Is the ghost of Thomas Malthus stalking the global economy? It sure seems like it.
Malthus was a key figure in the 18th and early 19th century in developing economics. (Darwin hit on the idea of natural selection after reading Malthus’ Essay on Population.) Malthus is best remembered for his grim argument that there is a tendency from “the wretched inhabitants of Tierra del Fuego” to “the beggars of Teshoo Loomboo” for population growth to outstrip resources.
His grim dynamic runs along these lines: Growing incomes lead to increased fertility and reduced mortality. That means there are more mouths to feed on the same land. Growth and income fall. The process repeats itself, over and over again.
The English economy pretty much behaved along the lines Malthus described from the second half of the 13th century until nearly 1800. So did most other economies. The paradigm shift came in the 1800s with the Industrial Revolution. A wave of technological innovations boosted economic growth and living standards. The English economy no longer reflected Malthusian theory. The innovations spread.
In the 21st century, the Malthusian worry revolves around the dramatic expansion of the global economy and consumer purchasing power in China, India, Brazil, Chile, Mexico, Russia and other emerging markets. The rise of the frontier economies is putting too great a strain on natural resources.
Jeremy Grantham, the chief investment strategist at GMO, argues in his latest quarterly newsletter that “we are in the midst of one of the giant inflection points in economic history.”
The era of abundant commodities is over. The era of sustainability is starting.
Mrs. Market agrees. The prices of all important commodities except oil fell for 100 years, until 2002, by an average of 70%, according to Grantham. Yet from 2002 until now the entire price decline has been wiped out by a bigger price surge than occurred in World War 11.
Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it
extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources… Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.
Grantham’s argument is persausive and his detailed argument well worth reading.
Grantham is a legendary investor. He has a wide following on Wall Street. His reputation is that he’s unusually prescient about long-term market forces and, at the same time, for being early in his judgment calls. If he’s right the paradigm shift will affect everything from how we judge a good economy to waves of future innovation.
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