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Review
Money for Nothing: Real Wealth, Financial Fantasies
and the Economy of the Future
Nicholas Brealey Publishing, September 2003
Author: Roger Bootle
Review by Steve Rayson, Director, Epic Group
plc
Bootle was formerly one of the so-called 'wise men', the Bank of
England's independent panel of economic advisers. He currently runs
Capital Economics, an influential consultancy advising some of the
world's largest companies. He is probably best known for the Death
of Inflation (1996), which forecast an era of persistently low inflation,
and for his more recent prediction that UK house prices will fall
by 20% over the next three years. His latest book "Money for
Nothing" is a wide ranging review of global economics and the
influential factors in the future. One of the most critical factors
that will influence the future health of the world economy, he argues,
is the capacity for learning.
Bootle recalls the work of the Robert Thomas Malthus in the late
eighteenth century, the first man to be appointed a professor of
political economy. Malthus was concerned that population growth
would create problems because of the limited supply of land and
hence food. As he feared, populations have grown substantially -
and there has been a sharply declining amount of space per person.
However, this has had not had the negative effects he anticipated.
Interestingly some of the smallest countries with very low ratios
of land to people have the highest per capita GDP, such as Japan.
In fact, as Bootle demonstrates, there is no direct relationship
between land and materials, and wealth creation. Thus those who
have gone to war on the basis that control of land is the foundation
stone for wealth and power (such as Hitler, and many before him)
have been misguided and wrong.
Bootle argues convincingly that land and materials have been falling
in terms of their economic importance whilst the role of knowledge
has been growing significantly. It is the role of knowledge that
explains why the economy of Hong Kong can be almost as large as
that of Russia.
The importance of knowledge to companies can be seen from the rising
ratio of sales to physical assets. This is because knowledge 'possesses
the magical quality of being able to produce money out of nothing.'
Unlike land and materials knowledge has a peculiar quality, in that
if someone acquires or possesses it, this in no way diminishes what
anyone else possesses. Once knowledge has been gained, which takes
time and effort, it can be used again and again at potentially no
cost. Knowledge also builds upon itself, a fact acknowledged in
the famous saying of Isaac Newton's: 'If I have seen further it
is by standing upon the shoulders of giants'.
To Bootle, what traditional economists missed was the human factor,
or human inventiveness: the ability to get more out of less. To
Bootle productivity is the key to wealth and knowledge, and productivity
means getting more output for the same level of input. This cannot
be achieved by working harder, but only by working smarter.
Given that knowledge builds on knowledge, our increased ability
and willingness to communicate and receive knowledge should lead
to great leaps forward. In the past, knowledge has not been communicated
quickly around the world.
Bootle takes us on a quick history tour to provide examples of how
the spread of knowledge has been actively resisted in certain cultures
at certain times, with invidious results. The Chinese used paper
more than a millenium before the West, but suffered a subsequent
stagnation in their culture. This can be put down to a prevailing
set of values that stunted innovation: in contrast to the hypothetical
and deductive models that drove forward the industrial revolution
in the West, China shut out foreign influences and pursued a logic
based on historical analogy. In other areas there was religious
resistance to new ideas and technologies from other cultures. Whilst
the Gutenberg Bible was printed in the 1450s, the Koran was not
printed until the twentieth century. Bootle puts this down to a
backward-looking Islamic tradition that grew up around the belief
that all useful knowledge had already been acquired - contrasting
sharply with the early Muslim thirst for knowledge from all sources.
Knowledge was also held back in previous times by the relatively
small number of people engaged in 'thinking' - and a lack of communication
of the results of that thinking, which led to considerable duplication
of effort. The internet could be set to revolutionise the speed
with which knowledge is discovered and built upon. People now have
much greater access to the thinking and knowledge of others. The
internet also allows groups of researchers to share ideas very quickly
and to develop for the first time a true global community of thinkers.
Also our greater knowledge has led to greater productivity and greater
wealth, thereby enabling more people to engage in thinking. Of all
the scientists who have ever lived it is estimated that over 90%
are still alive today.
Thus, in contradiction of Malthus's ideas, societies with larger
populations can now achieve higher levels of progress and wealth.
This is not just a case of numbers, as millions of people in isolation
could not make the same progress as millions working in a networked
community. Thus a new world order which encourages participation
and the free exchange of ideas could rapidly increase levels of
knowledge.
Bootle argues that computers have so far had little impact on productivity
growth. In the UK the rate of productivity growth actually slipped
back to 1.3% in 2001 and 2002 having averaged 2 % over the previous
30 years. This could be because the actual impact of computers on
productivity will be small as they are simply the latest in a line
of technological inventions which had a much greater impact such
as electricity and the combustion engine. Alternatively it could
be that as Arthur C Clarke said, people usually overestimate the
impact of technological change in the short term and underestimate
it in the long run.
To Bootle it is likely that companies and people are not yet making
the most of computers and the internet due to lack of awareness
and familiarity and that "its full impact may lie in the future".
The internet may be the shoulder upon which future knowledge discoveries
stand on. To Bootle the power of the internet is that it has increased
significantly the learning capacity of the world community.
This is critical to Bootle as there are three critical human activities
at the centre of economic growth:
- Specialist knowledge embedded in skills
- Capacity for learning by doing, so capabilities of workers increase
with experience
- Management and co-ordination to ensure cumulatively greater
output than workers working individually
Knowledge and learning can positively improve performance in all
three areas. Bootle concludes that due to the growth in the importance
of knowledge in the economy and the advances in communications we
are now at a tipping point.
Will this see huge leaps forward in economic growth? The potential
is certainly there, however, there are other factors such as the
degree of global trade, culture and governance which might limit
this potential. What is clear is that learning will have a critical
role to play in the future world economy.
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