Monday, July 11, 2011

The Economy as a Bio-Phenomenon

Karl Smith on Modeled Behavior here comments on the long term growth trend of the economy and presents a graphic showing GDP since 1929. His comments, which note that GDP appears to ignore human fiddling, arose in reaction to some comments by columnist (and economist) Paul Krugman (link)—who emphasizes that long term trends are very hard to influence but short term interventions do have effects.

I thought I’d play with the same numbers. Smith’s graphic is in logarithmic form and delimits the maximum and minimum boundaries. His chart also shows the recessions beginning with the one that kicked in in January 1920—but without GDP data. These differences cause both the Depression and World War II to be more prominently visible than they are on mine—but he uses the same data; those Smith shows came from here; I used this table.  Here is my graphic:

To match Smith’s presentation, my graphic, in ordinary scale, features an exponential curve fit to the data, which is identical to a straight line on a log scale. On Smith’s graph, GDP does indeed form an almost straight line. The benefit of my approach is that divergences from trend are much easier to see.

In a word, GDP data closely match exponential growth—when rendered inflation-free by using BEA’s method of calculating constant dollars, the chained-dollar approach. In nature we see exponential growth in the biological sphere; it’s also called geometrical growth. Thus we might call economies bio-phenomena.

Over too many decades of working with data by now, I’ve discovered a truth. In collective matters, demography is fate. Time and time again I discovered that what I thought were new developments, divergences, or novelties in society or economics, these could all, with some work, be reduced to underlying changes in demography. The interventions by humanity’s organized bodies (read government) are almost always too feeble really to interfere with anything much. The interventions have to be major, as in great wars or falling prey to the temptations of huge bubbles. I remember laughing when, in the years leading up to the dot com bust people seriously proposed that fundamental economic laws were now being transcended…

Worth nothing in this version of the graphic (although also visible in Smith’s, but more difficult to see) is that the GDP traced its path above the exponential curve except for the Great Depression and the evidently harsh recession of 1981-1982—until, in the wake of the 1990-1991 recession, it has been consistently below that curve since and—beginning in 1999—diverging from it in a marked way.

The tail end of this graphic, its last decade or so, is food for thought, isn’t it? Is something unnatural happening out there? Our distance from the curve is growing, the finger is pointing in another direction. Has our economy detached itself from the biosphere somehow? And faltering because the sap no longer flows?

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