A Look at the Short and Long Term

In an era of ever improving living standards, it’s hard to believe that growth was non existent for most of human history. But take a look at the very long run – and by that, I mean a few millennia – and that is what you’ll see. The chart below, from a speech by Andrew Haldane of the Bank of England called “Growing, Fast and Slow”, shows that there was no noticeable economic growth until the mid-1700s. The few extraordinary centuries we’ve had since – and they have been extraordinary -- are a relatively short blip in time. In fact, Haldane says, “If the history of growth were a 24-hour clock, 99% would have come in the last 20 seconds.”

We’ve gotten used to living standards doubling every 50 years or so, but for most of history, progress between generations was nearly imperceptible.  Before 1750, with economic growth averaging 0.01% a year, a doubling of living standards would have taken 6000 years. Life spans, calorie intake, and adult heights stayed the same for thousands of years. And yet somehow today, unbelievably, we live in an era where close to 99% of the stock of available information has been created this century.

Why should we look back at the previous centuries of no growth? Because it may help us better understand our present situation. There’s a lot of talk now about being in an age of “secular stagnation.” Since the 2008-09 financial crisis, the developed economies of the world have gone from 3% growth a year pre-crisis, to 1%. That has pessimists saying that high debt, worsening income inequality, and unfavorable demographics are paving the way for a New - and not very good - Normal. But the optimists say that new technologies will give us enormous potential to reshape our lives. So which is it?

Haldane doesn’t come down on either side here, but in typical economist speak, says it is probably both. More importantly, he says, forget everything. Widen your view. Step back from today’s zero interest rates and monetary policy debate and look back a few centuries.  Then you can really think about what fast growth is all about.

The neoclassical view is that lucky clusters of technological developments lead to fortunate periods like the industrial revolution or the digital information age. For example, in the late 1700s, the spinning jenny, water frame, and steam engine were invented in rapid succession and these fed increased investment in physical capital. But to Haldane, it is a mistake to view those technologies as random good luck or “manna from heaven.”  Those innovations happened, he says, because of the very earthly work of accumulating human, social, intellectual, and infrastructural capital over a long period of time. 

Haldane shows how a long wave of increasing literacy rates, decreasing violent crimes and wars, more democratically elected governments, improved legal and judicial systems, and well-developed institutions like (gulp) central banks set the stage for important innovations and growth.

But perhaps most surprisingly, he emphasizes that patience, the very human ability to think about the long-term, has been the key to income and wealth development. Like behavioral economist Daniel Kahneman, from whom he borrows his speech title, Haldane says that we humans are not very good at being patient or thinking long term. But somehow, we are getting better at it. For thousands of years, we lived at a subsistence level where merely surviving absorbed huge amounts of cognitive energy. Yet at different points in time, we gained more capacity to defer gratification today and accumulate capital for a more distant tomorrow.  And there is hope that we can get better at it still. Why? We don’t really know, but maybe each development in technology, education, and social capital helps to rewire our brains in a positive way.