When reading this, I was initially confused by a potential objection you don’t explicitly address. So I thought I’d quickly write up my thoughts in case others have a similar reaction. My guess is you in principle agree with all this (and I think you’ve in fact hinted at it in several places), and that it’s one of the reasons why you say it’s ultimately a messy empirical question.
I think my original objection is mostly flawed, but that it does point to some complications that mean that one needs to be a little more careful when deciding which spending on longtermism is ‘actually investment’.
Here it is:
Objection.
The longtermism community can enjoy above-average growth for only a finite window of time. (It can at most control all resources, after which its growth equals average growth.)
Thus, spending money on growing the longtermism community now rather than later merely moves a transient window of additional resource growth to an earlier point in time.
We should be indifferent about the timing of benefits, so this effect doesn’t matter. On the other hand, by waiting one year we can earn positive expected returns by (e.g.) investing into the stock market.
To sum up, giving later rather than now has two effects: (1) moving a fixed window of additional growth around in time and (2) leaving us more time to earn positive financial returns. The first effect is neutral, the second is positive. Thus, overall, giving later is always better.
This objection is actually based on an objection to an analogous argument about shorttermist spending (which I was recently reminded of by old posts, one by Paul Christiano and one by you and Ben Todd):
Just as “longtermism has outperformed the stock market”, so have, for instance, recipients of GiveDirectly’s unconditional cash transfers. They buy things like iron roofs, and this has much higher investment returns than the stock market.
More broadly, you might think that most shorttermist spending is ‘actually investment’ as well: as Christiano puts it, “When I support the world’s poorest people I’m not just alleviating their suffering, I’m increasing the productivity of their lives. The recipients of aid go on to contribute to the world, and their contributions compound in turn.”
Why doesn’t this show that shorttermist spending is better done now rather than later?
Because of an objection parallel to the above!
The spending will “diffuse throughout the economy” and its investment returns will over time approach the average growth rate. (Again, one way to see this is that, e.g., the poor Ugandan household receiving a cash transfer can’t have above-average growth forever: else it would eventually control the whole world economy!)
So by giving now rather than later you only move a fixed window of transient above-average returns to an earlier point in time. After that window, your spending will earn average returns (i.e. ~growth of gross world product). But if you delay the start of this whole process, you gain time in which you can earn above-average returns by e.g. investing into the stock market.
Thus, unless some assumptions of this simple model are wrong or there are other considerations, it’s better to give later!
---
Rebuttal of the objection
To be clear, I think the analog objection for to the analog argument for typical examples of shorttermist spending such as donations to GiveDirectly does work. (The objection doesn’t settle the debate because there are other considerations; but it does rebut the original argument.)
What is different about the longtermist case?
The key question is whether, after the finite window of above-average growth, the resources “descended” from your spending will still be “controlled by” your goals.
This is the case for a longtermist that now spends money that increases the number of longtermists in the future. In particular, once it’s no longer possible to get outsized investment returns from growing longtermism, future longtermists would invest in the stock market rather than engaging in ‘average activities’ that earn average returns. (Or more likely they’d pursue some other ‘investment-like’ spending activity that has lower returns than growing longtermism now but higher returns than the stock market then.) So you effectively don’t “lose” the opportunity to earn above-average returns on the stock market by first investing into longtermism.
By contrast, the shorttermist giving to GiveDirectly should expect the resources “descended” from her giving to eventually end up with the “average market subject”: the cash transfer recipient buys an iron roof, the iron roof vendor buys new tools, the tool manufacturer pays taxes, etc. Thus the resources will be held by average people who engage in average activities that earn average returns—rather than investing everything into the stock market, or pursuing some other activity selected for maximizing the shorttermist’s values (e.g. perhaps after finite window of above-average returns from the cash transfer it’s still the case that, by the shorttermist’s lights, you could get “investment returns” from buying bednets that exceed stock market returns—but the “average person” won’t donate to AMF either). So unlike the longtermist, by donating to GiveDirectly now, the shorttermist does “lose” the opportunity to earn above-average returns on e.g. the stock market.
