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ICYMI: The problem of linear thinking

March 10th, 2014 Leave a comment Go to comments

From a recent TJ column:

Newton’s first law of motion states that an object at rest will stay at rest unless an external force acts upon it. Similarly, an object in motion will not change its velocity without some kind of external pressure.

A lot of people apply this law to the economy.

Think back to the late 1990s.   The NASDAQ stock market was booming.  Tech stocks were driving unprecedented price/earnings ratios and experts were saying the market was on a rocket ship to the moon.  Many were predicting the NASDAQ would reach 10,000.

They didn’t foresee the dot.com bubble bursting. 

It’s now 2014 and the NASDAQ is still only 4,300 – 15 years later.  But don’t worry.  A new round of experts is calling for NASDAQ to  hit 10,000 once again.

Not that long ago, experts were predicting that $200/barrel oil was just around the corner.  More than a decade later it is still hovering around $100/barrel and very few, if any, are predicting $200/barrel any time soon.

Back during the heady days of the Atlantic Gateway conversation I went to a symposium in Halifax where we were told that cargo shipments into North America from Asia would triple by 2050.  That prediction had me scratching my head.  Just about everything in my house was already made somewhere in Asia.  How could a 300 per cent growth rate even be possible? 

All of these examples have one thing in common.  At the time of the prediction, we had just been through a period of rapid growth.  Experts saw a trend line heading up and to the right and just assumed things would continue to grow ad infinitum.

But just like the NASDAQ, the oil price and the Atlantic Gateway, something always happens.  Usually it is some form of what author Nassim Taleb famously called a ‘black swan’ event.  Something very few experts saw coming.

Newton’s first law of motion gets applied to economic development too.

Just about everyone I talk to these days from government economists to business leaders tell me the Maritime provinces are in for a period of prolonged stagnation or decline.  They are trapped in the linearity problem.  There is an inevitability to this that can lead to a self-fulfilling prophesy.

What is the ‘black swan’ event that will turn our fortunes around in New Brunswick?

We have other examples.   Think about the economic revival of Newfoundland and Labrador.  You can plot the change in direction when the federal and provincial governments agreed to fund and support offshore oil and gas development. 

Think about Saskatchewan where a forwarding thinking government decided to leverage that province’s abundant non-renewable natural resources and turned it into an economic powerhouse.

Think about Ireland.  Despite its recent setback, Ireland’s economy has been among the top performers among OECD countries for more than two decades.  This resulted from a deliberate strategy to position that country as an ideal location for international firms to set up European operations.

Some folks believe that shale gas could be New Brunswick’s black swan event – the catalyst that turns the economy around similar to Newfoundland and Labrador or Saskatchewan.

I have studied the numbers as closely as anyone and would suggest shale gas could be part of the solution but will not be the kind of catalyst as oil has been in Newfoundland and Labrador, Saskatchewan or South Dakota.

But it could play an important role adding an in the range of 1-2 per cent to annual GDP growth in New Brunswick each year once the industry reaches maturity.    This will be a nice boost to the economy and tax base of the province each and every year.

While it may not be a single black swan event, if New Brunswick can attract investment into its natural resource industries, foster robust urban growth and attract significantly more immigrants to our shores that could be the combination of forces that gets us on the right path.

Newton’s first law of motion says an object at rest will stay at rest unless an external force acts upon it. 

We need to figure out what those external forces will be in New Brunswick to move us from a state of rest to a state of motion.

 

David Campbell
davidwcampbell.com
An economic development consultant based in Moncton
 

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  1. mikel
    March 11th, 2014 at 17:58 | #1

    That’s the kind of writing that makes this blog worth coming back to, even if its more sporadic than it used to be. Unfortunately, what you ask is either a rhetorical question, or else just a setup to your paragraph on shale gas. Its a POLITICAL question that nobody in politics seems to be answering, except Alward, who answers it in an insane way that nobody can take seriously.

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