Michael Baxter: Progress is progress, no matter how fast it moves and innovates

No Pain, No Gain

Matt Ridley's new book The Rational Optimist looks at the world's potential future through spectacles that some might say are rose-tinted. I thought it might be fun to ask the same question of the economy: is there reason to be optimistic? All but the recently estranged from Mars will know the world has problems.

There are global imbalances, sovereign and household debt, peak oil, food shortages, the twin demographic timebomb in which the world ages and expands simultaneously and, to top it all, climate change.

But squint a little, view the world from a different angle and things look a lot more promising. The missing ingredient the cynics overlook (and by the way, the most negative of the lot; the ones who practice what has become known as the "miserable science", namely economists, also miss this ingredient) can be summed up by two words – Moore's law.

Moore's law describes the way computers double in speed every 18 months, but I am using my own particular definition of the law and applying it to any scenario in which we get a positive feedback loop of improving technology creating new demand, facilitating further technological advances.

To put the law in context, if the top speed of your average family saloon car had increased at the same pace as computers since that day in 1965 when Gordon Moore first defined his law, it would now be able to travel faster than the speed of light.

Using my definition, genetic science has its own Moore's law. The pace of development over the past half a century has been just as stunning as the advances in computers. Craig Venter has now created synthetic life. Even so, the story of genetic science is still beginning.

Matt Ridley is a climate change cynic and an advocate of nuclear power. I am neither, but I remain optimistic. Take wind and solar power. Both technologies have shortcomings, but then what were computer chips like 40 years ago?

Within a few years solar power technology may prove just as efficient at generating energy as traditional fossil fuels. It will then continue to advance.

As for wind power, those wind farms that are popping up at the moment are interim developments. The future of wind power probably lies in massive kite-like structures that fly thousands of feet up. But advances in alternative technologies reveal a rarely considered problem with nuclear energy. Because it takes so long to build a nuclear power station, the generation gap between each leap in technology is too long and nuclear power can never follow a Moore's law trajectory.

Then there is the internet. Considering the grand scope of history, there have been four major advances in promoting specialisation, trade and the flow of ideas. First there was the development of speech. Then some 7,000 or so years ago, came writing. The next step came with the printing press. The internet was the next leap.

But specialisation and new technology have downsides; specialists can struggle to see the big picture. Bankers, for example, failed to spot the inherent danger in mortgage securitisation. Specialisation can stand in the way of progress. We are now so accomplished at using computers that the QWERTY keyboard, designed in the 1870s to be deliberately awful so as to slow typists down, will never be replaced.

That awful decade – the 1930s – followed a 50-year technological revolution. This was no coincidence. It took time for the economy to adjust to technological change and the interim period was painful. It is like that now.

Real hardship has been created out of the miracle of technological advances. But if we let Moore's law continue to work, rather than blame specialisation and globalisation for our ills, then we have no debt crisis – debt worth 100 per cent of annual output is trivial if GDP is rising rapidly; we have no pending energy crisis; and even climate change can be defeated.

The key lies in demand – global consumer demand. The biggest risk today is a backlash against the consumer, accompanied by calls for prudence and for exporting more and importing less.

When this becomes a global phenomenon, even Moore's law itself may start to unwind.

Michael Baxter produces a daily newsletter about the economy at www.investmentandbusinessnews.co.uk. He also co-wrote "Bubbles And Wisdom", published by Asenta