(On the other hand, the objection won’t work for shorttermist spending that’s mostly “meta”. For instance, donations to animal welfare organizations also pay for “research or career development or book-writing or websites or community-building”, or even just additional vegans that convince others of veganism without additional effort, etc.)
I think this shows that the availability of stock-market-beating longtermist spending opportunities is a significantly weaker argument than it might seem at first glance.
First, the size of the effect is less dramatic. You won’t earn higher returns forever, you just optimize the relative timing of higher-return and lower-return periods by frontloading the higher-return period.
Second, the target you need to hit is arguably pretty narrow. The rebuttal only works fully for things that create cause-agnostic, transferable resources that are allocated at least as well as if allocated by your future self. If resources are tied to a particular cause area, are not transferable, or are more poorly allocated, they count less. For example, all of the following arguably don’t count as ‘actually investment’ (at least not fully), and instead are much more similar to the shorttermist donating now to GiveDirectly:
Growing the number of AI safety researchers more quickly than stock market investments, if most of these AI safety researchers wouldn’t be willing or able to switch their careers to, say, climate change mitigation if it turned out that was much higher impact.
Growing the number of longtermism-relevant research results more quickly than stock market investments, unless these research results generate transferable and cause-agnostic resources such as money held by longtermists.
Growing the number of sort-of-longtermists if they have a bias toward spending rather than investing—for instance if they wouldn’t be willing to invest all their resources for potentially thousands of years or more into a super-long-term investment fund if that looked like the best option.
Growing the number of resources aligned with relatively common-sensical goals like “taking global challenges seriously” or “generally-sensible action”, if you believe that the best longtermist spending will eventually be super weird (perhaps “tile the universe with hedonium”).
Acquiring resources (longtermists, research results, etc.) that ‘perish’ more quickly than money held by yourself. For instance this would be the case if research gets “forgotten” too quickly or new longtermists have higher rates of value drifts than yourself.
(There are also a number of other ways in which the objection can fail, which admittedly at first glance seem more likely for longtermist spending than for donations to GiveDirectly: e.g. if the timing of your spending influences the length of the period of above-average returns or the future average growth rate.
E.g. suppose it was the case that if you start to grow longtermism now, eventually 10% of the world’s population will be longtermist, but if you start to grow longtermism only in 50 years then growth will max out at 5% of the world population; this would push toward spending now. On the other hand, the effect could also turn out to work the other way around and favor spending later!)
(These are more additional considerations, not intended to be counterarguments given that your post itself was mostly pointing at additional considerations.)
Objection.
The longtermism community can enjoy above-average growth for only a finite window of time. (It can at most control all resources, after which its growth equals average growth.)
Thus, spending money on growing the longtermism community now rather than later merely moves a transient window of additional resource growth to an earlier point in time.
We should be indifferent about the timing of benefits, so this effect doesn’t matter. On the other hand, by waiting one year we can earn positive expected returns by (e.g.) investing into the stock market.
To sum up, giving later rather than now has two effects: (1) moving a fixed window of additional growth around in time and (2) leaving us more time to earn positive financial returns. The first effect is neutral, the second is positive. Thus, overall, giving later is always better.
Given that longtermists are generally concerned with trajectory changes, controlling all resources seems like we’ve largely ‘won’, and having more financial returns on top of this seems fairly negligible by comparison. In many cases I’d gladly trade absolute financial returns for controlling a greater fraction of the world’s resources sooner.
Second, the target you need to hit is arguably pretty narrow. The objection only applies conclusively to things that basically create cause-agnostic, transferable resources that are allocated at least as well as if allocated by your future self. If resources are tied to a particular cause area, are not transferable, or are more poorly allocated, they count less.
Speaking to movement-building as an alternative to financial investment in particular:
It feels to me like quality-adjusted longtermists are more readily transferable and cause-agnostic than money on short time-scales, in the sense that they can either earn money or do direct work, and at least right now, we seem to be having trouble effectively turning money into direct work.
