Financial Independence is awesome!
I can’t wait to quit my job!!
Life is going to be great!!!-me
But, one thing about index funds bothered me. I understood how index funds worked and why they’re better; it’s very difficult to pick single stocks over the long-term. However, there was something that I didn’t understand:
Why does VTSAX go up and to the right over the long-term?
For VTSAX to grow ever bigger, there has to be economic expansion. In other words, gross domestic product (GDP) has to consistently grow. This was my big question:
What is the mechanism behind this?
I asked a lot of smart people and no one seemed to have the answer.
But then, I heard Warren Buffett talk about it at one of his annual meetings. He said something like this:
Population growth and productivity gains are what causes economic expansion. The latter is more important than the former.
The first one, population growth, is obvious. More people need more stuff to live.
Productivity is more complicated. I’m not an economist (hell, I can barely find my keys on an average day), so I won’t even try to explain it. If this nerdy stuff interests you, dig deep over to Wikipedia.
Are you still here? Great! If you didn’t click over to Wikipedia, consider these excerpts that are relevant to the rest of this post:
In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent
Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation.
So, much of the growth of VTSAX, which results from the growth of GDP, which mostly results from productivity gains, is mainly driven by one thing:
The Tractor Can Drive Itself Now
I was talking to a farmer acquaintance recently who told me something amazing. The conversation went something like this:
- Me: How many hours per day do you spend on the tractor?
- Farmer: Now many at all. The tractor can drive itself now.
- Me: Wow, that’s amazing! How do you spend all of that time you now have?
- Farmer: I now have time to spend on more difficult work like solving problems that come up almost daily. I also just have more free time in general.
In 1900, about 40% of Americans were farmers. Now, it’s 1%. Technology has reduced the need for human input.
Mechanized agriculture is just one example. Others are all around us:
- the internal combustion engine
- the lithium-ion battery
- chemical fertilizers
- the assembly line
All of these developments and many others have improved productivity and our lives.
The next question to ask is this:
What is going to keep productivity gains going?
Why Your Future Is Going To Be Awesome
Perhaps the greatest technological advance of our lifetime is artificial intelligence (AI). If you’ve been to a city like Austin, San Franciso, Phoenix, or Las Vegas you’ve seen a form of it in action on the roads:
Autonomous cars are in the news frequently as Waymo, Tesla, and others race to launch robotaxi services. At the core of the technology is a form of artificial intelligence called neural nets that are the artificial brain of the car. So, the car’s actions aren’t hard-coded. Instead, the neural net is trained from data gathered in the real world. Just like a human, if you show the neural network lots of pictures of stop signs, it will learn to identify them in the real world.
The same methods that train the car brain can also be used to train other brains. Like the one in the Tesla Bot. If you can train a car to drive, you can train a robot to perform tasks.
AI has many other applications. It will be used to analyze complex data. AI will help automate our lives, making us more efficient. I suspect that many use cases haven’t even been thought of yet.
And AI will lead to massive productivity gains. So, we’ll have more wealth. At the same time, humans will be liberated from mundane, repetitive, and dangerous jobs. At work, we’ll use our brains more. However, we’ll also work less.
Causes For Concern?
As optimistic as I am, AI also concerns me:
The Great Adjustment: As AI takes away boring jobs, humans will have to figure out how to adjust. We can’t all do brainy or creative work. I don’t know what the answer to this will look like, but perhaps taxation will have to change. I also think that humans will end up working less. The 40-hour workweek is a relic (I’ll have more to say about this in a future post).
AI Gone Awry: The other fear is that AI wipes us out. I don’t worry too much about this one as I see it as a binary situation. Either the world will be great or we’ll all be dead. Meh.
Natural-Born Pessimist, but…
I’m not naturally an optimist, but I’ve found that being a pessimist is a toxic way to live. Mark Twain said it best:
I’ve had a lot of worries in my life, most of which never happened.
My favorite MMM post of all time is the one where he wrote about optimism. This line from it is particularly great:
Optimism is rare, and deadly when combined with competence.
Since being a natural-born pessimist isn’t a great way to live, I have to work at optimism. This involved intercepting the negative thoughts my brain tosses my way and then dismissing them or turning them into something positive.
Despite what the news wants to scare us into thinking, the world is pretty great now. And, it’s getting better.
More 1500 Days!!!
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