We Are Reaching 1/25th of our Economic Potential

It’s a simple fact.  We are being held back economically, but not in the ways you think.

Simply, the technology we use is being improved at compounded annual growth rate of 50%, yet the economic system we use reduces the improvements we get from it to less than 2% a year (measured by labor productivity).

That’s huge.  We’re improving at a rate that is only 1/25th of what we could be accomplishing.

That means that we have the potential to make twice as much as we do today, every two years without inflation, but we don’t because the economic system stops it from happening.

More specifically, the systems we use — from finance to law to government to retail — to run the economic system are so poorly design that they slow the rate of economic innovation we could potentially achieve to 1/25 of what is possible.

The solution?  Cut the overhead and go direct.  It’s the ticket to the future of the American Dream and the only way we’ll reach our potential.

Join the movement to restore America's prosperity

Discussion — 9 Responses

  • Chris November 16, 2013 on 5:30 pm

    The economy we have did not just develop overnight. Finance, law and government didn’t just happen so someone could make a buck off of someone else. They developed because of real problems, and were originally the solutions to those problems. So now, they may be inefficient and no longer the right solutions. But they won’t just disappear, they will evolve. And the problems that they addressed will evolve too. So new “inefficiencies” will be imposed as a means of dealing with the new problems.

    • John Robb Chris November 19, 2013 on 4:22 pm

      Chris, Of course they won’t go away entirely. However, when the delta between potential and reality is large due to an inability to evolve quick enough, variants emerge. When they do, they can do so aggressively. Note the rise of Western Europe relative to the rest of the world when it replaced feudal agrarianism with something new that more closely aligned with potential technological innovation rates…

  • Penses November 16, 2013 on 8:53 pm

    For what it’s worth: This post “seems” like a right-direction insight to me, but very much “feels” like an oversimplification. (Perhaps even to the point of being an exaggeration?)

    I think Chris gets at some of it. i.e. where systems have evolved to support cooperation and thwart aberrations of same.

    Three examples I think about occasionally: 1) Real Estate law, 2) the Uniform Commercial Code, 3) International Commercial Terms. They all evolved over a long period of time, they all are very complex, and they all put into standardized code, structures that allow various actors to operate under given assumptions with other actors — especially ones they do not know well enough to trust blindly. Notably, this isn’t just “reputation” information (i.e. like modern reviews and network-reputation systems facilitate on most “market” websites), but rather, codified “standards of behavior” — i.e. what you can expect to expect, as an actor in a given system.

    An interesting example of the latter that relates to Chris’s point, from International Commercial Terms, is freight damage liability when freight is being loaded onto a ship. I believe (though I am not an expert on this subject ), it became part of legal practice centuries ago that the liability of freight damage passed from one party to the other literally as the rope net filled with freight went over the ship’s rail. If the net broke on the dock/water side, it was one party’s liability. If it broke on the ship’s deck side, it was another party’s liability. I’m sure this standard evolved over time after many, many damaged-freight events.

    Notably, this structure changed in 2010 (which I found out just now, looking this “ship’s rail” example up again). I’m guessing it changed because it is no longer useful in the age of containerization. “The ship’s rail” legal standard has been relegated to the dustbin of history (at least as I understand it), as the “solution” evolved.

    Real Estate law is fascinating as well, in terms of its historical development. It evolved over a VERY long time. It’s cumbersome, and clearly pretty inefficient, but I’m not sure I have many suggestions that would improve the legal aspects of the transaction process.

    My read from your writing over the years is that, broadly, you think much of this system & structure has been hijacked (especially in finance), and in that hijacking, has become both a drag on legitimate value-creation, and a means of legalized theft in the form of illegitimate rents, cronyism, etc. I’m not inclined to entirely disagree with that assessment. Much of the promise of the direct economy, at least as I read you, is that it routes around these hijacked structures. (Is that a correct assessment of your view?)

    I see similar potentials, but am perhaps more cautious, and maybe even a little bit skeptical. I also think it’s very easy to underestimate the economic value of the various structures underlying a developed economy, which I think we probably take for granted even more than we take physical infrastructure for granted.

    Part of what is “yet to shake out” in the direct economy, I think, is where such structures make sense, and where they don’t. Uber is a great study in that, from my POV. What services need regulating, and which don’t, and why? Where is regulation actually a positive, friction-reducing support structure, and where is it just pure drag? I find these to be difficult questions to answer with much precision or confident accuracy.