It’s definitely a lot less clear whether there’s a compounding effect to longtermists and how readily they can be transferred into the longer-term future. For what it’s worth, I’d guess there is such a compounding effect, and they can be transferred, especially given historical evidence of transfer of values between generations. Whether this is true / consistent / competitive with stock market returns is definitely debateable and a matter of ‘messy empirics’, though.
I do agree with all of this, but one important point wasn’t salient to me at the time of writing the post: that you want the resources returned to be under direction as sophisticated as your future self or they should get discounted, and that this might constitute a narrow target. I’m uncertain how narrow a target it is, but I think that getting clarity on that seems quite important as it could affect judgements about which opportunities are good investments.
Yes, though to be fair financial investments (and generally everything that won’t have most of its total effect soon) need to hit the same narrow target. But perhaps for those the mechanisms by which we might miss the target have been more prominent in recent discussions (value drift, expropriation, etc.).
Relevantly to this comment thread, Trammell says during his 80k interview:
Philip Trammell: [...] in this write-up, I do try to make it clear that by investment, I really am explicitly including things like fundraising and at least certain kinds of movement building which have the same effect of turning resources now, not into good done now, but into more resources next year with which good will be done. I would be just a little careful to note that this has to be the sort of movement building advocacy work that really does look like fundraising in the sense that you’re not just putting more resources toward the cause next year, but toward the whole mindset of either giving to the cause or investing to give more in two years’ time to the cause. You might spend all your money and get all these recruits who are passionate about the cause that you’re trying to fund, but then they just do it all next year.
Robert Wiblin: The fools!
Philip Trammell: Right. And I don’t know exactly how high fidelity in this respect movement building tends to be or EA movement building in particular has been. So that’s one caveat. I guess another one is that when you’re actually investing, you’re generally creating new resources. You’re actually building the factories or whatever. Whereas when you’re just doing fundraising, you’re movement building, you’re just diverting resources from where they otherwise would have gone.
Robert Wiblin: You’re redistributing from some efforts to others.
Philip Trammell: Yeah. And so you have to think that what people otherwise would have done with the resources in question is of negligible value compared to what they’ll do after the funds had been put in your pot. And you might think that if you just look at what people are spending their money on, the world as a whole… I mean you might not, but you might. And if you do, it might seem like this is a safe assumption to make, but the sorts of people you’re most likely to recruit are the ones who probably were most inclined to do the sort of thing that you wanted anyway on their own. My intuition is that it’s easy to overestimate the real real returns to advocacy and movement building in this respect. But I haven’t actually looked through any detailed numbers on this. It’s just a caveat I would raise.
With regards to the “mechanisms by which we might miss the target”, in that post on crucial questions, I highlighted and collected sources relevant to the following questions:
But if you delay the start of this whole process, you gain time in which you can earn above-average returns by e.g. investing into the stock market.
Shouldn’t investing into the stock market be considered a source of average returns, by default? In the long run, the stock market grows at the same rate as GDP.
If you think you have some edge, that might be a reason to pick particular stocks (as I sometimes do) and expect returns above GDP growth.
But generically I don’t think the stock market should be considered a source of above-average returns. Am I missing something?
The stock market should grow faster than GDP in the long run. Three different simple arguments for this:
This falls out of the commonly-used Ramsey model. Specifically, because people discount the future, they will demand that their investments give better return than the general economy.
Corporate earnings should grow at the same rate as GDP, and stock price should grow at the same rate as earnings. But stock investors also earn dividends, so your total return should exceed GDP in the long run. (The reason this works is because in aggregate, investors spend the dividends rather than re-investing them.)
Stock returns are more volatile than economic growth, so they should pay a risk premium even if they don’t have a higher risk-adjusted return.
[Low confidence as I don’t really understand anything about finance.]
It sounds right to me that the stock market can’t grow more quickly than GDP forever. However, it seems like it has been doing so for decades, and that there is no indication that this will stop very soon—say, within 10 years.
(My superficial impression is that this phenomenon it somewhat surprising a priori, but that there isn’t really a consensus for what explains it.)
