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Why The Philosopher's Stone Does Exist
16 May 2021
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A few years ago, a political candidate proclaimed, “If we win, our policies will make it possible to grow at a 4% annual rate”. I half-smiled when I heard it. Growth in an advanced economy boils down to two drivers: The increase in hours worked, which in turn depends on the active population increasing, and the increase in productivity per hour worked.

Dismal birth rates mean we are not faring well in the first variable, so we should focus on the latter.  However, the news here is disheartening too: productivity has grown less than 1% per year since the 70s, regardless of the party in power.  This highlights the nonsense of the politician’s statement (the sum of both drivers does not equal 4%).  However, is there a magic solution that could change this situation?

Today’s society rejects superstitions and magical solutions, but, when it comes to creating growth and happiness, there is one. The philosopher’s stone, which according to legend could turn ordinary metals into gold, does exist. It is innovation, and its product is more valuable than gold. Let us see why.

First, as we have already discussed, there is not much room to grow the number of hours worked: in the short term, controlled and qualified immigration can help. In the long term, policies that help reverse the dismal trend in birth rates.  This leads us to focus on the second driver of growth: productivity per hour worked.

Second, productivity rises easily when a low-qualified labour force receives training and advanced production systems are introduced. This explains why productivity increases more in emerging than in advanced economies. In an advanced economy, output gains not attributable to the accumulation of capital or labour are referred to in economics as total factor productivity (TFP). These are the only recurrent productivity increases, as the rest are limited (there comes a point when more tractors working in a field does not mean an increase in output).

Third, the main driver of TFP is innovation (doing new things) or streamlining existing processes (doing things better). Spain focuses on the latter; the United States, on the former. The former boosts productivity more than the latter, and is recurrent.

Fourth, greater productivity correlates to higher earnings.  For example, a German worker costs 37 euros per hour worked, a Spanish worker, 23.  A German worker produces 58 euros per hour, a Spanish worker, 46.

Fifth, more productive workers command higher salaries and can decide to work less hours. Germans work some 1400 hours per year, versus Spaniards, who work 1700 (OECD).

Sixth, shorter and better-paid working hours allow us to spend more time with our families and friends, which translates into a feeling of freedom and greater happiness.  According to the World Happiness Report (UN, 2021), the level of happiness stands at 7.3 in Germany (on a 1 to 10 scale); in Spain, at 6.5.

From these six points we can infer that strategies stemming from innovation produce virtuous effects that, as stated above, may be more valuable than gold. So, what are the factors shared by countries that innovate?

The most important are: (1) collaboration between military and academic research (devices such as GPS, touch screens, Nano cameras and the Internet have a military origin); for example, it will be interesting to see whether Spain is able to capitalise on the huge investment made in Eurofighter systems; (2) promotion of ‘triple-helix’ models to bolster joint research between university, industry and non-university public sector; (3) development of venture capital as the main driver of innovative start-up financing: Spain invests proportionately half as much as the Eurozone average, and one tenth as much as the United States, partly as a result of preposterous pension-related regulations; (4) promotion of university patent transfer agencies to encourage researchers to develop and monetize their innovations; (5) creation of national research agencies, not dependent on the government in office, but with long-term mandates and a budget of their own to coordinate all initiatives set herein; (6) holistic support of an entrepreneurial culture from elementary education, including the acceptance of failure as a key element of start-up ventures; and (7) promotion of business concentration – turning small companies into mid-sized – so that their greater critical mass allows them to invest in R&D.

For centuries, alchemists sought from philosopher’s stone a way to turn substance into gold. One might think that those who devoted part of their lives to do so were medieval lunatics or uneducated people.  On the contrary, they were mostly qualified individuals.  The best example is probably Isaac Newton, renowned for being the father of calculus and the theory of gravity.  He was also a famous alchemist.

Now, in the 21st century we know that the basis for transforming matter into gold is to transform innovation into productivity. Greater productivity brings about higher salaries, fewer hours worked and more happiness. Yes, the philosopher's stone exists, but it requires policies that deliver in the medium term, which is why politicians are not enthusiastic about them. Yet, they would offer a better future for the next generation. We should demand them.