This week we discuss the controversy over growth… watch now!
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VIDEO SUMMARY
Last week we talked about Growth. We recognized that growth exists. It is a phenomenon that is out there that is important to business. So we are going to continue this discussion, and we have to start this exploration by addressing the key issue. This video is on the controversy over growth.
We know that growth is out there. What I am going to do is start defining the key characteristics of growth. If we can define growth, we can better understand it.
Growth is the area that I focus on in my own research. If you want to know more about my research, I have written a summary called “On Wolves And Finance” which you can get on Amazon. The link is on my website WolvesAndFinance.com which is in the description box below.
I promised you a controversy and you are going to get one. We are going to define one of the central characteristics of growth, and it is pretty controversial. Growth continues forever. This might seem like a very bold statement, and some people might say, “That can not be right. Nothing continues forever.” But this is actually one of the characteristics of growth. Growth continues forever.
You have to understand that this is not just an opinion of mine, or some theory I made up. This is an assumption that the entire business world is based on. If you look at the math equations, the academic papers, the stock valuations from the last fifty years, they are all based on this assumption. They assume that the global economy will grow by a certain percentage year after year forever. That is the assumption the entire global financial system is based on. You need to realize that and understand the implications.
Let us explain where this assumption comes from. We talked last week about how when you look at human history, it is a long term story of continuous growth from cavemen to the smart phones we have today. Just from observation, we have to explain that the phenomenon of growth has this continuous element to it. When we evaluate where we are at today, it is a pretty logical assumption that our technological advancements are going to continue in the future. So we started as cavemen, we now have smart phones, and we will be even better in the future. We capture this understanding in the assumption that growth continues forever.
The job of Finance professionals is to help us make decisions on how to use our money today. What they do is create mathematical models that predict what might happen in the future. So you can then look at your money today and decide it makes sense to invest a certain amount of your money, because technology will be more advanced a year from now, and so it will be a good investment. And all these mathematical models are based on the assumption that growth continues forever, because that makes the most sense based on what we know about the world around us.
The funny thing is that no one talks about this assumption. If you are in college, I am betting your finance professor has never told you about this assumption that growth continues forever. The reason they do not bring it up, is because it is controversial. Let me explain why. This is going to get into theoretical physics, so please bear with me, because there is a point.
If you talk to a scientist and ask them whether it makes sense to have a process that will continue to grow forever, they will probably laugh in your face. One of the central theories of science is Newton’s Third Law of Motion, which says that every action will have an equal and opposite reaction. You probably have all heard of this. It basically means that energy cannot be created or destroyed. If that is true, it means you could never have a process that continues forever. Because you would have to continually be adding energy to the process, and there is not enough energy in the universe to keep that up forever.
Instead, scientists like to describe things in terms of cycles. The earth revolves around the sun. There are four seasons that continually repeat. The human life cycle goes from birth to death. When you throw something into the air, it always come back down. So scientists have all these cycles but they do not continue forever unless you continue to add energy.
That is why physicists love the Big Bang Theory. The Big Bang Theory says that the universe started with a big bang, started expanding out. The universe is still expanding today, but at some point billions and billions of years from now, it will collapse back into the center and destroy itself. It is one giant cycle where energy is neither created nor destroyed. Whether or not you believe the Big Bang Theory is true is not important. What is important is we have to decide today what we have to do with our money. I do not have time to wait around for billions of years to find out whether these physicists are correct.
This brings us to the great dilemma. So we clearly have this phenomenon of growth that continues forever, but science tells us we should not have a phenomenon that continues forever. On our university campuses we have two different schools: the school of science and the school of business. And both these schools have two fundamentally different ways of how to describe the world around us. One is based on the idea that growth exists, while the other says that growth should not exist. That is the controversy of growth.
Personally I have to say that I do not think anyone is incorrect here. We are just at a point in time where no one has verbalized how to reconcile these two different ideas. There is some ideas out there, but there is no consensus in academia on how to explain this discrepancy. It is not like the idea of continuous growth is foreign to science, because it is not. If you look at the process of evolution, that is also a continuous process of growth that continues forever. So it is not impossible to explain how both can be true. In later videos, we will talk about how to explain the discrepancy. For now, I just want you to realize this controversy exists.
Here is why this matters. The reason Finance professors never talk about this assumption is because they know it is controversial. The fact that all of finance is based on a shaky assumption, opens the entire global financial system to criticism. Critics of the financial system can then say, “The financial system is a sham. We are about to experience a global financial collapse and return to cavemen days. This growth cannot continue forever. Everyone better build a bomb shelter and prepare for the apocalypse.” In the world today there is so much uncertainty. What is the economy going to do? What is the job market going to look like? With all this uncertainty, how do you make decisions with your life? When you understand growth, it makes it easier to answer these questions and address this criticism. That is why I am addressing this issue head on because growth can continue forever. I can sit here today and tell you with certainty that the future of humanity looks bright, because all you have to do is look at history. Humanity is on a shooting star of growth upward into the future, which makes the argument about the collapse of the global financial system a little silly.
Let me explain how all of this affects you. I have been describing over the last ten minutes how there is a theoretical area in business that is not fully understood yet. It deals with the concept of growth. This unclear area is baked into the financial equations that underlay all of finance. If you can develop a mathematical equation that better represents the characteristics of growth, you can beat the investment banks. You can also make better strategic decisions in your business and beat the competition. You can also make better economic decisions as a nation and avoid things like recessions. Is it not strange that after all our advancements, we still experience massive economic recessions that completely catch us off guard? I would argue that has something to do with the fact that we do not fully understand the concept of growth.
We covered a lot in this video. This is a subject we will keep talking about. But I want to bring it back to the two main concepts that are the foundation of finance.
- Growth exists
- Growth continues forever
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.