Therefore, in particular, for the window of time made available by moving spending from now to, say, in 1 year, it seems you can earn returns on the stock market that exceed world economic growth.
If we know that this can’t continue forever, it seems to me this would be more relevant for the part where I say “future longtermists would invest in the stock market rather than engaging in ‘average activities’ that earn average returns”etc.
More precisely, the key question we need to ask about any longtermist investment-like spending opportunity seems to be: After the finite window of above-average growth from that opportunities, will there still be other opportunities that, from a longtermist perspective, have returns that exceed average economic growth? If yes, then it is important whether the distant returns from investment-like longtermist spending end up with longtermists; if no, then it’s not important.
My superficial impression is that this phenomenon it somewhat surprising a priori, but that there isn’t really a consensus for what explains it.
Hmm, my understanding is that the equity premium is the difference between equity returns and bond (treasury bill) returns. Does that tell us about the difference between equity returns and GDP growth?
A priori, would you expect both equities and treasuries to have returns that match GDP growth?
Hmm, my understanding is that the equity premium is the difference between equity returns and bond (treasury bill) returns.
Yes, that’s my understanding as well.
Does that tell us about the difference between equity returns and GDP growth?
I don’t know, my sense is not directly but I could be wrong. I think I was gesturing at this because I took it as evidence that we don’t understand why equities have such high return. (But then it is an additional contingent fact that these returns don’t just exceed bond returns but also GDP growth.)
A priori, would you expect both equities and treasuries to have returns that match GDP growth?
I don’t think I’d expect this, at least not with high confidence—but overall I just feel like I don’t know how to think about this because I understand too little finance and economics. (In particular, it’s plausible to me that there are strong a priori arguments about the relationships between GDP growth, bond returns, and equity returns—I just don’t know what they are.)
I thought about this for another minute, and realized one thing that hadn’t been salient to me previously. (Though quite possibly it was clear to you, as the point is extremely basic. - It also doesn’t directly answer the question about whether we should expect stock returns to exceed GDP growth indefinitely.)
When thinking about whether X can earn returns that exceed economic growth, a key question is what share of those returns is reinvested into X. For example, suppose I now buy stocks that have fantastic returns, but I spend all those returns to buy chocolate. Then those stocks won’t make up an increasing share of my wealth. This would only happen if I used the returns to buy more stocks, and they kept earning higher returns than other stuff I own.
In particular, the simple argument that returns can’t exceed GDP growth forever only follows if returns are reinvested and ‘producing’ more of X doesn’t have too steeply diminishing returns.
For example, two basic ‘accounting identities’ from macroeconomics are:
β=sg
α=rβ
Here, s is the savings rate (i.e. fraction of total income that is saved, which in equilibrium equals investments into capital), g is the rate of economic growth, and r is the rate of return on capital. These equations are essentially definitions, but it’s easy to see that (in a simple macroeconomic model with one final good, two factors of production, etc.) β can be viewed as the capital-to-income ratio and α as capital’s share of income.
Note that from equations 1 and 2 it follows that rg=αs. Thus we see that r exceeds g in equilibrium/‘forever’ if and only if α>s - in other words, if and only if (on average across the whole economy) not all of the returns from capital are re-invested into capital.
(Why would that ever happen? Because individual actors maximize their own welfare, not aggregate growth. So e.g. they might prefer to spend some share of capital returns on consumption.)
Analog remarks apply to other situations where a basic model of this type is applicable.
When reading this, I was initially confused by a potential objection you don’t explicitly address. So I thought I’d quickly write up my thoughts in case others have a similar reaction. My guess is you in principle agree with all this (and I think you’ve in fact hinted at it in several places), and that it’s one of the reasons why you say it’s ultimately a messy empirical question.
I think my original objection is mostly flawed, but that it does point to some complications that mean that one needs to be a little more careful when deciding which spending on longtermism is ‘actually investment’.
