Sunday, October 28, 2007

The Age Of Innovation

I am often astouned by the pace of scientific and technological progress in our era. Dr. Michio Kaku writes in Visions: How Science Will Revolutionize the 21st Century (one of my favorite books), that more scientific knowledge was generated
from 1987 to 1997 than in all of human history which proceeded it. It is astounding
to realize that human knowledge is doubling every ten years. Thus, we have learned
more in the last ten years, from 1997 to 2007, than we did in the entire history of
humanity up to 1997.

Computer scientist Ray Kurzweil points out that in addition to learning more about
the world than we ever have before, the very pace of the this learning is increasing.
He asserts that we are doubling the rate of progress every decade. Thus, in the future
we will learn more and more about the world in a shorter and shorter timespan than we
ever had in the entire history of humanity.

The number of DNA sequences that can sequence is doubling roughly every year. Computing power is doubling every year. The size of the internet is doubling every year. This extraordinary growth will transform the world beyond imagination. Perhaps the most extraordinary prospect is that of creating computers which can exceed the power of the human brain. According to the calculations of the computer scientist, Ray Kurzweil, we can create computers equal to the 
capacity of one human brain for a $1,000 in the year 2023. We can create the same computer
for one penny around the year 2037.

A more interesting concept is that we could create computers which would be equal to the total human race for a $1,000 around 2049. We could create computers which would be equal to the
entire human race for 1 cent around the year 2059.

Indeed, what an amazing future to ponder. The most important challange in this future is to ensure that all people around the world benefit for this extraordinary era.

Saturday, October 27, 2007

Why The Stock Market Matters Very Little

It is one of the staples of news programs. Every evening it is reported that the Dow Jones industrial average is up or down a certain number of points. This could lead one to assume that the stock market plays a very large (indeed, dominant) role in the economy. But this is not the case.

In the United States, the country where the stock market plays the largest role in the economy, about 9% of all capital is raised through the equities market. The vast majority of capital is raised through the debt market. The most important financial elements in the economy are banks and the bond market. Bank loans account for 40% of all capital raised in the United States. Bonds account for an another 35%. Thus, together bank loans and bonds account for 75% of all capital raised. The other 16% of capital raised is accounted for through finance companies and such.

In other industrialized nations, the stock market plays a smaller role than it does in the United States. In developing nations, it plays an almost insignificant role. Some will argue that because the Efficient Market Hypothesis is true, that the current stock price is a reflection of the present value of all future earnings, that somehow the stock market is a barometer of the future economy. This is not so. A very small percentage of firms are listed on stock markets and of those that are listed, the stock market may not be their main (certainly not only) method of raising capital.

So, instead of the stock market, perhaps the rate of inflation (or perhaps the budget deficit and the price of gold - an indicators of future inflation) or the rate of economic growth should receive more attention. I highly doubt that will be the case because the stock market provides new news everyday - it's ups and downs are interesting to report. But in reality the fluctuations of the equities market are not the most important variable which affect the broader macro economy.

Source for the above statistics: Fredric S. Mishkin, The Economics Of Money, Banking And Financial Markets

Wednesday, October 24, 2007

The Greatness Of Private Property

In contemporary popular culture, private property is often derided as the root of evil. That the unequal divisions of economic product among the various elements of society are the fundamental cause of social ills.

That is not the case. Indeed, private property is the greatest idea which ever the imagination of man conceived. Private property is the foundation of a liberal society. James Madison once wrote that property, more broadly understood, is more than just the ownership of physical objects, it is the ownership of intellectual ideas.

The right of private property is defined through the principle of exclusion. It is the right to exclude others. Just as we have the right to exclude others from enjoying the benefits of our labor, we also have the right to exclude others from influencing our mind. This right of the property of our ideas is the foundation of a liberal society.

Social norms matter a great deal. A society in which private property is not the norm will not be inclined to respect the rights of individuals. Leon Trotsky, one of the leaders of Russian communism, once said in reference to the Soviet government that "once we own everything, we can do anything.". A society in which certain matters are recognoized and respected as private is more inclined to be a liberal society.

There are two types of power in the world. One is the power of the purse, the other is the power of the sword. The worst type of society is one in which the purse and the sword are in the same hands. A society in which the sword and the purse are vested in two different groups would be acceptable. The best society would be one in which the sword is in the hands of one entity, a democratically elected government, and the purse in as many different hands as possible.

A society with private property allows the existence of factions. James Madison in Federalist 10 wrote that the unequal distribution of property is the most important cause of enduring factions. These enduring factions are the key to democracy.

One must view freedom as an absolute. Since the institution of private property is the foundation of a liberal society and the existence of factions which the institution of private property fosters are the foundation of democracy, we must view the right of private property as an absolute.

Saturday, October 20, 2007

The most interesting time in human history

Each person reading this has the distinct privilege of living at the most interesting time in human history. Never before has the prospects for humanity have been as bright as they are now.

In order to truly appreciate the extraordinary nature of our era, we must take a historical perspective. According to Angus Maddison, a highly regarded economic historian, for the vast majority of human history per capita income was no greater than a few hundred dollars. In the year one of the common era, world per capita GDP was around $450. By 1800, it had increased to around $600. The quality of life for most people has increased more in the last two hundred years than it did in the thousands (indeed, millions) of years before 1800. According to Maddision, the standard of living in Africa (generally considered to be the world's poorest region) is greater than Europe in 1800 (which was then the region with the highest per capita GDP in the world). In Asia, the standard of living has improved more in the last 50 years than it did in the thousands of years before.

Two hundred years ago, life expectancy was in the range of 35 to 40 years. People who are considered adolescents in today's world would have been considered middle aged two hundred years ago. Two thousands years ago, most people could not expect to live past 25; in today's world, we usually consider 25 to be the beginning of one's life. Today, even in developing countries, life expectancy is around 60. The poorest people in the world today live longer and better than the richest people of a few hundred years ago.

Of course, not everyone has shared in this era of modern economic growth. Half of the world's population still lives on $2 per day. One-sixth of the world's population (1 billion people) still go to bed hungry every night. The difference between today and eras past is that now for the first time, it is within our grasp to eliminate that harsh reality. If governments around the world become and remain committed to pro-economic growth policies, open markets, embrace globalization and spend more on education than they spend on subsidies, within our lifetimes, the harsh reality of extreme poverty can be eliminated.

In any instance, it would behoove us, in this world of 24 hour sensational news and such, to take a historical perspective and appreciate the life with which we are blessed.