Imagine that two families each started with $100 in 1900.
One family enjoys a 4% return every year.
The other family enjoys a 12% return every year.
One family enjoys a 4% return every year.
The other family enjoys a 12% return every year.
After a decade, the 12% family has $311 compared to the 4% family's $148. They have twice as much.
After a century, the family getting 4% has $5,050.
The family getting 12% has $8,281,797,452.
The family getting 12% has $8,281,797,452.
12% is only three times 4% but over a century it is the difference between having thousands or billions of dollars.
This return doesn't come from magic. The returns on financial capital come from the same dynamic of compound returns on industrial capital. And it explains why there have been fewer factory jobs every decade since about WWII.
I was working with a management team for a mine in Michigan. When those guys - most in their 50s and 60s - had started their career, the trucks pulling ore out of the mines could carry about 25 tons of ore. Now those trucks carry more than 350 tons.
Assume that when they began their careers, that mine employed 100 truck drivers. Today, to carry the same amount of ore, they would need only 7 drivers.
The productivity of industrial capital - like financial capital - compounds over time. The original $100 you invested in 1900 will be making more money in 2000. The original factory or mine you setup in 1900 will be producing more product in 2000 with fewer workers.
Given our intuition for compound interest is so poor, it is little wonder that we fail to understand how a growing economy might actually need fewer and fewer factory workers even as it makes more and more stuff.
Meanwhile, a country like China that began industrializing decades - probably close to a century - after we did is still at the stage of compound interest that it needs 100 workers in the mine or factory rather than the 7 we in the US need.
People who don't understand how compound interest works could look at this and think that "our factory jobs are going to China." China's per capita GDP is one-sixth ours and one horribly crude way to think about that is to assume that their level of industrialization means that they need about 6 factory workers (or truck drivers) for every one we need. Our jobs are not going there; they simply need more workers given how much less capital they have.
Returns to capital eventually give a country such an abundance of capital that capital no longer limits. At that point, a community has transitioned from an industrial economy into an information economy. New jobs and wealth will not be created in factories or industrial companies but instead in cubicles and information economies. US Steel and General Motors fall in value and the number of employees and Microsoft and Google rise.
To fight to get back all those factory jobs from 1950 is to fight to get back to a time of less capital, less wealth, less productivity. It is like fighting to return to a time when 90% of the population still farmed just to feed us all. Progress leaves behind earlier stages of development as it takes us into new stages. The miracle of compound interest is one big reason why.
This return doesn't come from magic. The returns on financial capital come from the same dynamic of compound returns on industrial capital. And it explains why there have been fewer factory jobs every decade since about WWII.
I was working with a management team for a mine in Michigan. When those guys - most in their 50s and 60s - had started their career, the trucks pulling ore out of the mines could carry about 25 tons of ore. Now those trucks carry more than 350 tons.
Assume that when they began their careers, that mine employed 100 truck drivers. Today, to carry the same amount of ore, they would need only 7 drivers.
The productivity of industrial capital - like financial capital - compounds over time. The original $100 you invested in 1900 will be making more money in 2000. The original factory or mine you setup in 1900 will be producing more product in 2000 with fewer workers.
Given our intuition for compound interest is so poor, it is little wonder that we fail to understand how a growing economy might actually need fewer and fewer factory workers even as it makes more and more stuff.
Meanwhile, a country like China that began industrializing decades - probably close to a century - after we did is still at the stage of compound interest that it needs 100 workers in the mine or factory rather than the 7 we in the US need.
People who don't understand how compound interest works could look at this and think that "our factory jobs are going to China." China's per capita GDP is one-sixth ours and one horribly crude way to think about that is to assume that their level of industrialization means that they need about 6 factory workers (or truck drivers) for every one we need. Our jobs are not going there; they simply need more workers given how much less capital they have.
Returns to capital eventually give a country such an abundance of capital that capital no longer limits. At that point, a community has transitioned from an industrial economy into an information economy. New jobs and wealth will not be created in factories or industrial companies but instead in cubicles and information economies. US Steel and General Motors fall in value and the number of employees and Microsoft and Google rise.
To fight to get back all those factory jobs from 1950 is to fight to get back to a time of less capital, less wealth, less productivity. It is like fighting to return to a time when 90% of the population still farmed just to feed us all. Progress leaves behind earlier stages of development as it takes us into new stages. The miracle of compound interest is one big reason why.
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