In economics, as in life, it is easy to sweat the small stuff.
We focus on why share markets moved yesterday and forget to ask why shares should grow in value at all?
Bubble hunters worry that shares fail entirely to reflect underlying value. But long-term investors know that company shares offer the best exposure to the biggest driver of increases in living standards: advances in technology.
When companies invent things and harness new technologies, we should expect their share values to rise in line with the increased value of the output of that technology.
Whether you think shares as an investment class will continue to rise over time will therefore depend quite a lot on your view of where we are in the innovation cycle.
US Federal Reserve chairman Ben Bernanke put it this way at the weekend: “Many factors affect the development of the economy, notably among them a nation's economic and political institutions, but over long periods probably the most important factor is the pace of scientific and technological progress.”
Bernanke’s speech, delivered last Saturday at a graduation ceremony at Bard College, Massachusetts is well worth a read.
In it, Bernanke takes on the conclusions of “techno-pessimists”, such as US economist Tyler Cowan, who argue the world faces a new era of stagnation as all the low hanging fruits of economic and technological reform have been plucked.
The current IT revolution, on this reckoning, will not unleash the sorts of productivity improvements seen during the steam-driven industrial revolution of the 1800s or the electricity-driven boom in labor-saving devices of the 20th century.
“Extrapolating to the future, the conclusion some have drawn is that the sustainable pace of economic growth and change and the associated improvement in living standards will likely slow further, as our most recent technological revolution, in computers and IT, will not transform our lives as dramatically as previous revolutions have,” is the way Bernanke characterised this position.
And, he noted in his speech: “Well, that's sort of depressing.”
The Australian debate about declining productivity growth often takes on this sort of gloomy tone Bernanke is talking about.
But I suspect time will show that the early 21st century was a time of immense productivity gains thanks to technological advances such as the internet, iPhone and social media.
These new technologies have fitted so easily into our lives, they are almost invisible. Except when you sit on a bus - when it becomes apparent how addicted to our iDevices we all are.
Bernanke says there are good reasons why we tend to become blind to the possibilities of new technology.
“First, innovation, almost by definition, involves ideas that no one has yet had, which means that forecasts of future technological change can be, and often are, wildly wrong. A safe prediction, I think, is that human innovation and creativity will continue; it is part of our very nature. Another prediction, just as safe, is that people will nevertheless continue to forecast the end of innovation.”
I think there’s another element. Humans have an innate desire to control the world around them. We want, for example, the government to legislate for improvements in technology, by passing multi-billion dollar innovation programs.
But innovation is more often the product of chance and fluke. Innovations will keep happening, but they are incremental and take time to spread. It is a precious and fleeting thing, innovation.
There is good news, though, according to Bernanke. First, it is entirely possible we are still only in the early days of the IT revolution. He points to biotechnology as an area of particular future potential: “Robots, lasers, and other advanced technologies are improving surgical outcomes, and artificial intelligence systems are being used to improve diagnoses and chart courses of treatment.”
Bernanke is also a long-term bull on clean technologies, such as wind, wave, solar, electric and hybrid cars.
Compounding Bernanke’s reverie is the idea that advances in communication technology will speed up the spread of good ideas.
In the past, “the transmission of new ideas and the adaptation of the best new insights to commercial uses were slow and erratic,” he said. “But all of that is changing radically.”
Outlets like email and Twitter have made it easier than ever for scientists to share their findings and learn from each other.
Meanwhile, a focus on scientific and technological advances by developing nations, like China and India, has unleashed a boom in scientific research the likes of which has not been seen before. “The number of trained scientists and engineers is increasing rapidly, as are the resources for research being provided by universities, governments, and the private sector. Moreover, because of the internet and other advances in communications, collaboration and the exchange of ideas take place at high speed and with little regard for geographic distance.”
Bernanke is a man who has to listen to a lot of nay-sayers. Recent years have not been a hotbed for optimism and hope on the future of the world economy.
But that is the cyclical story. In the end, whether this is a period that leads to long-term increases in living standards will be driven less by the GFC, and more by the technological advances of the day.
And behind the cyclical gloom is a longer term story of hope, according to Bernanke.
“In short, both humanity's capacity to innovate and the incentives to innovate are greater today than at any other time in history.”
It’s something to keep in mind while other investors around you are losing their heads.