| The author uses several analogies which are rather cutesy, but doesn't address the main issue in a salient way. All consumption comes from some combination of raw resources and the addition of technological input. In real prices, as the cost of raw resources increases over time, this means that technological innovation is not making up for how much of those resources are being consumed as compared to the population as a whole. At it's most basic we can calculate the rate of change as the amount of time it takes the average worker to buy a gallon of water or food and shelter for a single person. These are resources that aren't substitute-able, and are required for life. Other costs are rather nebulous (how much does a college education cost and what does this say about society now versus how much technological innovation is necessary for the continuation of the species)? So then the question then becomes, does the real rate of return for any particular company or the stock market as a whole assume that a potential future exists in which that real rate of return is actually possible to exist? Let's assume, in a model as simplistic as possible, that there is one stock (or market) that represents all of the world's companies that has a real rate of return of 2.5 percent per annum that is compounded once per year. As a sum total of world wide growth this would seem rather modest. The worldwide initial capital we'll assume is $100. So the growth rate is given by A = P(100 + r/n)^(nt) which would be in our case
(for an investment of 100 dollars) - 100x(1.025^10) = $128. So for the real capital stock of $100 to increase to a real capital stock of $128 some combination of things must happen - the amount of capital stock in terms of raw resources must increase in real terms and the amount of technology must increase in order to make the use of these inputs more efficiently. If technology remains constant then there must be an increase of 28% over ten years of capital. If capital remains constant then technology must make the current use of capital 28% more efficient. Compound return over time is concerning in the long run, and hand waving it away is either ignorant at best or disingenuous at worst. And capitalism is still the best distribution system we have come up with. Most of the world is working with a single overall social model, because it has been so successful, and we don't have a backup that's been shown to work in practice. My concern isn't in favor of Das Kapital or Marxism - who owns the product of labor and historicism over labor rights isn't as concerning as compound interest over all. Most economists I've worked with don't seem to think that this is a problem or that technology will magically free market a utopian future of plenty for all. This is an article of faith. |