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