Why aren’t we getting richer? The scarring tissue theory

Bankers will tell you that to get rich, you should rely on compound interests. Save up a little bit of everything you earn, and you will soon be wealthy. What they often fail to mention is that prices may also increase exponentially. Once you deduct this inflation from your gains, you may even end up losing money, despite the compound interests! This is not just theoretical: the current return on US government bonds is negative!

Most of our wealth comes through innovation, not saving. While the world population doubled from 1960 to 2000, the price of food fell by 50% due to the Green Revolution. The wheat you eat today has little to do with the wheat you ate in 1940. In the 1960s, we reinvented agriculture.

Alas food prices have again doubled in the last ten years. This was one important factor in the recent Arab Spring. If you have trouble feeding your family, you are vastly more likely to risk it all on a revolution.

In a recent essay, Peter Thiel blames this problem on science. According to Thiel, scientists might have become politicians in disguise. They are more interested in gathering support for their next grant applications, and building up their laboratory, than science itself. Many decades ago, Feynman similarly remarked that his colleagues pursued cargo cult science: an activity which is indistinguishable from science except for its lack of useful output. Government bureaucrats have probably never had so much power in science. In Canada, the new president of the National Research Council, who is not a scientist, decided to adopt a handful of projects at the expense of all others. Curiosity-driven research is frowned upon. Bureaucrats are eager to turn professors into managers who spend the bulk of their time looking for funding. In effect, in the war between individual freedom and central planning, central planning is winning. Ph.D. students who do not play the political games don’t become professors. Scientists are fast becoming indistinguishable from bureaucrats and politicians.

Thus,  scientific progress may be stalling. But scientific progress merely makes innovation easier. New science might enable new inventions, but without adoption, it is worthless. During the cold war, the Russian scientists were a match for American scientists, but the USSR could barely copy American innovations. And today, again, bureaucrats are winning. Worstall gives several insightful examples:

  • Why is it nearly impossible for individuals to purchase small equity in new ventures through sites like Kickstarter?
  • Why is online banking so convoluted? In Africa, they are using mobile phones to pay each other, across countries. There is much room for innovation but it is stalled by regulations.

Today, I could probably install solar panels on my house and generate my own power, but my electricity provider makes it extremely difficult. Last time I was in a hospital, it was full of red tape, and they are still talking about implementing an electronic health record (in 2011!). Classrooms today look just like they did in 1950, except that we (sometimes) have a desktop computer in the back of the class. I am still not allowed to use a Segway where I live, let alone more innovative transportation solutions.

My take: After WWII, everything had to be constructed. Entire countries had literally to be rebuilt. The baby boomers were, to some extend, starting from scratch. They could create new government agencies, build new roads… new industries… This is still happening in China, and has happened recently in Germany because of the reunification. However, we now have too much organizational scarring tissue. So why do we see so much innovation online? The computer industry, and more recently, the web, have much less scarring tissue compared to the mining, transportation or health industries. In effect, the web remains a frontier… and this is where the wealth is being generated. Soon enough, governments will successfully tame the web. But for now, we can enjoy Facebook freely…

So, how do we renew with prosperity? I believe we need some form of reboot. We need a major disruption. We don’t need to keep General Motors alive, we need to reinvent transportation. We don’t need to save Wall Street, we need to reinvent banking.

Further reading: W. Buxton, The Cost of Saving Money: The Folly of Research Funding Policy in Canada; Gordon Green and John Coder, Household Income Trends During the Recession and Economic Recovery; Arnold Kling, Scientific stagnation

11 thoughts on “Why aren’t we getting richer? The scarring tissue theory”

  1. There are lots of good analogies between biological systems and economic systems. Both are actually organisms built around natural ecologies, though you might not want to tell the humans who would be embarrassed by that sort of thing.

    To understand societies as organisms you need to give particular attention to their stage of development. Sure Europe after the war had fewer constraints. Everyone was eager to help too. It also had a crop of very smart macro/micro economists who did a fantastic job of matching the working parts of things. Today’s economists don’t seem to actually know how anything works and just play with wild theories and equations that don’t. There is major “scar tissue” binding them to ideas that were true for a while but stopped being true ~50 years ago, is one problem.

