Productivity is likely linear and thus an energy miracle is needed
As we wait for the big US technology earnings tonight from Microsoft and Alphabet, and other important earnings from Visa, UPS, PepsiCo, General Electric, and Mondelez (read our earnings take from yesterday and listen in on today’s podcast), we will talk about GDP growth, energy, and productivity, and the apparent road block the physical world has hit.
The economic paper Additive Growth* this month by Thomas Philippon has got a lot of attention because it shows that total factor productivity (TFP) is linear and not exponential (see chart below for difference in linear and exponential growth) which is a huge deal for the economic growth theory. We always here that productivity is the most important factor, but if it is linear the growth from productivity will converge over time to zero. Standard of living will continue to increase but at a slower pace. That might be the reason why the technology progression seems less “explosive” in 2022 compared to the steam engine, electricity or the invention of combustion engines (cars)?
But now it gets interesting. Despite GDP is a terrible measure for measuring economic activity due to the ensemble vs time average issue, economic activity can be formulated as GDP = energy input x productivity (TFP). If productivity is linear (additive) to economic growth and we observe exponential GDP growth over 500 years, then the only explanation is that energy input is exponential. Energy input by the way can be seen as a combined input of humans (the machines before the machine age if you will) and energy such as coal, oil, gas etc. The chart below by Ole Peters shows this dynamic by plotting GDP against CO2 emissions (burning coal, oil and natural gas) on a logarithmic scale. Grow energy input and we grow the economy.