Here it is:
This objection is actually based on an objection to an analogous argument about shorttermist spending (which I was recently reminded of by old posts, one by Paul Christiano and one by you and Ben Todd):
Just as “longtermism has outperformed the stock market”, so have, for instance, recipients of GiveDirectly’s unconditional cash transfers. They buy things like iron roofs, and this has much higher investment returns than the stock market.
More broadly, you might think that most shorttermist spending is ‘actually investment’ as well: as Christiano puts it, “When I support the world’s poorest people I’m not just alleviating their suffering, I’m increasing the productivity of their lives. The recipients of aid go on to contribute to the world, and their contributions compound in turn.”
Why doesn’t this show that shorttermist spending is better done now rather than later?
Because of an objection parallel to the above!
The spending will “diffuse throughout the economy” and its investment returns will over time approach the average growth rate. (Again, one way to see this is that, e.g., the poor Ugandan household receiving a cash transfer can’t have above-average growth forever: else it would eventually control the whole world economy!)
So by giving now rather than later you only move a fixed window of transient above-average returns to an earlier point in time. After that window, your spending will earn average returns (i.e. ~growth of gross world product). But if you delay the start of this whole process, you gain time in which you can earn above-average returns by e.g. investing into the stock market.
Thus, unless some assumptions of this simple model are wrong or there are other considerations, it’s better to give later!
---
Rebuttal of the objection
To be clear, I think the analog objection for to the analog argument for typical examples of shorttermist spending such as donations to GiveDirectly does work. (The objection doesn’t settle the debate because there are other considerations; but it does rebut the original argument.)
What is different about the longtermist case?
The key question is whether, after the finite window of above-average growth, the resources “descended” from your spending will still be “controlled by” your goals.
This is the case for a longtermist that now spends money that increases the number of longtermists in the future. In particular, once it’s no longer possible to get outsized investment returns from growing longtermism, future longtermists would invest in the stock market rather than engaging in ‘average activities’ that earn average returns. (Or more likely they’d pursue some other ‘investment-like’ spending activity that has lower returns than growing longtermism now but higher returns than the stock market then.) So you effectively don’t “lose” the opportunity to earn above-average returns on the stock market by first investing into longtermism.
By contrast, the shorttermist giving to GiveDirectly should expect the resources “descended” from her giving to eventually end up with the “average market subject”: the cash transfer recipient buys an iron roof, the iron roof vendor buys new tools, the tool manufacturer pays taxes, etc. Thus the resources will be held by average people who engage in average activities that earn average returns—rather than investing everything into the stock market, or pursuing some other activity selected for maximizing the shorttermist’s values (e.g. perhaps after finite window of above-average returns from the cash transfer it’s still the case that, by the shorttermist’s lights, you could get “investment returns” from buying bednets that exceed stock market returns—but the “average person” won’t donate to AMF either). So unlike the longtermist, by donating to GiveDirectly now, the shorttermist does “lose” the opportunity to earn above-average returns on e.g. the stock market.
(On the other hand, the objection won’t work for shorttermist spending that’s mostly “meta”. For instance, donations to animal welfare organizations also pay for “research or career development or book-writing or websites or community-building”, or even just additional vegans that convince others of veganism without additional effort, etc.)
I think this shows that the availability of stock-market-beating longtermist spending opportunities is a significantly weaker argument than it might seem at first glance.
First, the size of the effect is less dramatic. You won’t earn higher returns forever, you just optimize the relative timing of higher-return and lower-return periods by frontloading the higher-return period.
Second, the target you need to hit is arguably pretty narrow. The rebuttal only works fully for things that create cause-agnostic, transferable resources that are allocated at least as well as if allocated by your future self. If resources are tied to a particular cause area, are not transferable, or are more poorly allocated, they count less. For example, all of the following arguably don’t count as ‘actually investment’ (at least not fully), and instead are much more similar to the shorttermist donating now to GiveDirectly:
Growing the number of AI safety researchers more quickly than stock market investments, if most of these AI safety researchers wouldn’t be willing or able to switch their careers to, say, climate change mitigation if it turned out that was much higher impact.
Growing the number of longtermism-relevant research results more quickly than stock market investments, unless these research results generate transferable and cause-agnostic resources such as money held by longtermists.
