29 January 2016

What if this new economy drives less investment and consumption? Would we still call it progress?

Last year, "investment in mining exploration, wells, and shafts fell 35 percent." With oil prices down, there is less reason to invest in finding and tapping new sources of oil. Unless oil prices fall another 50%, this represents a one-time drop. It is also a reminder that we might be moving into a less capital intensive period of economic development.

If you are starting an oil drilling or mining company, you have to spend a lot of money on capital. A mining company client I worked with in the Upper Peninsula of Michigan had trucks the size of two-story houses, trucks able to move 320 tons of ore in a single trip. Not only do these trucks costs millions to purchase but they burn 1,000 gallons of diesel fuel a day. Replacing a tire costs $52,000. The custom built shovels that fill these trucks scoop 70 tons of rock at a time and cost $20 million. This sort of industry is capital intensive. You have to invest big in order to compete. And this sort of capital-intensive industry defined the economy of 50 years ago.

The investments of the new economy firms are different, more public. It's not unusual to see a group of employees in tight work areas all on computers. It's rare that those computers would cost more than $4,000, often considerably less. The investment in that room was likely made in their education, money spent out of private household investments in tuition or private endowments of prestigious schools or public funding of state universities. The capital equipment spending is often low. (That's obviously not true of all knowledge workers. Folks working at the Hadron Collider, for instance, are working with a billion dollar a year expense.)

And on the consumption side, there are two trends that might keep spending down.

One is that millennials are less prone to go to the mall to buy things. They seem to be more deliberate about how they spend and they see conspicuous consumption as a moral failing, reliant as it often is on sweat shops, waste, and unsustainable production techniques. If 50 years ago having a closet bulging with clothes was a sign of affluence, it is now a sign of poor judgment, in the same way that in a time of frequent famine a belly is a sign of affluence and in a time of abundance, a belly is just a sign that one lacks self-restraint. While such lifestyle choices could still result in comparable levels of spending (one hand-crafted, quality sweater might cost as much as half a dozen cheap sweatshirts), it isn't likely. This sort of lifestyle may well bring down consumption levels.

Related, the sharing economy could result in less spending  as well. Uber and Airbnb are cheaper than traditional taxis and hotels. Operating these businesses doesn't require explicit capital outlays (back to the notion that the new economy is less capital-intensive), using information to identify slack in capacity of cars and homes and people's schedules. Not only does this mean less investment (it's unclear that someone who lets out their home to Airbnb guests 6 times a month can expense their personal home construction as investment in the same way that the Marriott could expense hotel construction as an investment), it means less consumption. People spend less to get from one place to the next or to sleep overnight.

The economy is changing in a variety of ways and it is worth remembering that only in the wake of the Great Depression in the 1930s did Simon Kuznets develop GDP as a measure of economic activity. GDP is a measure that we didn't have in the 1800s and is a measure of economic progress and well being that we may radically change by the 2100s.

The economy is still evolving. To capture reality, so must our measures of it.

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