Larry Fink, the chief executive of the world’s biggest fund management company Black Rock, recently argued that ‘the big winners will be countries that have shrinking populations’. He said in the past it was assumed that shrinking populations would be the cause of negative growth, but because of the advent of AI and robotics, productivity would increase and the standard of living would rise even with falling populations.
It is instructive to pull apart Fink’s comments to get a sense of where things are heading. Some of the assumptions he makes are aberrant, but the tentative prognostications may well be right. What it points to is the need for a new system that is neither conventional capitalism nor socialism.
Fink’s first questionable move is assuming that a higher standard of living is the same as strong economic growth. They are not. Economic growth, or an increasing GDP, has a very specific definition. It means an increase in the total value of transactions, the amount of money changing hands.
Standard of living is different. Growth can go up while the standard of living is going down. Indeed that is what has happened in Australia. Soaring house prices and rising household debt has led to reasonable ‘growth’ but as a consequence many found their standard of living falling. The cost of having a dwelling has become a much larger portion of recent home buyer’s budgets and less money was available for spending on other things, including necessities. Yet the financialisation, driven by bank lending, improved GDP and created economic ‘growth’.
Fink also conflates productivity and efficiency. They are not the same. Productivity is a measure of how much money has been generated in order to produce something. In that sense it is like GDP, a measure of transactions. A product with a high profit margin, for example, will create more productivity than a product with a low profit margin.
Efficiency is more tangible. It is how much output there is relative to how much money has gone in. In that sense, it is closer to measuring standard of living. Long term efficiency gains in areas like food production and manufacturing have greatly improved people’s quality of life.
Fink assumes that greater efficiency will result in higher growth. If anything, it is more likely to do the opposite. The assumptions he makes are typical. There is very little close examination of what the economic terms precisely mean, let alone an exploration of the implications.
'What does seem certain is that the financial foundations of the developed world are weakening, and the conventional formulations of someone like Fink – and virtually all economists – do not address the extent of the challenge.'
Fink would be the first to argue for a strong return on capital from Black Rock’s investments, which means that ‘economic growth’ has to be continued for the system he profits from to be resilient.
Yet the world he sketches out will not create that growth. If the developed world has smaller populations, soaring efficiency from AI and robotics, less employment, it would become a low growth environment (that is, have weak transactions). Investment managers like Black Rock would struggle to get an adequate return.
And it is coming. As the management thinker Peter Drucker commented, ‘demography is destiny’. We can witness that in the decades of weak economic performance in Japan, which has a fertility rate of 1.26 per woman (the replacement rate is 2.1). South Korea is an extraordinary 0.78 and China 1.18, its population has started shrinking. Australia’s is 1.63 but there is high immigration.
The tentative conclusion is that efficiency is bringing down capitalism, at least as it has been practiced since World War II. It suggests that new types of transactions have to be found.
For most of this century the transactional growth has come from financialisation and increasing debt levels, largely driven by banks lending aggressively. That has now reached its limit. The debt is out of control in most countries.
Fink, and most of his cohorts in the investment world, had thought that the solution would be the transition to zero carbon, which would have cost hundreds of trillions of dollars and provided the necessary volume of transactions, mainly from completely reconfiguring the energy grid and accompanying infrastructure.
That hope is fading fast, as evidenced by Fink’s reluctance to use the term ESG (Environment, Social Governance), describing it as ‘unhelpful.’ Only two years ago he was openly bullying corporations if they did not fall in line on ESG metrics.
So what will take up the slack, generate the transactions to maintain growth? The economist Steven Keen has promoted the idea of governments’ creating fiat money (money without an interest rate) to reduce household debt, although he admits it has no chance of happening in the current context. His idea is for governments to print money and give it to households to retire their debt, effectively a debt-for-equity swap. Those without houses would get the same amount in another form and the aim would be to reduce the overall level of credit in the system: money that has an interest rate. In the sense that debt markets for thousands of years have failed as the interest on the debt compounds, it is a reasonable argument, albeit politically unpalatable.
Perhaps new types of transactions and wealth creation will emerge that cannot be imagined now. Universal basic income initiatives might be used to create economic growth, but if it is funded by increasing government debt it will just deepen the problems of over-leverage.
What does seem certain is that the financial foundations of the developed world are weakening, and the conventional formulations of someone like Fink – and virtually all economists – do not address the extent of the challenge.
Fink is correct that the proper aim is to raise people’s standard of living. But the way it can be achieved in a low or negative growth environment is yet to be delineated. A way needs to be found to improve peoples’ lives in a manner that doesn’t inevitably start with ensuring more money changes hands and firms like Black Rock always get strong investment returns. The aim and purpose of society is not to keep Larry Fink in a job.
David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.