Growing the number of sort-of-longtermists if they have a bias toward spending rather than investing—for instance if they wouldn’t be willing to invest all their resources for potentially thousands of years or more into a super-long-term investment fund if that looked like the best option.
Growing the number of resources aligned with relatively common-sensical goals like “taking global challenges seriously” or “generally-sensible action”, if you believe that the best longtermist spending will eventually be super weird (perhaps “tile the universe with hedonium”).
Acquiring resources (longtermists, research results, etc.) that ‘perish’ more quickly than money held by yourself. For instance this would be the case if research gets “forgotten” too quickly or new longtermists have higher rates of value drifts than yourself.
(There are also a number of other ways in which the objection can fail, which admittedly at first glance seem more likely for longtermist spending than for donations to GiveDirectly: e.g. if the timing of your spending influences the length of the period of above-average returns or the future average growth rate.
E.g. suppose it was the case that if you start to grow longtermism now, eventually 10% of the world’s population will be longtermist, but if you start to grow longtermism only in 50 years then growth will max out at 5% of the world population; this would push toward spending now. On the other hand, the effect could also turn out to work the other way around and favor spending later!)
(These are more additional considerations, not intended to be counterarguments given that your post itself was mostly pointing at additional considerations.)
Given that longtermists are generally concerned with trajectory changes, controlling all resources seems like we’ve largely ‘won’, and having more financial returns on top of this seems fairly negligible by comparison. In many cases I’d gladly trade absolute financial returns for controlling a greater fraction of the world’s resources sooner.
Speaking to movement-building as an alternative to financial investment in particular:
It feels to me like quality-adjusted longtermists are more readily transferable and cause-agnostic than money on short time-scales, in the sense that they can either earn money or do direct work, and at least right now, we seem to be having trouble effectively turning money into direct work.
It’s definitely a lot less clear whether there’s a compounding effect to longtermists and how readily they can be transferred into the longer-term future. For what it’s worth, I’d guess there is such a compounding effect, and they can be transferred, especially given historical evidence of transfer of values between generations. Whether this is true / consistent / competitive with stock market returns is definitely debateable and a matter of ‘messy empirics’, though.
Yes, with how under invested in GCR mitigation is now, I think it is better to have many resources for longtermism sooner.
Thanks, I think this is really useful to unpack.
I do agree with all of this, but one important point wasn’t salient to me at the time of writing the post: that you want the resources returned to be under direction as sophisticated as your future self or they should get discounted, and that this might constitute a narrow target. I’m uncertain how narrow a target it is, but I think that getting clarity on that seems quite important as it could affect judgements about which opportunities are good investments.
Yes, though to be fair financial investments (and generally everything that won’t have most of its total effect soon) need to hit the same narrow target. But perhaps for those the mechanisms by which we might miss the target have been more prominent in recent discussions (value drift, expropriation, etc.).
Relevantly to this comment thread, Trammell says during his 80k interview:
I also collected some relevant discussion under the heading “Which “direct” actions might have compounding positive impacts?” in a post on Crucial questions about optimal timing of work and donations.
---
With regards to the “mechanisms by which we might miss the target”, in that post on crucial questions, I highlighted and collected sources relevant to the following questions:
How effectively can we “punt to the future”?
What would be the long-term growth rate of financial investments?
What would be the long-term rate of expropriation of financial investments? How does this vary as investments grow larger?
What would be the long-term “growth rate” from other punting activities?
Would the people we’d be punting to act in ways we’d endorse?
Shouldn’t investing into the stock market be considered a source of average returns, by default? In the long run, the stock market grows at the same rate as GDP.
If you think you have some edge, that might be a reason to pick particular stocks (as I sometimes do) and expect returns above GDP growth.
But generically I don’t think the stock market should be considered a source of above-average returns. Am I missing something?
The stock market should grow faster than GDP in the long run. Three different simple arguments for this:
This falls out of the commonly-used Ramsey model. Specifically, because people discount the future, they will demand that their investments give better return than the general economy.
