By Les Nemethy*
Allow me to start with two thoughts. First, there was once an economist called Thomas Malthus who projected that population would continue increasing, while resources were finite, hence humanity was doomed to famine and pestilence.
He was dead wrong. He, as well as classical economists, ignored or completely underestimated the role of technology in economic growth. Today, economists generally recognize technology as the most important driver of economic growth, even more important than capital accumulation.
My second thought is a memory, dating back to watching Star Wars as a teenager. As the starship encountered new civilizations in outer space, the crew decided that the single best explanatory variable to get a quick read on the state of advancement of a civilization was to examine its use of energy. When you look back at human development, from the discovery of fire to nuclear fission, this becomes self-evident.
I explore these two thoughts as a way leading into an important question: are we potentially on major breakthroughs in technology, ones with potential to accelerate GDP growth and lead to a more advanced state of development? (I will briefly discuss downside risks as well).
I have sometimes been accused of being a pessimist, after predicting that Covid would claim a million lives in the US to inflation not being transitory. This article provides the underpinning as to why I am a radical optimist. Although it always seems that the world is going to hell in a handbasket, the continuous advance of technology, combined with entrepreneurialism has, over the past millennia, led to steady economic growth and improvement in the human condition.
There is a case to be made that currently technology is improving both quantitatively and qualitatively. What do I mean by that? You might look at the number of patent applications or patents granted, for example, as a proxy for the quantity of technology being adopted in the world. The number of patent applications has been rising inexorably in each of the US, Europe and China, (with the latter seeing the greatest growth over the past decade).
Qualitative change is a more subjective, harder to measure concept. Think of some inventions as being quite useless. Others, such as electricity, have changed the world. I would argue that we may be on the cusp of a number of changes that may fundamentally change current notions of economics, scarcity and indeed, the human condition. I will briefly touch on three areas: energy, artificial intelligence, and biology.
Energy. Nuclear fusion has seemed to be forty years away for at least the last forty years. Fortunately, in the past few years it seems to have come tantalizingly close. Experimental fusion reactions have recently occurred in controlled environments where the reaction released more energy than consumed. But there are so many other breakthroughs happening in energy—from constantly improving efficiencies in harnessing alternative energies, to constant breakthroughs in battery technologies.
Artificial Intelligence. Artificial intelligence allows us to produce more with fewer factor inputs (materials and labor). It has the potential to vastly impact productivity, hence output per person. We are now on the cusp of computer programs creating new programs without human intervention—which would vastly speed up the rate of progress. And ChatGPT has set the world afire.
Biology. Advances in genetic engineering will eliminate or treat numerous diseases. We are on the cusp of technology that greatly increases lifespan and healthspan.
On all three points, I am only scratching the surface, just to provide examples of where potential for major breakthroughs are greatest.
Technology has always contributed to economic expansion and human well-being. We may be on the cusp of technological change of such magnitude that it has the potential to dramatically increase the rate of GDP growth and improvements in standards of living. Think, for example, of the implications of harnessing nuclear fusion, a potentially close-to-infinite and almost free form of energy… I don’t mean tomorrow, but within a decade or two.
I am the first to admit the downsides of these technological advancements. I’m sure very soon after man invented fire came the first arsonist. The greater the power, the greater the potential for abuse.
Nuclear power has huge potential as an energy source, but also to blow up the world. Artificial intelligence has the potential to turn on its human masters and enslave us. Genetic engineering has the potential to create a monster race, or virus epidemics. Perhaps Elon Musk is right that humanity needs to create a presence beyond planet earth to enhance its chances of survival.
In summary: if my thesis is correct, technology in the medium to long-term may well provide us with higher GDP growth and faster improvements in living standards; but remember, a basic principle of finance— risk and reward are correlated. Higher rewards beget higher risks.
*CEO Euro-Phoenix M&A Advisors, former World Banker