    I’d like to know more about where your calculations come from on this. Will follow the referenced link and see where that leads.

    Thanks for your posts — they spur much thought.


  • James Bowery November 18, 2013 on 6:43 am

    From Machiavelli’s “The Prince” chapter 6:

    “It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them.”

    It must be kept in mind that “new” here means “new” to the current generation since one may attempt to reintroduce an old order and encounter the same difficulty due to the failure to learn from actual history (as opposed to the version of history provided by the existing order).

    • John Robb James Bowery November 19, 2013 on 4:13 pm

      Sage advice. The good part is that I’m just following an existing trend. It’s doing all of the work. JR

  • JayLib November 21, 2013 on 9:58 pm

    Very interesting blog. I came upon your previous blog months ago — I can’t recall how — but anyway, you are thinking about a lot of the stuff I spend most of my waking time thinking about.

    Don’t have a lot of time but I must mention, as focus for future writing:

    – “Economic Rents” (or, somewhat snappier IMO, “Privilege Profits”): the gains accruing to monopoly/protectionism/privilege as opposed to production.

    – How to identify them?

    – How does the massive taking of economic rents/privilege profits contribute to inflation that eats away at wages and quality of life?

    – How to change the system/shift the incentives so privilege is no longer rewarded and production is more fully rewarded?

    There is no one, IMO, better to read than the writers/economists in the Georgist tradition, including Henry George himself. I think the 21st century will be the Georgist century. It had better be — or we all lose.

    Most people recommend George’s tome Progress and Poverty, but I think his son (who became a Congressman) laid out his program much more succinctly in The Menace of Privilege. But for dated references, I think the essence of George Jr.’ s argument remains the same today, as does the essence of economics. The big three issues in the lopsided division of wealth and power are

    1) Government-protected land concentration (yep — hardly mentioned at all in neoclassical econ or even Austrian, this is the Big One; the effects of Ricardo’s Law of Rent, as extended by George, is under our current law and custom as inescapable as gravity.)

    2) Government interference in peaceful private enterprise via taxes or needless regulations;

    3) Government monopoly grants, privileges, and other subsidies to private parties at the expense of the others; and another gets a passing mention:

    4) Government-created corporate privileges.

    These problems all connect, but they all rest and feed back into and are amplified by 1), and until remedies are applied to solve that issue, the fact is that no amount of increase in production or technology or smarts, no matter how good those things may be, will ameliorate the wealth gap or inflation — it will at best, only temporarily slow these trends, and at worst, accelerate them!

    That has, in fact, been the course of the age of “capitalism” (which isn’t), which gave birth, of necessity, to the equally erroneous age of welfarism in an attempt to rectify the horrendous design flaws (or sabotage) of “capitalism” because the fundamental problem was not dealt with.

    I would also recommend the work of Mason Gaffney and Fred Foldvary and Fred Harrison, and my friends at who review the news through a Georgist lens.

    More specifically, the systems we use — from finance to law to government to retail — to run the economic system …”

    Next to economic rents (also protected by same government systems), the fact “we”(?) have “systems … to run the economic system” is the problem.

    In fact, government presuming to “run the economic system” creates much of the privilege in the first place.

    So I agree — “Cut the overhead and go direct.” But again, how this is gone about is important. Unlike the neo’s and the others, do not overlook what everything stands on, and virtually everybody has to pay for, just to have somewhere to stand.

    • John Robb JayLib November 22, 2013 on 11:36 am

      Jay, The direct economy solves quite a bit of this, merely through design. However, there isn’t any real underlying ideology driving this forward, it’s just how technological progress will change our social economy. So, all you can do is pick an app you like and use it to cast your vote.


  • JayLib November 21, 2013 on 10:05 pm

    I realize that I neglected the issue of money/credit above. The first thing that is apparent is that it should not be run by a state-protected private cartel. The second thing is that a greenback system would likely work much better than the Fed system. (Henry George Sr., too, was a greenbacker.) But beyond that, I also can’t escape the logic of free banking. So I see a possible role for several types of currency; local ones to facilitate local transactions, and the national/international for others, just as we have local, State, and national arteries for travel. I don’t follow the money issue as much as I used to.

    • John Robb JayLib November 22, 2013 on 11:31 am

      Jay, There’s already an open source/decentralized app for money – bitcoin. There will be more in the financial sector. The financial middleman is going to find it harder and harder to make a dishonest buck. JR