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By Root 580 0

’ lives because posterity can be richer through innovation. If somebody somewhere takes out a mortgage, which he will repay in three decades’ time, to invest in a business that invents a gadget that saves his customers time, then that money, brought forward from the future, will enrich both him and those customers to the point where the loan can be repaid to posterity. That is growth. If, on the other hand, somebody takes out a loan just to support his luxury lifestyle, or to speculate on asset markets by buying a second home, then posterity will be the loser. That is what, it is now clear, far too many people and businesses did in the 2000s – they borrowed more from posterity than their innovation rate would support. They misallocated the resources to unproductive ends. Most past bursts of human prosperity have come to naught because they allocated too little money to innovation and too much to asset price inflation or to war, corruption, luxury and theft.

In the Spain of Charles V and Philip II, the gigantic wealth of the Peruvian silver mines was wasted. The same ‘curse of resources’ has afflicted countries with windfalls ever since, especially those with oil (Russia, Venezuela, Iraq, Nigeria) that end up run by rent-seeking autocrats. Despite their windfalls, such countries experience lower economic growth than countries that entirely lack resources but get busy trading and selling – Holland, Japan, Hong Kong, Singapore, Taiwan, South Korea. Even the Dutch, those epitomes of seventeenth-century enterprise, fell under the curse of resources in the late twentieth century when they found too much natural gas: the Dutch disease, they called it, as their inflated currency hurt their exporters. Japan spent the first half of the twentieth century jealously seeking to grab resources and ended up in ruins; it spent the second half of the century trading and selling without resources and ended up topping the lifespan league. In the 2000s the West misspent much of the cheap windfall of Chinese savings that the United States Federal Reserve sluiced our way.

So long as somebody allocates sufficient capital to innovation, then the credit crunch will not in the long run prevent the relentless upward march of human living standards. If you look at a graph of world per capita GDP, the Great Depression of the 1930s is just a dip in the slope. By 1939 even the worst-affected countries, America and Germany, were richer than they were in 1930. All sorts of new products and industries were born during the Depression: by 1937, 40 per cent of DuPont’s sales came from products that had not even existed before 1929, such as rayon, enamels and cellulose film. So growth will resume – unless prevented by the wrong policies. Somebody, somewhere, is still tweaking a piece of software, testing a new material, or transferring a gene that will make your and my life easier in the future. I cannot know who or where he is for sure, but let me give you a candidate. In the week I wrote this paragraph, a small company called Arcadia Biosciences in northern California signed an agreement with a charity working in Africa to license, royalty-free to smallholders, new varieties of rice that can be grown with less nitrogen fertiliser for the same yield, thanks to the over-expression in the roots of a version of a gene called alanine aminotransferase borrowed from barley. Assuming the varieties work in Africa as well as they do in California, some African will one day grow and sell more food (for less pollution), which in turn means that he will have more money to spend, earning the cost of, say, a mobile phone, which he will buy from a Western company, and which will help him find a better market for his rice. An employee of that Western company will get a pay rise, which she will spend on a new pair of jeans, which were made from cotton woven in a factory that employs the smallholder’s neighbour. And so on.

As long as new ideas can breed in this way, then human economic progress can continue. It may be only a year or two till world growth resumes after the current