    The stage of development of modern economies in that they were built for ever more rapid expansion on ever cheaper energy and other resources. That’s what the historical record around which we built our modern society and academic institutions told us. Now that promoting growth as a limitless solution for all has completely backfired what we are most lacking is any other vision. The vast majority of the general population think planting some vegies and saving plastic bags will transform a global finance system that needs doubling real returns from the earth every 15-20 years, endlessly into the future. It’s not going to work, and there seems to be no place to hide.

  2. I hope the wealth generated from the internet revolution finds it way, in some form, to impact the basic sectors such as agriculture and alternate forms of energy which really need help.

  3. “The computer industry, and more recently, the web, have much less scarring tissue compared to the mining, transportation or health industries. In effect, the web remains a frontier… and this is where the wealth is being generated.”

    This is interesting. It’s likely that the computer industry will be the one, not only providing the wealth, but also the technology and innovation needed in the health and transportation sectors. See the recent blog post by Matt Mullenweg, founder developer of WordPress:

  4. I don’t think the computer industry has less scarring. The scarring is largely inherited from other sectors. What the computer industry has is more unexploited fanout. More open territory to organize. The scarring occurs when the open territory has mostly been taken and what’s left is zero-sum to take, in which case the defensive side can profit more than the offensive side. But because the law behind scarring is abstract and general, previous fence-building efforts affect the new ones because their generality shadows new efforts.

  5. Looking at this again made me realize my comment (#3 above) should have addressed what “scarring tissue theory” seems to correspond to in the natural stages of development observable in common ecological, business and biological systems.

    There is something that regularly corresponds to “scarring tissue” as described above, that does indeed prevent further growth. It is the physical organization of the system that grew, left behind as the product of the growth process. Growth in nature is invariably a process of building an energy using system.

    Growth is a construction process that self-organizes as it builds on itself over time. That leaves itself in place as “scarring tissue” that is both quite hard to abandon once its organization is complete and leaves little option for further growth too. Construction projects of all kinds reach that sort of natural end, the infrastructure that growth built.

    In the gestation of organisms that “scarring tissue” and end of growth is the organism, though. It’s not dysfunctional left over fiber at all, as suggested by “scarring tissue”. It does indeed exhaust the need for growth as the initial multiplication of parts is followed by their integration and refinement, then education, in making it ready for something else.

    What happens in nature is a “succession” of projects, with one project coming to completion as a preparation for its roles in **the next project**. So, the end of growth does naturally make further growth kind of useless. It ends growth so the organism can go on with **having its life** as its next project and perhaps reproducing.

    I agree with many of your observations above, and I think you’ll agree with my final conclusion, but you see my general picture of how the parts fit together is completely different. When growth becomes unprofitable, completing the system to work by itself allow it to survive beyond its growth.

    From my fairly broad study of this, this seems clearly to be the growth strategy of complex systems in nature that last significantly longer than their growth periods.

  6. “…I believe we need some form of reboot. We need a major disruption…”

    Interestingly, Joseph Tainter (http://www.cnr.usu.edu/htm/facstaff/memberid=837) back in 1988 published “The Collapse of Complex Societies”, based on his studies of ancient civilizations (i.e., Roman, Mayan, Angor). Essentially, his thesis is that, when a society becomes too complex, it can not react effectively to major crises.

    In my opinion, we need to dump the concept of “too big to fail”- if it is too big to fail, it is too big to be managed, and should be broken up into smaller, less-complex units.

    One of the things about the Internet is that it is really an amalgam of diverse interests, each with its own agenda. Opening to door to Government control is likely to destroy it…

  7. Considering the current battle over SOPA, and the constant attempts by the Gvoernment to define “appropriate content”, I would say that cnstant vigilance is called for…This is not only true in the US- many governments around the world are trying to control content or block “antisocial” behaviors.

    Governments everywhere hate to see aspects of the society over which they have no control.

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