Aging, Debt, and the End of Innovation

Typically provocative new Andy Xie piece out pointing to aging societies as being fundamental to why all economies are steadily catching "Japan disease". Further, Xie goes on to argue that innovation won’t save us from debt and death:

An economy ages in many ways. The most common are tied to the exhaustion of factors such as production-labor, capital and resources. When an economy begins to develop, labor is the abundant resource. Hence, it makes sense to develop labor-intensive industries. When labor surplus is exhausted, it makes sense to develop capital intensive industries. When capital stock is high enough, investment cannot drive growth anymore. Economists call it diminishing returns, or more of the same yields less output. This type of aging doesn’t worsen. Economists say a steady state equilibrium emerges when consumption and investment are balanced just right, sort of like permanent middle age.

Moreover, youthfulness is possible for a mature economy. Through innovation, an economy can produce more with the same inputs. This so-called total factor productivity (TFP) is an elixir for a mature economy. It determines how fast a rich economy gets richer. A 1 percent TFP is considered mediocre, 2 percent is good, and 3 percent is super.

Many economists argue for freer and cheaper economic structure to stimulate innovation. But, in the Internet era, innovations rapidly disseminate around the world. It’s not clear if innovation benefits can be contained in any country anymore. For example, even though the United States is more innovative than Europe, it hasn’t outperformed by much. Its celebrated prosperity during the Greenspan era turned out to be an old-fashioned bubble, not a reflection of superior innovation.

Read the rest here.

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  2. A New Age of Innovation?
  3. S&P Notices Mexican Math Doesn’t Add Up
  4. P.J. O’Rourke’s Revenge
  5. Innovation and the Oil Industry, Part II

Comments

  1. Ival says:

    So true. Honesty and everything recgoenizd.