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Is There a Formula for Prosperity?

Jan 12, 2017

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Can you boil economic prosperity down to a simple formula?

It's the ultimate question. The economic version of, "what is the meaning of life?". Perhaps I'm setting myself up to fail in asking it. In fact, almost certainly so. But let's not shy away from a challenge!

According to Charles Hugh Smith, writing for mises.org last week, there is a formula for prosperity. It's simple, too. Far, far simpler than most economic formulae. According to Smith, it comes down to this:

Prosperity = Abundant Work + Low Cost of Living

He elaborated further in his analysis. (Full piece here if you're interested.) The argument comes down to this, though:

  • If we look at eras of widespread prosperity, we find that work is abundant, private enterprises and trade are vibrant, the currency is stable, the cost of doing business is low, inflation and the cost of living are low, so even low-wage households can slowly improve their lot.

    This doesn't just describe America in the 1950s and 1960s - it also describes the Tang Dynasty in 700 A.D. China and the Byzantine Empire in its heyday. These are the core dynamics of economies throughout history that generate and distribute widespread prosperity and opportunity.

When you boil it down, this is just another way of saying - of "formalising" - the guiding principles behind everything we write to you about at Capital & Conflict. A free market, economic liberty and sound money lead to prosperity. Why?

Sound money can't be debased or used as a tool for inflating away debts. It keeps a lid on runaway inflation and the cost of living. A free market encourages competition, which leads to falling prices and the birth of new industries. And economic liberty means people are free to take advantage of those opportunities (abundant work).

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Perhaps it is a formula for prosperity. But when you apply that formula to an idea we were talking about last week, increased automation, I think it's even more illuminating. And it explains why some people see AI and robotics as huge benefits to society, while others fear them.

That's because automation will affect both the work element and the cost of living side element. But it'll affect them differently. And depending on your viewpoint, that explains why some people see automation as the answer to everything or the virtual antichrist.

Increased automation will lead to a lower cost of living. That's the whole point. By automating processes companies can provide goods and services cheaper, faster and more efficiently.

For instance, last week Japanese insurance firm Fukoku Mutual announced it is beginning a drive to automate parts of its business. These are "white collar" jobs that're being automated. But the economics certainly work. The firm will spend $1.7 million to install the system. It'll save $1.1 million per year in salaries. And it'll improve productivity by 30%.

Productivity gains lead to lower prices for consumers. Multiply that across the economy and you get a much lower cost of living. That's a tick for one part of our formula.

And it shows that if you have a decent expectation of work in your field (for instance, if you work in software or other fast growing tech industries), then you'd associate automation with prosperity. But what if your industry is ripe for disruption? What if you don't have the expectation of abundant work?

Well, then you'd see automation differently. Probably as something that would make the world less prosperous. Those two competing perspectives are what make the debate about automation both interesting and often heated.

It is worth remembering, though, that we aren't the first society to have to grapple with these questions. There are countless examples of worries of "technological unemployment" becoming an issue. It's worth pointing out that at no point did the world end in any of these situations.

For instance, in 1927 the US secretary of labor, James J Davis, gave a speech that - were you to change the odd word here and there - would resonate today. He had this, among other things, to say (my emphasis):

  • Every day sees the perfection of some new mechanical miracle that enables one man to do better and more quickly what many men used to do. In the past six years especially, our progress in the lavish use of power and in harnessing that power to high-speed productive machinery has been tremendous. Nothing like it has ever been seen on earth. But what is all this machinery doing for us? What is it doing to us? I think the time is ripe for us to pause and inquire.

    Understand me, I am not an alarmist. If you take the long view, there is nothing in sight to give us grave concern. I am no more concerned over the men once needed to blow bottles than I am over the seamstresses that we once were afraid would starve when the sewing machine came in. We know that thousands more seamstresses than before earn a living that would be impossible without the sewing machine. In the end, every device that lightens human toil and increases production is a boon to humanity. It is only the period of adjustment, when machines turn workers out of their old jobs into new ones, that we must learn to handle them so as to reduce distress to the minimum.

Are we living through a similar "period of adjustment" today? I'd say we absolutely are. But it's worth remembering the history of technological advances: this isn't as unique a problem as we like to think it is. That's not to downplay it but to contextualise it.

It's also worth keeping in mind that there's a vital difference between trying to slow the pace of innovation down and helping the technologically dislocated out. The former is impossible, while the latter is achievable. It starts with education and reforming people's expectations. And it leads all the way to what our own publications seek to do: help you understand, anticipate and act to profit from large scale change.

Please note: This article was first published in Capital and Conflict on January 10, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

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