Paul Romer is an economist who is at the vanguard of the most exciting school in the science today: New Growth Theory. Some history: until the 1960s, economists believed that economic growth resulted from two things:

1. investing today's surplus (mostly profits) in more equipment, like factories and/or more civil infrastructure, like highways and canals
2. adding more workers through social policy -- immigration, the baby bonus, etc. -- to accomplish more economic activity at lower cost

In the 1950s, Robert Solow amended that formula by adding technology to the mix. In Solow's view, most economic growth results from technological change -- discovery -- while some still results from the things mentioned above. As an economist, Solow didn't seek to understand why technological change occurred, but he could measure it and this came to be called the Solow Residual. The Solow Residual measures the pace of discovery: things like more viscous motor oils, more durable highway pavement, more efficient light bulbs. Imagine for a moment that in World War II you were asked by your government to build a computer with eight billion vacuum tubes; in fact, winning the war would be easier than building such a device, though today you can buy 8.56 billion transistors at Wal Mart for $10 in a 2 gig flash key.

In Solow's view, this technological change occurs exogenously -- outside of the economic system. Perhaps discoveries happen in universities, or in government labs.

Romer's contribution in the 1980s, as a young economist moving between Chicago, MIT and, for a year, Queen's University in Kingston, was to place technological change within the economy. For Romer, transistors don't become smaller because the government makes this a priority, but because every man woman and child in North America may have bought 1000 transistors in 1985 annually, via their TV remote controls, Walkmans and home computers. Today, we perhaps buy 25 billion transistors annually -- all the while directing investment to transistor development and research, while innocently playing X-box or using a remote control or answering a cell phone.

In fact, the Soviets developed the system of centralized discovery; that regime was an impressive force in science and technology, but this was never linked to the market system and so advances never went beyond the moon -- which in fact is not a good thing. The Soviet model could not benefit from compounding returns from discovery, from the X-box market funding the development of faster computers that design better transistors to make faster computers. Romer boldly projects increasing returns for humanity in perpetuity.

Richard Florida and Jane Jacobs comprise the Yin and Yang of urban theory. Jacobs prized diversity and density as necessities for a thriving city; Florida looks for thriving cities to find pools spawning the ideas that are changing the world. Famously, Florida uses a "gay index" to rate cities; though predominance of overt homosexuality in a city is unlikely to cause genius, it tends to be correlated with tolerance and openness to new ideas; while Pride Week doesn't spawn transistor development in any direct way, Florida believes that a city that can handle Pride Week is more likely to discover new things. To Florida, this diversity is exogenous; Jacobs situates it in an urban planning policy that, thankfully, Toronto has to a large degree adopted. So has New York and many other leading cities.

So, to this point in my post you have Jane Jacobs telling us how to arrange cities, Richard Florida telling us how good cities produce discovery, and Paul Romer telling us that discovery matters more than anything else when describing economic growth.

But take this interesting article by a U.S. academic, Vivek Wadhwa. Titled, America's Perilous Anti-Immigrant Protectionism, Wadhwa delves into recession-fueled Xenophobia in America -- blaming foreigners for taking "American jobs"; Wadhwa claims he himself is not excepted, receiving hate mail and threats for pointing out roughly what I have just written -- that America's immigrants are not taking "commodity jobs"; rather, they are growing the U.S. economy through discovery linked with the uniquely pervasive American market system. In simple terms, non-white people are inventing things and then employing lots of white people, all the while keeping America at the leading edge of economic growth and technology.

Wadhwa astutely notes that these immigrants, facing hate and anti-immigrant policies, may be taking their ideas elsewhere; just as many smart Jewish Germans did in the mid to late 1930s, in large part enabling the U.S. and not German to invent the atom bomb.

Much has been written about global neoliberalism and the "race to the bottom" of corporate tax rates -- certainly, states like Ireland have benefited by agreeing to charge multinationals much less tax. Horrible poverty has been wiped out in a generation by this.

But what about the race to attract the next Sergey Brin, the next Vivek Wadhwa, the next Albert Einstein? A cleavage is occurring in employment between the highly skilled and those who can only sell their labour as a commodity; the market is global for both, creating horrible pain for the unskilled and incredible opportunity for the skilled.

Growth in the global economy is from knowledge. People who are smart enough to contribute to that are smart enough, open enough to migrate globally. India and China must produce smart kids at the same rate as the U.S., or Britain -- just look at the competition in our universities at a point when the majority of people in these countries do not have access to proper education or opportunities to showcase their inheritance. In time, the cities with the right planning -- structural change -- and the states with the right policies to attract these people will quickly become better than the other ones.

