofits. We have too many regulations and layers of approval, which slows down progress.
By debureaucratizing our institutions, we’d be able to move faster and make change happen.
Ok, that is how we can make it happen. Let’s go back to the present.
What we need to do is focus on bringing back real growth. How? By encouraging technology.
Technology brought economic growth, better living standards, increased productivity, and a world like never seen before.
If we want to speed up the rate of technological innovation, we need one key component: science.
Science is crucial because it is what causes technology to improve. We need to encourage more investment in this area, but most importantly we need to encourage young people to get involved in science careers such as engineering, science, and even math.
We have an absurd over allocation of talent in fields such as finance, law, and business. The justification for this is that it improves the allocation of resources in the factors of production. But how can we improve it if there are no factors of production? That is why, more than ever, we need more people in STEM fields to create and build that future we all want.
I’m not a person who has always liked science. I was introduced to this idea of encouraging science by an entrepreneur (Naval Ravikant). I’m also becoming more interested in science because science is the engine of both technology and the economy. For example, the internet, the telephone, the tv, among many other inventions came from the field of physics.
Many entrepreneurs think they need to have an idea and start “hustling.” The best and most successful companies don’t come from business schools but from science and engineering departments. According to an Approved Index study of the 100 top billionaires, 22% studied engineering, and 12% studied business. I may be wrong, and there’s also a high probability of survivorship bias, but as I look to the future, it is more likely that more billionaires will have a STEM degree than a business degree.
The most fascinating entrepreneurs are the ones who combine business and science to create unique projects. For instance, Elon Musk, who majored in physics and business, has innovated with rockets, electric cars, and underground tunnels. Or the hedge fund manager, Jim Simmons, who is known as the “smartest billionaire” contributed to the development of string theory.
True innovation, development, and growth all come from an interesting yet unusual combination: Science & Entrepreneurship.
If we’re able to bring back and encourage the combination of science and entrepreneurship to bring back real growth, we also need to think about what composes a “good society.” Growth cannot be our only goal.
A good society will be one where everyone can enjoy the material foundations of a good life. A good society will be one where one can be made better off without making someone else worse off. A good society will be one where we acknowledge that a realistic narrative of a good life will be crucial to creating a better life and more sustainable society.
Let’s imagine the better future we all want so we can all start working towards it NOW. The future doesn’t begin with politicians, but with risk-takers, doers, and optimists. Let’s make it happen.
If you’re into interesting ideas (like the one you just read), join my Weekly Memos., and I’ll send you new essays right when they come out.