May 15, 2007
Goldman Sachs and Deepak Lal
I have to admit that reading this precis of the views of Peter Oppenheiner of Goldman Sachs on the global economy, it does appear that he's been reading Deepak Lal's latest tome. (Which, for anyone interested in the classically liberal view of globalization I strongly recommend.)
Oppenheimer's central claim is that "looking back at history, we observe that the combination of technological change and globalisation has tended to be associated with periods of higher growth and rates of return on capital that have been long-lasting. In all likelihood, these favourable conditions may remain in place".
Periods of strong-growth and high returns, in other words, are not cyclical but structural. They can provide multi-decade periods in which the global economy moves on to a new level. It's a "different this time" argument with a twist, because it's different to some periods of recent history but similar to others.
No, not in any way the abolition of the business cycle, rather a step change inthe economy as new technology fans out across the globe.
Oppenheimer highlights two golden periods in the past 200 years. The first was Brunel's age between 1820 and 1913. This was an age of accelerating technological progress and rapid accumulation of capital stock in which per capita income in Britain rose three times faster than between 1700 and 1820.
Thanks to the achievements of people like Brunel, the industrial revolution was accompanied by massive advances in transport and communications. As a result of the explosion of rail travel, the introduction of transatlantic sea crossings and the development of the telegraph, costs plummeted. The price of transporting wheat fell from 79pc of production costs in 1830 to 27.5pc in 1910.
Those changes in transport costs also led to two huge agricultural recessions in the UK, first as the Latin and North American grain producers became able to export to us and then again later as the railways (and the people) opened up the steppes of the Ukraine.
Goldman Sachs believes that the full impact of the introduction of electricity in the 1880s was not felt until its widespread use in factories in the 1920s. The internet information revolution will no doubt have a more rapid impact but arguably the world is only just beginning to feel the benefits of the technological advances that began in the 1990s.
Pretty much my view of it all. As a personal example of the way in which costs have fallen dramatically and thus made viable things that were previously not. In the mid 1990s I was spending $4,000 or so a month on phone bills and another $2,000 a month on (small) office space in Moscow. This was in order to organise a small amount of trade in weird and exotic metals. With those costs it wan't really worth doing, we didn't make a profit substantial enough to cover our wages, for example.
Now, the fact that pretty much every business has email plus Skype means that we pay about $60 a month for telecoms and don't have office space at all. It's this change in technology which is driving globalization, not what Minister do or do not decide at trade meetings. And I'm with Goldman Sachs in thinking this has a lot further to go as well. Like, for example, those two reporters in India who now cover the Pasadena City Council beat for the local paper (by watching the internet videocasts of meetings) at a total cost of $20,000 a year. Less than the pay of a cub reporter if he were actually on the ground.
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Hmmmm... key here is "high rates of return on capital". Why were they then (if that was the case) and why will they now not be competed away??
Posted by: ChrisC | May 15, 2007 9:16:01 AM
Sorry, one more point, isn't capital investment both in the US and UK at historically low share of GDP?
(Which of course might well explain the high returns on capital but does not argue that waht we are currently seeing is rapid increase in the capital stock.)
Tim adds: The returns will be competed away: but only after productivity growth slows. Further, if you've got high productivity growth, then why do you also need high capital investment? You can expand production without having to invest.
Posted by: ChrisC | May 15, 2007 9:18:21 AM
But the Goldmans argument as you precis it is that the scenario is one of "rapid accumulation of capital stock" which doesn't appear to be happening? How is the productivity miracle to be susatined without investment?
Of course Goldmans have never ever been bearish of equity markets and certainly not at the top in 1999 when, erm, similar "permanent plateau" arguments were being made!
(Doesn't mean they're wrong this time - just that this is their song, and they never stop singing it...)
Posted by: ChrisC | May 15, 2007 12:02:48 PM
"Further, if you've got high productivity growth, then why do you also need high capital investment? You can expand production without having to invest."
I'm not sure about this. The table here suggests that productivity per capital unit has fallen since 1987, doesn't it?
Posted by: Matthew | May 15, 2007 12:42:58 PM
Moore's law (that computer capacity doubles every 18 months) suggests that productivity growth due to computerisation has a good future. The reduction of air transport costs should be having a similar effect though I doubt if there is as much potential for future reduction. GM/nanothechnology is another area where we may see effects on the same order as Moore's law. We are technologically at the point where it is possible to design orbital craft that will launch humans for a cost within 1 or 2 orders of magnitude of the cost of flying to Australia - in terms of energy once you reach Earth orbit you half way to anywhere in the solar system.
The technological changes of the age of Brunel are small compared to what we will see.
Posted by: Neil Craig | May 15, 2007 4:58:31 PM
"Brunel's age"; boy is he over-rated.
Posted by: dearieme | May 15, 2007 10:23:06 PM