Gross Domestic Product is a very simple recipe. It is simply labor force growth and productivity. If an economy has both of these things growing in the same direction, it is a powerful combination with a great deal of momentum behind it. In a world of declining birthrates and aging populations, productivity should be an urgent priority.  Sadly it is not, at least not yet.

Across the developed countries there is a lot of economic pain right now. I believe much of it relates to increasing levels of competitiveness coming from the emerging economies. As they become more competitive and more productive, the emerging nations are generating significant savings. Those savings can be invested in additional productive projects. You can see the positive loop this creates.

The response to this in the developed world has been, in part at least, to ignore it.  If you can’t or won’t be competitive, a credible alternative is to redistribute income.  It softens the edge.  However, as Margaret Thatcher once put it “the problem with socialism is that eventually you run out of other people’s money.” The end game of the redistribution state is playing out before our eyes in Europe.  The system only works if you have an unlimited ability to borrow.  This we know is not the case.

Here in the U.S. we have historically had a pretty productive economy. My hope is that we are not losing sight of the importance of this. Recently, I read a piece by a Nobel Prize-winning economist who wondered whether technology helped or hurt employment.  I would guess that it could hurt some forms of employment in the short run. However, would the world be better off if you still had to cross the country by train, or the Atlantic by ship? How about going back to the time before email or overnight package delivery existed?  I doubt that would be any sort of advancement.

My point is that you can’t go forward by going backward. Forward, to higher levels of productivity, is one of the ways that living standards have gone up in the history of mankind.  It means some things must get destroyed so capital can be directed to new things. Productivity creates savings, and savings creates a platform investment for future growth. Let’s not forget this.

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