Apparently Newton took over 20 years to fully develop and publish his three laws of motion and gravity theory. In this modern age information moves a little bit faster and so you won't have to wait that long. Indeed, if we are not careful the terminology will be quickly into the modern lexicon and most likely used incorrectly. I'm not all that convinced that Australia's treasurer Mr Swan knew precisely what economic gravity was when he proclaimed recently that Australia had "defied global economic gravity" 1.
This article presents Xcheque's Second Law of economic gravity. The Second Law is all about the nature of economic change and progress. It is not good enough to keep working at the same thing in the same way for ever - somebody is going to overtake you, reducing the value of your work and eventually diminishing your opportunity for wealth. Here we look closely at the nature of this change process and show that it is a fundamental driver of economic wealth.
The first two articles in this series discussed the nature of work and wealth, and the inextricable link between the two ("Xcheque's three laws of economic gravity - Definitions and the First Law" Dr Jon Hauser, Xcheque.com, 13 December 2009 ; "Xcheque's three laws of economic gravity - Exploring the First Law" Dr Jon Hauser, Xcheque.com, 5 May 2010). The symbology of the laws is given below and your mousepointer will reveal the First Law and other definitions.
In these previous articles it was noted that work can take many forms, the key types being: physical work, the application of intellectual prowess and knowledge, and leadership. All of these forms of work can contribute to the creation of wealth. It all seems so easy - is it the case, that to be wealthy, all you have to do is bend your back or your brain, or provide leadership to those who are doing the bending? Unfortunately no. There are other factors that drive the generation of economic wealth - and one of the fundamentals lies in the nature of competition and continuous improvement.
Xcheque's Second Law:
Change, continuous improvement and competition are fundamentals of nature and the human condition. A person must adapt to this competitive and changing environment if they expect to accumulate or maintain wealth over time.
in simple terms
Change is inevitable and cost is king
As with the First Law this is a simple idea with profound consequences. To explain further let's look at some of the evidence and outcomes of the Second Law, and no better place to start than the economic success story of the 20th Century - the US of A.
The US is a wonderful reference point for economic theory as it applies to the dairy industry. The USDA do an excellent job of harvesting and reporting data on the industry. Their milk production data even goes back as far as 1924.
This chart is a perfect demonstration of Xcheque's Second Law of economic gravity. Since the second world war milk production per cow in the US has steadily increased year on year. It is now more than 4 times the level of 1945 and 5 times the level of 1930.
This improvement in production per cow means that there is a lot less cows, labour and cost going into the production of a litre of milk. Put a different way - one cow now feeds 33 people in the US whereas 80 years ago 1 cow would only feed 5 people. There must be a limit to milk production per cow but it doesn't look like we are going to reach it anytime soon.
(For non-US readers 50 lbs of milk / day is equivalent to approximately 22 litres / day)
For the population at large, this example of improved food production efficiency is one of the drivers of the modern age and modern economies. You can add to this a more labour efficient milking process and ever increasing numbers of cows per farm. At a farm level at least, there is much less work required to provide an important part of a western diet.
For the average dairy farmer the trend in the data must send a shiver down their spine. It gets worse when you look at the chart for farmgate milk price - this is where the Second Law of economic gravity really kicks dairy farmers in the backside.
(For non-US readers $US 15.00 / cwt is approximately 34 cents per litre).
After adjusting for inflation, the US farmgate milk price data shows slowly increasing milk price from 1961 to 1975 and then a dramatic decline over the past 35 years. The famous volatility of the past decade is also evident - making it difficult to see whether prices are still declining or have reached some sort of unsteady equilibrium.
It seems that farmers are destined to a life of producing more for less and, in the current environment, not knowing from one year to the next what their income is going to be.
There are many more examples of this type of change process in our own lifetime and historians will be able to trace production efficiency improvements over many thousands of years. Technological development has been at the core of much of this change and the industrial revolution represents a particularly productive period for new ideas, knowledge and technology.
Technological development has accelerated again following the onset of the information revolution. It seems clear that the development of science and technology still has a long way to go - underpinned by the computational and storage capacity of modern computers, and the speed of information transfer across the planet. The simple example is the speed and efficiency with which we can find information we need. I have an electronic sticky note on my computer that says "Google is my friend" - and if you clicked on the link here you would know exactly what I mean. It is not so many years ago that, if we needed to know something, we would look up a text book, phone a friend, guess, or give up.
The nature of people, politics, and leadership is another important issue that drives the Second Law. This has been a critical factor in facilitating the change and improvement processes in modern as well as ancient societies. Yes, you can stop the processes that are characteristic of the Second Law. This might be a result of the nastier side of human nature and there are plenty of examples of that throughout history. You also don't have to look too hard to find some current cases that will almost universally be described as a descent into darkness. There are however more altruistic attempts to control the outcomes of the Second Law and the GM issue is a modern case in point.
It is difficult to have a debate on GM without provoking a large amount of emotion. That aside, there is a clear a division of quite rational philosophical and scientific views within and between the societies and cultures of the world. As with matters spiritual, do not take my comments here to be expressing an opinion on merits of one side of the argument versus the other. What I would say however is that for those who are opposed to GM technologies, you are fighting a losing battle. The Second Law of economic gravity has already put the change process in motion and it will not stop. Regulated and restricted maybe, but short of a major global catastrophe or war, GM technology is here to stay. That is because GM technology unlocks much more productive and efficient ways of producing what humans need and want. With the world's population still growing, along with the aspirations and expectations of the developing (and starving) nations, it will be necessity as well as economics that forces the change.
Whilst developing this concept of change and ongoing improvements in production efficiency I was forced to consider some products and services that appear to defy the gravity law. The one that really gets up the noses dairy farmers is the example of bottled water. Many people will now pay $3.00 or more for a 600ml bottle of water at a café or service station but will take the discounted milk from the supermarket shelf at $1.00 / litre. The answer to this is that the 600ml bottle of water has nothing to do with the fundamental and necessary economic systems and wealth of our society. It is an indulgence, just like going to see a film, or having a holiday, or buying that painting by Picasso. The purchase of bottled water is a consequence of an excess of wealth in society. This excess has come about because of improvements in the efficiency with which we produce and deliver those fundamental and necessary human needs (ie. the real economic wealth of society). Rightly or wrongly we humans have a propensity to distribute our excess wealth into all manner of interesting and pleasurable ways - the bottled water phenomenon being one of the more recent innovations.
To finish this chapter in the gravity series, it is a good question to ask why the processes of the Second Law occur. The law dictates that an ongoing change process will occur but, just like Newton's laws, there no clues on the why. You could do a lot worse than to read something of Darwin's work2 to understand some of the more natural and biological aspects of this law. There are however overlaying factors which are unique to humans, and a foundation of our success as a species - that is the inate curiosity of the human brain and its ability to "build a better mouse trap" ... just for the hell of it. Another way of describing this uniquely human character is captured in the axiom: "I think because I can".
We are now on the home stretch and in my next article in this series I will present the third and final law. Xcheque's Third Law of economic gravity takes us back to the concepts of work and wealth and the dynamics between them. It is the Third Law that determines whether work done will be converted into wealth and provides a measure of the amount of wealth created. In the meantime I'll leave you to think about the wisdom or otherwise of Xcheque's first two laws.
- "Meltdown turnaround: economy set for growth", Mark Davis, The Age, 12 May 2010
- "On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life", Charles Darwin, Pub: John Murray, 1859.