It is very popular among economists to bring up the Red Queen in Lewis Carroll’s Through the Looking Glass. Notably when assessing the challenge of China and India, to the old world economies of Europe and the United States.
In case you have forgotten.
The Red Queen is Regent of a “Fast” country.
In the book the queen is somewhat puzzled by Alice’s “Slow sort of country“.
The Red Queen tell Alice “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” .
Based on this the Call to arms we hear from economists usually goes something like this:
The western world needs to pull up its collective socks, fix its educational system, think long term and reallocate its resources into less frivolous, less instant gratification endeavors. We must stop dilly-dallying and act like a grown up if we want to preserve our privileged position in the world.
This is not true, we are in great shape.
As a society we have climbed the hill and we can now pretty much coast for the duration.
Few economists and fewer politicians have realized it, but we have entered a new economic phase. Now the current structure of the economy combined with Moore’s law is giving the economy such a tail wind that a substantial yearly growth in the standard of living is not only secure but accelerating almost regardless of what we do, bar nuclear doomsday.
Let me explain. Economists notably Monetarists likes to talk about Units and Price. The economy is made up of a lot of different Units that are transacted at different prices and the GDP is the sum total of all those. Inflation is the delta weighted average of all those prices and real growth is the weighted increase in all those units. Simple as that.
The different units are affected by Moore’s law to a varying degree. Units like Computers, Cell phones and MP3 players follow a Moore’s law almost directly whereas barley, pumpkin and electricity production is affected to a significant lesser degree.
The key point however is that everything is affected to some degree and this portion is growing each year.
Bio Tech is currently exceeding Moore’s law as the capabilities afforded by compute power transformed the industry and a huge catch up is underway. This translates directly into health care units and we will see the effects over the coming decade. We are talking about big chunks of the economy.
Entertainment is being transformed as CGI replaces physical models and actors. Not only in animated movies like Toy Story but all films are affected to a varying degree as A Night at the Museum will attest too. The design content of a car or a dish washer is going up and the cost of the parts is falling relatively. Everything is being transformed.
The key is the content of Moore’s law in the units of the economy and the mix of those units in their totality.
This is where the western world excels. We have transformed our economy towards the elements highly driven by technology acceleration. We spend less than 5% on food and groceries compared to 70% for the developing world.
This transformation is what allows us to coast and help the rest of the world with little impact on ourselves whereas the less fortunate geographical areas has a long haul in front of them.
Assume a conservative 20% extraction of our economy follows Moore’s law 100% and that this portion of the economy continues to grow at its historic rate of 10% annually. The 10% is what we have seen in the pure areas like Computer’s and Communications so it is probably a good if somewhat conservative assumption.
Combine this with the normal 3.0% general price inflation we have seen over the last decade and the result is truly astounding. Based on Moore’s law alone our economy will grow at an annual clip of 2.5% in constant dollars, we will experience a raw 8.7% deflation measured in prices of unchanged units and unit mix and a whopping 15.6% increase in unit based standard of living. Every year regular as a clockwork. I repeat, this is not a prediction for the overall economic development of the western world this is the impact from Moore’s law alone.
Rather than fret over our lack of “seriousness” we should watch more movie preferably download them from home, buy iPods in bulk, substitute teachers for technology, replace psychiatrists with medication. In general do everything we can to tilt the economy toward the amazingly free ride afforded us.
All this from shrinking transistors on a die.
Pat Haggerty co-founder of Texas Instruments said back in the 70′s that Semiconductor would replace oil as the “fuel” of the 21′st century. Astounding prescience.