The Paradox of Wealth

William J. Bernstein

Financial Analysts Journal, 2013, vol. 69, issue 5, 18-25

Abstract: A recent FAJ article by Laurence Siegel painted a sunny picture of the world’s economic and environmental future. Although the author agrees with Siegel’s analysis, his optimism does not extend to security returns; both theory and long-run empirical data support the notion that economic growth lowers security returns by reducing impatience for consumption and altering the supply–demand dynamics of capital—the price of living in an increasingly prosperous, safe, healthy, and intellectually gratifying world.In a recent issue of this publication, Laurence Siegel presented a compelling case for optimism about continued growth of the world economy, for improvement in the global environment, and for higher security returns. The author shares his optimism about the first two items but is more pessimistic about the last one.Over the past several decades, it has become obvious that although national economies—and thus corporate aggregate profits—frequently experience sustained growth, such growth often does not translate into similar growth of per share profits. This slippage occurs mainly as a result of share dilution, with the most rapidly growing economies, particularly in Asia, issuing the largest proportion of new shares. This dilution negatively affects per share growth of earnings and dividends and, ultimately, security returns.More importantly, as societies become wealthier, they become less “impatient” (in Irving Fisher’s memorable wording) for consumption because of improved housing, food supply, and life span. Nor is that all. Subsistence societies, by their very nature, exhibit an extreme imbalance between the supply of investment capital, which is tiny by definition, and the need for it; as societies become wealthier, this imbalance improves, which also reduces the return on/cost of capital. Over the past 5,000 years, this rate has been falling slowly, and I propose an approximate, simple inverse relationship between per capita total energy consumption and the cost of capital.This fall is a noisy one. In the past century alone, extreme swings in the return on/cost of capital have occurred, creating pockets of opportunity for the observant, disciplined, and historically aware. It seems likely, however, that these opportunities will be less frequent and more fleeting than in the past.

Date: 2013
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DOI: 10.2469/faj.v69.n5.1

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