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State of Global Markets 2017 - Report

The Most Exciting Period of Human History Is yet to Come

Politics / Technology Feb 10, 2017 - 02:12 PM GMT

By: John_Mauldin

Politics

While complexity mathematics and information theory may be relatively new, the general concepts contained in them were well known to previous generations of economists dating back to Adam Smith.


Matt Ridley, who you’ve met before, is one of my favorite economic writers. He authored the powerhouse books The Rational Optimist: How Prosperity Evolves and The Evolution of Everything.

I have literally scores of pages underlined in The Evolution of Everything and am especially enamored with Ridley’s chapter on the evolution of economics.

What we see is not the result of human design

This decentralized emergence of order and complexity is the essence of the evolutionary idea that Adam Smith crystallized in 1776.

Yet, when Smith wrote his Wealth of Nations, there was little good evidence for his central idea that free exchange of goods and services would produce general prosperity.

Adam Smith is no paragon. He got plenty wrong, including his clumsy labor theory of value, and he missed David Ricardo’s insight about comparative advantage, which explains why even a country (or person) that is worse than its trading partner at making everything will still be asked to supply something, the thing it or he is least bad at making. But the core insight that he had, that most of what we see in society is (in Adam Ferguson’s words) the result of human action but not of human design, remains true to this day and under-appreciated.

They simply got it wrong

The really big thing that both Smith and Ricardo—and Robert Malthus and John Stuart Mill, and all the other British political economists of the time—missed, however, was that they were living through the Industrial Revolution.

This was because their world view was dominated by the idea of diminishing returns. So Smith’s division of labor, and Ricardo’s comparative advantage, could improve the lot of people only up to a point. These were just a more efficient way of squeezing prosperity out of a limited system.

Even after living standards began to rocket upward in Britain from the 1830s, Mill saw it as a flash in the pan. Diminishing returns would soon set in. In the 1930s and 1940s, John Maynard Keynes and Alvin Hansen saw the Great Depression as evidence that some limit of human prosperity had been reached.

The end of the Second World War would bring stagnation and misery. Again in the 1970s, and in the 2010s, there was widespread talk of sharing out the existing wealth of society rather than hoping living standards could go higher.

Yet, repeatedly the opposite happened. Far from diminishing, returns kept increasing thanks to mechanization and the application of cheap energy.

Even Ricardo’s wheat yields, from British fields that had been ploughed for millennia, began to accelerate upward in the second half of the twentieth century thanks to fertilizers, pesticides, and plant breeding.

By the early twenty-first century, industrialization had spread high living standards to almost every corner of the globe, in direct contradiction to the pessimistic fears of many that they would forever remain a Western privilege. China, a country mired in misery for centuries, and plunged into horror for decades, sprang to life and saw its billion people create the world’s largest market.

The most exciting period of human history is yet to come

Even though contemporary economists pay lip service to the marvels of technological change, I think that—like the classical economists mentioned above who missed the fact they were tumbling into the Industrial Revolution—current economists vastly underestimate the amount and variety of change that is going to occur in the next 20 years.

Conservatives and free-market economists are going to have to completely rethink their concepts of what government should be and how society should be structured. It is not clear that we will be up to the task. I’ve said it before and I’ll say it again, the next 20 years will be far and away the most exciting period of human history. You won’t want to miss it.

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