Bank of England chief economist Andrew Haldane recently gave a well-written and wide-ranging speech “Growing, Fast and Slow” on the sources of economic growth. Haldane observes that for most of history living standards were relatively fixed. The average person in Biblical times or even much earlier did not live that differently than the average person in the 18th century. Then around the year 1800 something changed, and ever since the standard of living has been rapidly increasing (see chart below). This growth of course hasn’t come all at once and is not uniform across countries. For instance Haldane illustrates the difference in growth between Italy and China:
Consider two economies – China and Italy. As recently as 1990, the aggregate annual income of these two economies was roughly equal.2 Now let’s run these economies forward, with China growing at more than 10% per year, Italy by less than 1% per year. By 2014, what do we find? Due to the magic of compound interest, China is now almost eight times the size of Italy. Indeed, China creates a new economy the size of Italy every 18 months; an economy the size of Portugal every quarter; an economy the size of Greece every month; and an economy the size of Cyprus every week.
So what is it that drives economic growth in different places and times? This is of course something of a chicken-and-egg problem, (was it rising education and capital that drove innovation or the other way around?) but Haldane’s discussion of the issue sheds a lot of light on our current global growth situation.
To sum up Haldane’s explanation of growth, it is not just the rise of invested capital or innovation or the rise of literacy and so-called “human capital” but all of these things as well as less measurable factors such as strong social institutions and trust and long-term thinking or the ability to put off gratification until the future.
Haldane draws on the writings of Nobel-winning psychologist Daniel Kahneman who posited that the brain has two different sorts of thinking, fast and slow. In the period of stagnant growth before the Industrial Revolution, most people because they lived near subsistence level were driven by reactive, short-term “fast thinking.” After the rise of the printing press people became more adept in reflective, long-term “slow thinking.” This in turn led people to save and invest and educate themselves and to innovate, which drove increased economic growth. The worry is that with the popularity of Twitter and YouTube and smartphones we may be reverting to a shorter and shorter attention span and thus “fast thinking” that is less likely to produce the accumulation of financial and human capital that are essential to economic growth.
So where are we now? Are we on the cusp of another economic revolution, a digital revolution, or are we headed back towards stagnation? There is plenty of evidence on both sides. On the one hand education and demographics and economic equality are heading in the wrong direction in developed countries. On the other, we have a tremendous new efficiency from the internet and new technologies that span all economic sectors. In the end, Haldane concludes with the typical “two-handed” economist take in which he considers both sides but fails to come down strongly one way or the other. Nonetheless the speech is a fascinating reflection that provides a lot of clarity on the mind-bendingly complex issue of economic growth.
You might ask what are the investment lessons of Haldane’s thoughts on economic growth. It’s hard to pin down any practical investment take-aways from such a wide-ranging discussion. Perhaps acknowledging the many factors that drive economic growth and the intangible nature of many of those factors, we should give up trying to forecast economic growth and instead judge stocks from the bottom up, identifying securities that could survive and flourish regardless of the macroeconomic environment. I’m reminded of an interview with hedge fund manager Allan Mecham that I read recently in which he says, “I constantly try and guard against investing in situations where the intrinsic value of the business is seriously impaired under adverse macro conditions. We prefer cockroach-like businesses — very hardy and almost impossible to kill!”