Corporate earnings should grow at the same rate as GDP, and stock price should grow at the same rate as earnings. But stock investors also earn dividends, so your total return should exceed GDP in the long run. (The reason this works is because in aggregate, investors spend the dividends rather than re-investing them.)
Stock returns are more volatile than economic growth, so they should pay a risk premium even if they don’t have a higher risk-adjusted return.
[Low confidence as I don’t really understand anything about finance.]
It sounds right to me that the stock market can’t grow more quickly than GDP forever. However, it seems like it has been doing so for decades, and that there is no indication that this will stop very soon—say, within 10 years.
(My superficial impression is that this phenomenon it somewhat surprising a priori, but that there isn’t really a consensus for what explains it.)
Therefore, in particular, for the window of time made available by moving spending from now to, say, in 1 year, it seems you can earn returns on the stock market that exceed world economic growth.
If we know that this can’t continue forever, it seems to me this would be more relevant for the part where I say “future longtermists would invest in the stock market rather than engaging in ‘average activities’ that earn average returns” etc.
More precisely, the key question we need to ask about any longtermist investment-like spending opportunity seems to be: After the finite window of above-average growth from that opportunities, will there still be other opportunities that, from a longtermist perspective, have returns that exceed average economic growth? If yes, then it is important whether the distant returns from investment-like longtermist spending end up with longtermists; if no, then it’s not important.
Hmm, my understanding is that the equity premium is the difference between equity returns and bond (treasury bill) returns. Does that tell us about the difference between equity returns and GDP growth?
A priori, would you expect both equities and treasuries to have returns that match GDP growth?
Yes, that’s my understanding as well.
I don’t know, my sense is not directly but I could be wrong. I think I was gesturing at this because I took it as evidence that we don’t understand why equities have such high return. (But then it is an additional contingent fact that these returns don’t just exceed bond returns but also GDP growth.)
I don’t think I’d expect this, at least not with high confidence—but overall I just feel like I don’t know how to think about this because I understand too little finance and economics. (In particular, it’s plausible to me that there are strong a priori arguments about the relationships between GDP growth, bond returns, and equity returns—I just don’t know what they are.)
Okay, sounds like we’re pretty much in the same boat here. If anyone else is able to chime in and enlighten us, please do so!
I thought about this for another minute, and realized one thing that hadn’t been salient to me previously. (Though quite possibly it was clear to you, as the point is extremely basic. - It also doesn’t directly answer the question about whether we should expect stock returns to exceed GDP growth indefinitely.)
When thinking about whether X can earn returns that exceed economic growth, a key question is what share of those returns is reinvested into X. For example, suppose I now buy stocks that have fantastic returns, but I spend all those returns to buy chocolate. Then those stocks won’t make up an increasing share of my wealth. This would only happen if I used the returns to buy more stocks, and they kept earning higher returns than other stuff I own.
In particular, the simple argument that returns can’t exceed GDP growth forever only follows if returns are reinvested and ‘producing’ more of X doesn’t have too steeply diminishing returns.
For example, two basic ‘accounting identities’ from macroeconomics are:
β=sg
α=rβ
Here, s is the savings rate (i.e. fraction of total income that is saved, which in equilibrium equals investments into capital), g is the rate of economic growth, and r is the rate of return on capital. These equations are essentially definitions, but it’s easy to see that (in a simple macroeconomic model with one final good, two factors of production, etc.) β can be viewed as the capital-to-income ratio and α as capital’s share of income.
Note that from equations 1 and 2 it follows that rg=αs. Thus we see that r exceeds g in equilibrium/‘forever’ if and only if α>s - in other words, if and only if (on average across the whole economy) not all of the returns from capital are re-invested into capital.
(Why would that ever happen? Because individual actors maximize their own welfare, not aggregate growth. So e.g. they might prefer to spend some share of capital returns on consumption.)
Analog remarks apply to other situations where a basic model of this type is applicable.
Ah, good point! This was not already clear to me. (Though I do remember thinking about these things a bit back when Piketty’s book came out.)