September 24, 2004
Malthus, The Club of Rome and others have it wrong
Malthus, The Club of Rome and others have it wrong when they see the world as finite and fortunes shifting from the rich to the poor while at the same time the rich get richer and the poor get poorer. Interesting contradiction there! China will eat America's lunch but the rich will get richer and the poor will get poorer.
There is no economic sense behind either statement. They are based on the fallacy of limited resources and on the fallacy of the economy as a closed, zero sum game. Let's take a simple, easy to understand example. Our Mother Earth has a fixed size. We will not be able to make her get bigger to support the increasing number of people on Earth. Clearly, with the agricultural methods of Malthus' day, food would soon run out and we would all starve. It hasn't happened and it does not look like it will and reason is simple, we added information to farming. Information in the form of better seeds, information in the form of pest control, information in the form of better machinery, information in the form of better fertilizers, better irrigation, better marketing. Today a tiny proportion of Americans are farmers and they not only feed America but a large part of the world. If in the days of Malthus it took one acre to feed ten people (I don't know, I'm making up these numbers), then doubling the population would require doubling the acreage to prevent famine. What Malthus didn't foresee is that acreage can be replaced with information. The more people the more information we can produce. It's that simple!
Human civilization has gone through various economic phases. Whatever is the centerpiece of one economic era is not the centerpiece of the next. Land was the centerpiece of the agrarian economy and landlords (kings and noblemen) were the rich and powerful because they owned the land. Once the industrial revolution replaced the agrarian society, land lost pride of place to capital. No longer did you need vast areas for farming. Now you needed to concentrate workers in as small a space as possible to make efficient use of capital. That's how big industrial cities were born. In the industrial age the owners of the capital (the robber barons) were the rich and powerful.
Now we are in the first innings of the information revolution and, just as in the past, pride of place is going to move from capital to something else. Creating a steel mill takes a lot of capital but setting up a web site takes amazingly little capital but quite a bit of information. Pride of place is moving from capital to information and that is the most important aspect of the information revolution. If you don't understand that then your opinions about the economy will be wrong. It's that simple!
BTW, in the information age, the owners of the information (super geek Bill Gates) are the rich and powerful. The good news for the rest of us is that while land was limited and while capital is hard to find, information is abundant and often free which means that the vast majority of the present and future population need not be serfs or salaried workers. This is how information makes us free, not the news of the latest political happening but the information that helps us make a better mouse trap.
Let me illustrate with an industry that didn't exist 10 years ago. This industry was not invented in India or in China. This industry is not based in India or in China. This industry was invented, developed and based in good ol' USA for one simple reason. That's where the information required to create the industry existed. I bring you eBay!
In case anyone still has doubts, here is how the market has allocated wealth. The top eight American billionaires are not members of the Industrial revolution, they sell knowledge and services:
Bill Gates (Knowledge)
Warren Buffett (Investing)
Paul Allen (Knowledge & Investing)
Alice, Helen, Jim, John, and Robson Walton (Retailing)
You could make a case that the 9th does belong to the Industrial Age, after all Michael Dell does make hardware, but hardware for the Information Age
And 10th we are right back in the Information Age with Larry Ellison
Gates again tops Forbes' richest list
Internet commerce is still fairly new but it is working hard at churning out billionaires as well, five of the top 400 are Internet entrepreneurs:
It's time to take the blinders off and recognize what is happening. The market does not distribute wealth at random. Wealth goes to those who produce a benefit for mankind, to those who provide what people want to buy.
When the world was poor, food was a necessity and the farmers, or rather, the owners of the land, were the rich and the powerful. Today food is no longer a necessity, it is a given, at least in affluent societies. The same has happened with the products of the Industrial Age, we still use them but they no longer rank as necessities, they are now a given, commodities.
As the world grows richer less developed countries learn to make Industrial Age products but these products are no longer as valuable as they used to be when they were first made in the "industrialized" countries. As the production of Industrial Age products moves offshore, their place is taken by newer products and services. How do we know which they are? Easy! They are valuable enough to produce billionaires: retailing, investing and knowledge!
There's a better way to gauge the relative value of products and services and the BMW Methods helps. The more valuable something is, the more people want it and the faster the producer grows. Mike's charts show the average CAGR of all the companies he follows. The higher the average CAGR, the faster the company is growing, the more valuable its products and services are for the buying public. How else would a company grow?
Of course, this is not a perfect meter because you have better and worse managers who skew the results but average out the various companies in any industry and you're sure to notice that the higher the content of knowledge the faster the industry tends to grow. Here is a quick sample using 25 year charts:
Of course, this is not scientific proof but I suggest you play with the numbers. What this tells me is that importing cars from Japan could be a good thing but importing medicines from China would be worrisome. The reason is simple, the value added by knowledge is far greater than the value added by capital.
Caracas - Venezuela
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