Wednesday, March 11, 2009

World Economy and Human Productivity

I was recently watching a TV news report in a news channel that the World Economy could shrink by a certain extent. Now that raised a serious red flag.

When I think of the World Economy, I think of the collective effort of all the humans in the world. If the population were constant, increase in World Economy would have meant an increase in productivity of humans as a whole. Productivity could be increased by finding more efficient ways of doing things - a process of continuous improvement - use of tools, better tools. World Economy has certainly increased since the days of industrial revolution - the revolution that flooded the world with tools. Anyone could guess how many lesser humans it takes to prepare a piece of cloth now-a-days than it would have taken, say, before the weaving machines - a tool. If all this makes sense, then I can think of 2 scenarios for the potential shrink in the World Economy -

Scenario 1:

Now, the world population is not constant - it has been increasing. If the World Economy doesn't grow as fast as the human population, what does it mean? It means that we have more humans producing lesser as a whole. Does it also imply that we did not find more efficient ways of doing things? Does it mean that we did not continuously improve or identify better tools? What happened to all the technology we built? Why didn't it amount to significant productivity increases - and significant economic cost reductions - making a lot of things cheaper? Or did we build inconsequential technologies?!

Scenario 2:

Probably it means all the above. Probably it means that there has been lesser need for producing anything more than we already do - in other words there may not have been growth in the demand for the products of this collective effort. Why? May be because some of the demand withered away due to changes in the macro-environment. But, is there no more Latent Demand today that is not yet addressed - as I mentioned earlier, there is so much unmet demand in the developing and under-developed world - I mentioned about how my farm still does not get enough electricity even today while the prices my farm produce can fetch is increasing - i.e. there is a sustainable demand for electricity that is not met. Why was the collective effort not addressing such demand that is more premanent in the first place? Should we as humans be more wiser in choosing which demand we address? Does it mean we need to define a mechanism, a business model, to provide businesses, the drivers of this collective effort, greater visibility and incentive to access such Latent Demand?

Conclusion:

In the both scenarios there are some action items on us humans -

1. Build more relevant technologies - May be we need to invest lesser in building fad-type technologies and invest more on such technologies that address real world needs
2. Incentivise businesses which address Latent Demand - May be the stock market should provide better P/E valuations for businesses addressing such demand - demand of a better quality should matter. May be there is a need for businesses (consultancies) that help other businesses access this Latent Demand.

Disclaimer:

Probably I did not understand this concept. Probably I just realized what a lot of people already know. Probably I hit a point that we need to ponder! Thought of sharing it anyway and be corrected, if appropriate. I did try to use more simpler relations in macro-economics to bring out the argument than the theory.