Where Progress Comes From

By Morgan Housel

To be an investor, you have to be an optimist. And to be an optimist, you have to know where progress comes from and what causes it.

So, let’s look at the basics.

The idea of growth is pretty new. For thousands of years, humans went nowhere.

World GDP per capita was barely higher in the year 1400 than it was in the year 1 AD. Europe’s standard of living actually declined for half a millennia after the fall of Rome as previous innovations were lost and forgotten. Progress just wasn’t part of the equation.

Then, around the middle of the 19th century, things changed. Growth exploded, exponentially and nearly everywhere. After stagnating for a thousand years GDP per person has increased tenfold in the last 150 years.

Why? A combination of the steam engine, the telegraph, and electricity is the common (and right) answer.

But it leaves the question: Why then?

People were capable of innovating for thousands of years, as the Romans proved. What happened in the 19th century that unleashed a wave of powerful inventions?


Photo from Matt Ridley, The Rational Optimist

Investor William Bernstein writes in his book The Birth of Plenty that people are predisposed for progress as long as their environment provides four things:

1. Secure property rights. This didn’t exist for most of history. There was no incentive for inventors to create wealth because it would have been seized by “feudal aristocracy, the state, the Church, or common criminals,” Bernstein writes. That changed in the 1700s as individual laws took hold and continued into the 20th century as democracy spread.

2. A scientific view of the world. Before acceptance of scientific principles was a world of superstition and guessing, neither of which fosters progress and often revolted against it when it arose. Bernstein wrote: “No European dared to think creatively or scientifically, since original thoughts often condemned their creator to oblivion both in this world and the next.”

3. Widely available and open sources of funding. There were hardly any markets for capital until investors began trading bonds in 16th century Holland. Before that, the money needed to start and grow a business didn’t exist for the huge majority of the world that wasn’t born rich.

4. Rapid communication and cheap transport of goods. Even when the first three came together, for most of history businesses “could not have advertised and inexpensively transported their wares to consumers in distant cities.” That took advances in shipping, railroads, the telegraph, and trade pacts between countries.

Bernstein writes that it wasn’t until the 1820s that all four factors coalesced in the English-speaking world, and not until the mid-20th century for much of Asia and Latin America. Africa is still stitching the four together, slowly.

There’s more to growth than those four factors. Demographics, natural resources, and more play into the equation. But nothing moves without those four factors in place. And the good news is that more of the world has those four factors in place now than at any time in history.

The economy always oscillates, boom to bust. Bad policy and dumb decisions slows us down and keeps us from achieving our potential. But almost all examples of permanent decline are caused by one of these four factors missing. It’s hard to slow people down once all four are in place. They get creative, invent new things, and figure out better ways to do old things, which pushes the whole ship forward.

The existence of these four factors is the backbone of economic optimism. The rest of the equation is waiting for businesses to create value.

How do they do that?

Again, here are some basics — prerequisites for individual business success.

Companies succeed and fail for all kinds of reasons. But you’ll find a few common denominators among the clear winners.

In the book The Everything Store, Amazon CEO Jeff Bezos was asked why Amazon succeeded where others failed. He gave three reasons, which I’d consider the backbone of lasting individual business success:

1. “We are genuinely customer-centric.”

2. “We are genuinely long-term oriented.”

3. “We genuinely like to invent.”

Bezos explained:

Most companies are not those things. They are focused on the competitor, rather than the customer. They want to work on things that will pay dividends in two or three years, and if they don’t work in two or three years, they will move on to something else. And they prefer to be close-followers rather than inventors, because it’s safer.

Businesses can prosper for some time without these factors. Yet wherever you find lasting success, you’ll likely find these three traits. Most competitors are just as smart as you are, so to stay ahead you have to be doing things they aren’t willing to do. Those three traits are the bedrock principles of what most businesses aren’t willing to do, but create lasting value for those that are.

This is way oversimplified. But it’s the foundation of success, and therefore the foundation of what we should pay attention to. And the more you see it, the more optimistic you get about the future.

This article is part of Motley Fool Mindset, an exclusive behavioral-finance service in Motley Fool One. Click here for more.

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