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This chart on research productivity is bad news for the stock market
By: Mark Hulbert | November 21, 2017

New ideas are getting harder to find



CHAPEL HILL, N.C. — Is the economy about to break Moore’s Law?

I’m referring, of course, to Gordon Moore’s famous prediction 50 years ago that the number of transistors fitting on a given computer chip would double every two years—a prediction, that at least so far, has largely come true.

Unfortunately, there is now serious doubt that Moore’s Law can continue, which in turn calls into question whether the economy and the stock market in coming decades will grow at a rate anything close to what it has over the last 50 years.

A new study from the National Bureau of Economic Research found it’s taking an increasingly large amount of research effort for the semiconductor industry to adhere to the Law.

But it’s worse than that.

The study, “Are Ideas Getting Harder To Find?,” found that research productivity is declining at a fast pace in not just the semiconductor industry but across the entire economy. And not by just a little bit, either. In fact, the researchers (Nicholas Bloom, Charles Jones, and Michael Webb at Stanford and John Van Reenen at MIT) calculate that across all firms, research productivity is declining at a 10% annual rate.

To be sure, these professors are wading into a field that has long been associated with intense ridicule. Almost all of us have heard of the comment attributed to the commissioner of the U.S. Patent Office in the late 19th century that everything that can be invented has been invented.

However, Professor Bloom, in an interview, said that he and his co-authors were prepared for such ridicule and have been surprised that it’s not been more forthcoming. On the contrary, he said, his contacts in Silicon Valley—down the road from Stanford, after all—have largely confirmed to him the accuracy of what their study documents.

In any case, we shouldn’t not ask a question just because we’re afraid of looking foolish. In fact, contrarians would insist that it’s more important than ever in such cases to ask it, since the fear of ridicule means it probably hasn’t received the full attention it deserves. And when the professors dispassionately look at the data, they find that “research productivity is declining at a substantial rate in virtually every place we look.”

The economy has responded to this decline by increasing the amount of resources dedicated to research. But at some point this growth will become unsustainable. “Just to sustain constant growth in GDP per person,” the professors argue, “the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.”

What happens if research effort doesn’t keep up? The likely answer, according to the professors, is that this would “cause economic growth itself to slow down.”

This is one of those studies that calls into question our optimism that the stock market over the very long term will do as well as it has over the last couple of centuries. All of us tend to repeat, like a mantra, that broad stock-market indexes like the S&P 500 SPX, +0.13% produce a return of close to 10% nominal, and 7% after inflation, over the long term.

But we should never take that, or anything else in the investment arena, on blind faith. Maybe, just maybe, that assumption is wrong.

https://www.marketwatch.com/story/this-chart-on-research-productivity-is-bad-news-for-the-stock-market-2017-11-20

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