Jeremy Grantham: This Time is Different

Jeremy Grantham is a paradox. A man who has said many times, “This time it’s different are the four most dangerous words in the English language,” is now saying – loud and clear – this time it really is different.

What does he think has changed? For a long time, prices of commodities – natural resources, fossil fuels, agricultural products, minerals, and metal ores – were stable or falling. Now, Grantham says, thanks to population growth and increasing scarcity, the rate at which we are using up our resources is intensifying and could make economic progress unsustainably expensive.

It’s not that solutions are impossible, says Grantham in his most recent February 2012 quarterly letter, but a particular failing of capitalism – its propensity toward short-term thinking – is severely impairing our ability to adapt.

If we are unable to cope with this challenge, will it prove to be capitalism’s fatal flaw?

Of course, short-term thinking is not necessarily inimical to long-term solutions, and it may be hasty to say that it is inherent in capitalism. Perhaps it is only an aberration, a mutation of capitalism brought on by poorly designed incentives. Similar perverse incentives, it could be argued, might cause a firm such as Goldman Sachs – to use the exemplar of capitalism du jour – to neglect long-term relationships with their “muppet” clientele, as well as cause the rest of us to undervalue our long-term relationships with the Earth’s resources.

Is such short-sightedness inherent in capitalism, or antithetical to it?

These are very big questions – ones we would all do well to ponder. On one side of the search for answers are those who think that, of course, we are running out of resources and “business as usual” cannot continue; on the other are those who believe that, of course, business as usual will solve our problems. I am substantially in sympathy with Grantham’s surprising position in this debate – which is hard to ignore – but the counterarguments are also compelling in their own right.

Malthusians vs. cornucopians

Grantham would probably accept the label “neo-Malthusian.” Thomas Malthus was an English scholar who argued that population increases exponentially, while resources increase only arithmetically. Therefore, he said, if limits are not placed on population growth, the Earth will run out of resources.

Malthusians are preoccupied with exponential growth and the power of compounding. They are constantly at pains to point out that compounding creates growth faster than almost anyone realizes. Grantham is no exception in sounding such alarms – in an anecdote in his April 2011 quarterly newsletter (which I find difficult to credit), Grantham says that he posed a question about compounding to a group of Ph.D. mathematicians and they got it wildly wrong. (Perhaps they were only Ph.D.s in finance?)