When I first discovered FIRE, I dove in and started consuming All. The. Things. Mr. Money Mustache. JD Roth. JL Collins. I devoured the information and embraced FIRE without hesitation:
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:
- electricity
- the internal combustion engine
- satellites
- 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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Thanks for the interesting look back at technology’s impact on our productivity and economic growth.
I like to think of myself as a realist, but I probably align more naturally on the pessimistic side as well. That said, optimism is surely a better way to view the world (and probably live longer and healthier). Here’s to hoping we can finally get rid of the 40- 80 hour work weeks that brought about the need for the FIRE movement!
I agree almost 100%. “It’s getting better” — except for all the folks whose entire identities are wrapped up in soon-to-be obsolete careers or sacred cows, and those at whom they lash out as a result. Feels like we’ve been seeing a lot of that the last dozen years or so.
Yeah, this is really difficult. The world is changing and I think you have to try to bring everyone along for the ride, but they have to be on board with the plan too. If you mine coal, it may be a good idea to idea to learn how to fix wind turbines.
life wasn’t so nice for the workers in the last third of their careers who lost their jobs when technology crushed manufacturing in the 1970s through 1990s. Ditto for late career office workers in the same period. Their kids did better but not so much for the parents. I saw it, I even made it happen in many cases.
We look at change as linear over time. It took close to 100 years to crush farming, 50 to crush paper pushing and 25 or so for labor intensive mining and manufacturing. The next round has already started and it will be even faster. All good if you live in a first world country and have an IQ over 120. OK with an IQ over 100. But half the country has an IQ below 100 and few lasting skills. Remember impacts aren’t in eliminating 100% of the jobs … it is the takeout of the easy 80%. Talk to a plumber about productivity because of PEX, quick fit fixtures and precise manufacturing that makes everything work the first time.
And third world countries will never get a chance to move up the economic ladder. And second world countries will regress back for many.
A million taxi drivers will disappear. Another million truck drivers. Even more in warehouses and retail. There are over 40 million US jobs in Education, Healthcare and Public Administration. All ripe targets.
There will be massive productivity gains. And for some of us, wildly better lives. I’m optimistic that I’m in this “some of us” group. And my extended family as well.
You didn’t even mention the automotive sector. Electric cars have almost no moving parts and as a result, are super simple. We’ll need far fewer people to make cars and auto parts stores will be out of business eventually.
And if robotaxis come online and car ownership falls away, that will crush even more jobs.
Not easy, but if you don’t do it, someone else will and you’ll be demolished anyway. There is some fancy economic term for this, but I’m undereducated, so have no idea what it is!
Here is what I was thinking about: https://www.economicshelp.org/blog/20255/economics/creative-destruction/#:~:text=Definition%20of%20creative%20destruction%20This,move%20into%20more%20productive%20processes.
Creative destruction is real destruction of individual lives. The market will expand and productivity makes the general economy better, but not necessarily every individual.
What folks didn’t see in the past is that technology improvements create exponential rates of improvement. Rates that are now faster than an economy can adjust to in the working lifetime of a single worker. Improvement rates that crush emergiong economies half way around the world.
There is no path for full utilization of unskilled and semi skilled labor. With each passing year, this surplus labor becomes larger. First world economies can provide welfare and ‘basic incomes’. Second and third world economies not at all. Add in government corruption and economic control and these second and first world economies are ‘toast’.
With advancing AI, most skilled jobs and most office work become targets of this relentless cycle of ‘improvement’. Again, 20% will be fine, another (first world only) 30%+ will survive and the bottom half will be comfortably impoverished with little opportunity for financial growth.
I’m optimistic about my extended family for the next half century. We have been preparing for this forever. The rest of America should look at their personal circumstances and see if they can find a rational reason to be optimistic. Most won’t.
The good news is that the characteristics of the FI community are very well suited for this quick changing economy and many (most?) in this community should prosper.
That was an enjoyable read ?
Thanks!
I wholeheartedly agree. Not sure if you have read the book “the future is faster than you think” but it illustrates so well the rationale why things will keep on improving more quickly – more people having access to internet (third world) multiplied by growing populations multiplied by Quantum computing etc…
I had not heard of that book, but I’ve added it to my list. As long as we don’t screw it up, the future is great!
Indeed, progress is accelerating more and more. However, there are also skeptics) But I think you have the right position regarding how everything will develop and you are right
Hi Mr. 1500. I just want to thank you for such an excellent article.
Especially what you’ve said about the reason why the stock market will grow overtime–population growth and technology.
I believe you might be humble and not mentioning, that you’ve invested heavily and done well in tech heavy stocks.
Again, thank you. To know what causes economic growth, and why one would invest is important. Buffett himself stated when he first started investing he bought stocks. Then he realized investing in stocks wasn’t what it was all about, but investing in businesses.
Yep! Never buy a stock; buy a business.
I hope you’re doing OK in the current crazy markets!