[Note: this post was called Xenophobia, discovery, and economic growth; Richard Florida linked to it under the current title, which I thought was a good one, so I changed it.]

I like France's TGV trains because you can cross the country in a few hours and, if you're travelling between city centres, it often takes less time to travel from a train seat to your destination building than it would from a plane's touchdown to arrive at baggage collection. While these trains cross the French countryside at close to 200 kph, passengers are able to roam the length of them reasonably freely, and can have a hot lunch or sit in a bar stool and read a newspaper. Though many are driven by the desire to arrive quickly at their destination, few are so obsessed that they move to the front of the train to achieve this. In fact, almost anyone on a TGV train would find it irrational for a passenger to deem forward motion within the train as progress toward their destination.

If anything, on a train moving to Lyon from Paris, it may be beneficial to walk toward Paris while being hurtled toward Lyon, because the train station exits may be close to the back of the train in Lyon. It's not really necessary to point this out; most people get it.

But I wonder if in other contexts progress is measured more in terms of moving up and down a train that is otherwise hurtling toward something else at an immeasurably higher vitesse.

General Motors is bankrupt and shedding decades-old brand icons -- not to mention 1/3 of managers -- as it tries to recover from something terrible that happened.

But what exactly happened? Did cars end? How could such a terrible outcome affect an otherwise blessed corporation?

Perhaps the answer can be seen in how progress was measured at GM. Manufactured Obsolescence is one business strategy aimed at stimulating demand by deliberately making your products worse. Stimulated demand could give the appearance of progress, while in fact, anyone who thinks clearly and independently could see that deliberately making your products worse for 40 years would probably not make your company better.

The finance industry -- capital for capital's sake -- similarly engineered highly complex new products that created an illusion of progress. Much of the mortgage industry stepped onto a train clearly marked "Going over a Cliff" and then began to, not just walk but run along the length of this train in a direction marked progress. Funnily enough, this blind march did not stop the train from going over the cliff.

I've written many times about Jane Jacobs. I think the lesson of her life is that an intelligent person who is exceptionally independent of mind or contrarian will find it easy to see that trains marked "Going over a Cliff" will in fact go over a cliff. But, as Warren Buffet says, the elite management class spends much more time looking left and right to see what they should do than thinking for themselves.

Check out this quote from Costco's plain spoken CEO, Jim Sinegal:

At Costco, one of Mr. Sinegal’s cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

“They could probably get more money for a lot of items they sell,” said Ed Weller, a retailing analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

Although there's more to Costco than its prices (the "treasure hunt" it engineers), having a firm limit on retail margins is part of its relationship with consumers. Consumers sometimes win big in this relationship. Where demand is extraordinarily high, Costco could break its 15 per cent rule and both raise profits and reduce out-of-stocks. This is commonly referred to as "good business".

But the unflappable Sinegal stands firm, in a sense allowing consumers to occasionally win a "shopping jackpot," further fulfilling its treasure hunt experience.

For casinos, their stream of revenue requires that they frequently hand over bags of money to random strangers. Any eight year old knows that this is their essential element (that and unnecessary sequins). Stop the jackpots and a casino wouldn't last a day.

Seems obvious. And it is obvious to Jim Sinegal. So why do other businesses subordinate their essential element to bottom line cost control?

In between reading about the decline of western civilization due to economic collapse, I like to lighten up and learn about the coming decline of global civilization due to environmental collapse.

Recently, it's become clear that common sense can go a long way toward understanding a complex world. Models and world leaders could not predict the current state of our economy, but if you think carefully about whether people can accumulate debt forever, some things become more clear. Jane Jacobs was a successful intellectual who observed and experienced reality and reported on it and theorized anew based upon it. She had little formal training, but she's been proven dead right on urban planning.

So, I'd like to offer two theories based not in math, but in observation of the economy and ecology.

Ecology and the economy are closely related. A hundred years ago, much of Canada's GDP was a measure of things that grow in dirt, livestock that eat those things, the harvest of trees and other organic material, and the mining of minerals and other deposits. In other words, our wealth closely approximated things we took from the Earth.

Today, we have a service economy, and this is underpinned by Paul Romer's theory of endogenous growth; ie. economies grow because they generate technological change, which makes things more efficient. Today, we take more corn, trees, deposits and livestock off of the land, but it's a fraction of our economy; in the large part, we design better fuels, improve the lay-out of cities, improve the rubber in tires, invent information technology and cure pot-holes. We incrementally improve the efficiency of society, all while freeing more people to spend more time thinking up more improvements.

