A case study in realistic futurism: Peak GDP
We build all our economic, political, and personal financial paradigms wholly around the concept that GDP will always increase. It will not.
The (self-taught) engineer in me likes explaining more than conveying. But the writer in me knows conveying is more powerful.
So here is the first of several case-studies in realistic-futuristic thought processes that I’ll publish in the coming weeks. Through them I hope to elucidate the glaring lack of realism in our current future thinking (oxymoron?) and to show, in consequence, why realistic futurism is relevant.
Let’s talk money
Economics is an important mediator of past, current, and of course future human history — as important as science and technology. Economic realities will shape global patterns of living, politics, foreign relations, technological investment (and therefore incremental technological change), and just about everything else.
And economics — or more crudely, "money" — affects everyone. So it's here, with economics, that I begin exampling a realistic-futuristic thought process.
GDP
Perhaps the most cited economic statistic anywhere ever is GDP: gross domestic product. As with "the Dow" (the Dow Jones Industrial Average), few people can articulate what GDP actually is, but every news organization cites its movements as a bellwether for the health of the economy. And every one knows that GDP growth is good. No growth or shrinkage of GDP is bad.
Very briefly, GDP is the total value of goods and services an economy makes. There are different ways to calculate it, and it can be measured at the household, city, state, nation or even global level. But essentially GDP = total value of an economic unit’s collective output.
If GDP grows, it means the economy can make more. If the economy makes more, then on average everyone in that economy gets more stuff and their quality of life improves. That’s good.
In broad terms, there are only a three ways to make GDP grow:
increase capital investment (build more factories and machinery, making more things);
increase the number of workers (get more people working to make more things); or
increase productivity (become more efficient at using workers and/or capital equipment to make things). Technological advancement is a key driver of productivity growth.
Peak GDP
Peak GDP and what comes after it represent a major shift in how we think about the world…something we should all be thinking about, actively and honestly, and planning for.
That we do not is a forceful showcase of our future biases and the glaring lack of foresight they cause.
You could spend a lifetime studying GDP and how to encourage its growth. Many academics and policy makers do. And the math and economic analysis get dense and difficult real quick.
But...some truths about GDP are inescapably simple:
When population stops growing, the work force can’t drive GDP growth with more labor (unless we allow children back in factories);
When productivity efficiency stops growing — when we've eked out every last bit of efficiency gain in our productive processes from technology and better management and so forth — then productivity growth also can't contribute to GDP growth.
And if those two aren't growing, it's hard to sustain an increase in capital investment on its own to drive GDP growth.
What happens then? And, more importantly, what happens after then?
GDP will peak and even start to decline. We will have hit peak GDP.
That won't happen, right? Technology will come to save the day. Technology gains will always happen, and they will drive efficiency gains, and so GDP will grow forever. Right?
Probably not.
Consider that, even if efficiency gains continue to be made for decades or centuries, population is peaking.1 In all likelihood, given the precipitous drop in birthrates globally, many of us writing or reading this post today will live long enough to form part of the peak human population generation: GenPeak! (has a nice ring to it!) — quite possibly the peak population forever in the whole future history of the human race.
That means that GDP growth soon can happen only in spite of population decline. In order for it to grow, technology-enabled efficiency gains and/or capital investment must increase enough to overcome the rate of population decline. Keeping that up for very long is a very tall order.
Getting realistic about GDP
Google the term "peak oil." That's the point at which global petroleum supplies will peak and then start to decline. It's forecast to be decades away, but because discussion of it directly serves political agendas today, you’ll find plenty written about it.
Google on the other hand "peak GDP" or "peak global GDP", and you get crickets. It's kind of important — something that should merit discussion decades or even centuries ahead of time. Yet no one (and I mean no one) is talking about it. Why is that?
Here’s my answer: we're spoiled by GDP growth. It's all we know. Just like technology, GDP value has generally moved in only one direction for the last 10 generations, and that is up. Barring the odd blip for a war or pandemic, global GDP has increased steadily for centuries, driven by a growing global population, the unleashing of women into the workforce, new technology, and the reinvestment of much of our global wealth back into capital investment.
Just as with technological gains, we mistake this long progression of growth in GDP as the infinite norm: an upward trend that goes on forever. We mistake this back of a long, rising ocean swell for the rest of the ocean.
And because we do that, we build all our economic, political and personal financial paradigms wholly around the concept that GDP will always increase. We look forward to the growth in our own personal well being that will accompany it, whether that's higher wages, or more cool stuff for cheaper, or higher real estate values.
The problem is, and here's the dose of realism that realistic futurism is meant to deliver, GDP will not grow forever. In some advanced economies, where population is already in decline and productivity leveling off, peak GDP may be upon us already. In developing countries, maybe it takes 100 years or more to get there. All the same, it won't be long.
And what happens to all our paradigms then?
When an economy starts shrinking, things we have taken for granted stop being true. For instance, the aggregate value of the stock market will start to trend down. Addressable markets for our businesses — whether its Coca Cola or Microsoft — will no longer grow at 2-5% per year. Real estate values may enter a long-term decline: less people and less wealth will put downward pressure on the value of a fixed supply of land. And all those sovereign debts our governments continue to accumulate become more difficult to pay off when GDP growth isn’t there to support growth in tax revenue, and a declining population is left holding the bag of their more numerous forebears.
I'm not being alarmist. And for what it's worth, it won't be all bad. Declining global GDP may correlate with less resource consumption and greenhouse gas emissions, or the return of more land to its natural state. Less crowded cities and greater ease of life may all feature for those around to enjoy it. Life can be perfectly nice in a post-peak-GDP world.
My point is only that peak GDP and what comes after it represent a major shift in how we think about the world. It's highly relevant to our own and certainly our children's and grandchildren's lives. Peak GDP is something we should all be thinking about, actively and honestly, and planning for.
That we do not is a forceful showcase of our future biases and the glaring lack of foresight they cause.
Addressing those is what realistic futurism is all about.
The New York Times provides regular coverage of population decline with helpful graphics, such as this article; as do others like FT.com with this.
This topic is fascinating, thanks for bringing light to what pertains to us all. There’s lots more to learn and adjust as the future progresses and we can begin adjusting our sails accordingly. Look forward to reading more.