Technology as a Driver of Both Economic and Societal Growth

Allow me to start with two thoughts. First, an economist called Thomas Malthus once projected that the population would continue increasing while resources were finite; hence, humanity was doomed to famine and pestilence.

He was dead wrong. He and other classical economists ignored or completely underestimated the role of technology in economic growth. Today, economists generally recognize technology as the most crucial driver of economic growth, even more important than capital accumulation.

My second thought is a memory dating back to watching “Star Trek” as a teenager. As the starship encountered brave new worlds in outer space, the crew decided that the single best explanatory variable to get a quick read on the state of advancement of a civilization was to examine its use of energy. When you look back at human development, from the discovery of fire to nuclear fission, this becomes self-evident.

I explore these two thoughts as a way leading into an important question: are we potentially on the verge of major technological breakthroughs, ones with the potential to accelerate GDP growth and lead to a more advanced state of development? (I will briefly discuss downside risks as well).

I have sometimes been accused of being a pessimist, whether predicting that COVID would claim a million lives in the United States or that inflation would not be transitory. This article provides the underpinning as to why I am actually a radical optimist.

Although it always seems that the world is going to hell in a handbasket, the continuous advance of technology, combined with entrepreneurialism, has, over the past millennia, led to steady economic growth and improvement in the human condition.

Quantity and Quality

There is a case to be made that currently, technology is improving both quantitatively and qualitatively. What do I mean by that? You might look at the rate of patent applications or patents granted, for example, as a proxy for the quantity of technology. The number of patent applications has been rising inexorably in each of the States, Europe, and China (with the latter seeing the most significant growth over the past decade).

Qualitative change is a more subjective concept, harder to measure. Think of some inventions as being utterly useless. Others, such as electricity, have changed the world.

I would argue that we may be on the cusp of a number of changes that may fundamentally change current notions of economics, scarcity, and, indeed, the human condition. I will briefly touch on three areas: energy, artificial intelligence, and biology.

Nuclear fusion has seemed to be 40 years away for at least the last 40 years. Fortunately, in the past few years, it seems to have come tantalizingly close. Experimental fusion reactions have recently occurred in controlled environments where the reaction released more energy than it consumed.

But there are so many other breakthroughs in energy, from constantly improving efficiencies in harnessing alternative fuels to constant breakthroughs in battery technologies.

Artificial intelligence allows us to produce more with fewer factor inputs (materials and labor). It has the potential to impact productivity vastly, hence output per person. We are now on the cusp of computer programs creating new programs without human intervention, which would considerably speed up the rate of progress. And ChatGPT has set the world afire.

Meanwhile, advances in genetic engineering will eliminate or treat numerous diseases. We are on the cusp of technology that dramatically increases lifespan and health span. 

Step Change

On all three points, I am only scratching the surface, just to provide examples of where the potential for significant breakthroughs is greatest.

Technology has always contributed to economic expansion and human well-being. We may be on the cusp of technological change of such magnitude that it has the potential to dramatically increase the rate of GDP growth and improvements in standards of living.

Consider, for example, the implications of harnessing nuclear fusion, a potentially close-to-infinite and almost free form of energy. I don’t mean tomorrow but within a decade or two.

I am the first to admit the downsides of these technological advancements. I’m sure very soon after man invented fire came the first arsonist. The greater the power, the greater the potential for abuse. 

Nuclear power has enormous potential as an energy source but could also blow up the world. Artificial intelligence could turn on its human masters and enslave us. Genetic engineering might create a monster race or virus epidemics. Perhaps Elon Musk is correct that humanity needs to create a presence beyond planet earth to enhance its chances of survival. 

If my thesis is correct, technology in the medium to long term may well provide us with higher GDP growth and faster improvements in living standards; but remember a fundamental principle of finance: risk and reward are correlated. Higher rewards beget higher risks.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (www.businessexitplanningbook.com), and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of March 10, 2023.