From www.businessinsider.com:
Here's Why Our Long-Term Growth Expectations Are Absurd
Republican presidential contender Tim Pawlenty has put forth a plan in which he hopes the US economy will grow at 5% a year for decades.
Over the short-term, economies certainly can grow 5% a year, or even faster. And Pawlenty's projected growth rate seems achievable in part because, in 2006 and 2007, the global economy grew at 4.5% a year. Thanks to that happy growth spurt, in fact, economic growth of 5% a year seems not just achievable but normal.
But lest we all become too enamored of the idea that we can grow at 5% a year forever, it's worth pointing out that we can't. Over the long term, this growth rate is not just unlikely--it's impossible.
Math. You're doing it wrong.
It's seemingly become fashionable to flaunt one's "understanding" of geometric series/exponential growth as a way to predict the future. In every example I've seen, the person making the argument only makes themselves look stupid or deceptive (take your pick which is worse), and this article is no exception.
The author cites an example based on ancient Egypt, which lasted for about 3,000 years. He points out that at 4.5% growth, if the entire possessions of Egypt ca. 3,000 B.C were about a cubic meter, then by the year 0, Egypt's possessions would fill billions of solar systems. Congratulations, you know how to use a calculator and apparently nothing else.
There are two fundamental flaws here. One, I think, is the author being purposefully misleading: that's the casual interchanging of "forever" with other, finite terms. For the record, I have no opinion on Tim Pawlenty. I haven't read enough about him yet. But certainly he isn't predicting 5% growth forever. I doubt seriously whether he's even projecting beyond 2050, let alone for another three thousand years.
So what does "long-term" really mean? Singapore achieved roughly 8% annual growth over 40 years starting in 1960. Granted, they started much smaller than the U.S. is now, but if that were the only argument against us achieving 5% annual growth, it would predict that we'd achieve some small fraction of a percent.
The other error, where it seems likely that the author is simply stupid, is the application of mere physical size to wealth. Certainly, if Egypt had one reed boat in 3000 B.C., and wealth were measured only in terms of reed boats, then under any integer annual increase, the world would have been swimming in reed boats within a few hundred years.
But this measure of wealth is simply idiotic. I am far better off than my great grandfather, and it is most definitely not because I own some multiple of the number of horses he possessed. Or buggies. Or clothes, or homes.
My great grandfather died of cancer. So did my grandmother. I've had cancer, but I survived. What is the value of that? Is it ten times the value of a horse? One hundred times?
The rulers of ancient Egypt (in every movie I've ever seen) had people to fan them to keep them cool. I enjoy air conditioning, in my home, my car, and my place of work. Would ten times as many people fanning the pharaoh make him as comfortable? How about a thousand?
One hundred years ago, only the few people who had access to a university library had a significant source of knowledge available to them, and it required substantial work to take advantage of. Today, roughly two billion people have access to the internet, with everything from wikipedia to the Khan academy. What is the value of that?
Physical resources are not our main sources of growth.
It's easy to predict that we will run out of oil. Take any usage of oil that is greater than the fossil method of producing it, convert it to a percent usage per year, then add enough zeroes to the time scale. If we use just a few barrels of oil a day more than the fossil method produces, then we'll run out in about a billion years. You can start panicking now. What's harder, but the only reasonable thing to do, is to try to predict what we'll do next. People who predict that the end of oil means the end of civilization are like people in 1850 New York wondering where they'd get all the horses necessary to power the city in 1950.
We are experiencing incredible growth now, and that growth feeds upon itself. As we need fewer and fewer resources to keep ourselves fed and clothed, we have excess that we can dedicate to moving forward faster -- or to nascar and lingerie football, the Transformers movies and liposuction.
Yes, there are likely limits to growth when considered in terms of forever. Forever is a very long time. Even a hundred years is far too long to think about. It makes as much sense to define public and economic policy in terms of 2111 as it does to drive your car based on how the road turns one hundred miles ahead. The truth is that no one knows what will be going on one hundred years from now -- not even close.
It makes sense to do roughly sensible things over the time frame that we can see, and not do obviously stupid things in the present. One stupid thing to do would be to act as if the world is in a steady state, or decline even, when we have obviously been managing exponential growth -- at some positive rate -- for hundreds, if not thousands, of years.