This is called a positive feedback loop, where "positive" is not a moral phrase. In fact, dire ecological predictions are underpinned by positive feedback loops; in the podcast behind the Gwynn Dyer link above (and here), three such positive feedback loops are named around global climate change:

• the melting of the polar ice caps, which has visibly started and cannot be disputed by people looking at them, removes an essential and quite big "Earth mirror" and replaces it with the Arctic equivalent of a black driveway.
• the melting of glaciers will release ancient stores of methane gas, which is 10-times worse as a greenhouse gas than C02
• as oceans warm, their capacity to absorb CO2 will decrease.

Each of these phenomena require a small trigger -- such as our global output of greenhouse gasses -- and they will then feed upon themselves, and each other, far beyond the capacity of our total economy to exert control. When you start to enter a black hole, you cannot get out.

Economically, the credit crisis was also a positive feedback loop, with the collapse in home prices starving consumers of their raison-de-spend, causing layoffs and further bank failures, accelerating the cycle. It really doesn't matter what the trigger is when you've been absent-mindedly storing pails of gasoline in your living room.

Tragically, the economic and ecological loops could trigger a third, political positive feedback loop. Should the ecological loop trigger migrations from equatorial areas, refugee issues arise just as the economic loop triggers civil unrest generally. Governments that should be tackling the first two feedback loops will be distracted trying to reverse the political loop. At just the moment when we need a belle epoque to create regulatory and technological solutions to these problems, we will have the least capacity to do so.

Now, in case you have a gun in your mouth, you may want to read a little further. I'm asking you to consider a second effect, which I'm calling inertial blindness.

Let's say that you want to build a party town somewhere in the Nevada desert. You require water, so you invest in technologies to draw the water from ancient sources deep underground and over time this water enables your manufactured city to generate billions of dollars in both private wealth and tax revenue. But as your city grows, your annual draw on the underground water supply becomes significant. Although your economic growth continues, you're creating an ecological deficit in doing so and the situation becomes absurd. That it continues can only be evidence of both blindness and inertia. No rational person would build a large city on top of a 10-year water supply, but inertial blindness allows this. No rational person would try to build the CN Tower 10,000 feet high, just because at 1800 feet things were going so well.

Borrowing to consume some goods is an interesting strategy, especially for a young person who needs a house and a car before s/he can pay for these things. But what if the inertia of this consumption continues into the realm of blindness, to where consumption-beyond-means occurs because not doing this is harder than doing it (also, see Sacco).

The oceans have absorbed roughly 30 per cent of CO2 emissions since the start of the industrial age. But we are inertially blind to the fact that they cannot absorb infinite CO2 emissions. At best, they will stop absorbing these emissions; at worst they will become emitters themselves. Inertial blindness may lead us to turn 70 per cent of the Earth's surface into a smoke stack.

When borrowing and consumption slackened in the early 1990s, quantitative minds who were financial experts engineered new financial products, capable of extending growth. Again, this was inertial blindness -- it was anything but real growth, but it allowed the real growth to transition into theatrical growth. Following 9/11, theatrical growth was accelerated with more creative mortgage products and low interest rates. (Note bene, we did get the Segway out of this decade).

I'm writing all of this because I think it is essential that we develop models -- more sophisticated than I'm capable of creating now -- which identify and isolate these two phenomena, allowing policy makers to kill their causes. It is important that the national conversation (again, what a terrible phrase) include terms that mean what I mean when I say positive feedback loop and inertial blindness. We need to know when we're cutting down the last tree on Easter Island and when we're switching from tree-based energy to alternative energy. We need to know when growth is real and when it is a stage play in a dark theatre.

It is just shocking that the top people in our society did not know these things.

I live in a town that's grown from about 20,000 people to about 65,000 people in six or so years. It's a suburb of Toronto; or, in a sense, a suburb of the Toronto suburbs.

I think, of the 45,000 people who just moved here, most came from the nearby suburbs. One thing you notice about this town is how few people shop on its traditional main street -- it's a pretty street with traditional shops, but at peak times it's dead. My theory is that, these people who came from other suburbs return to those suburbs to shop; they are used to the big box stores with big value. To the locals, it may seem odd to drive for 45 minutes to buy meat, but to suburbanites that's an average Saturday (ie. hell). You could say that main street has been disintermediated by people whose commute has conditioned them to long drives.

I think something similar occurs on the Web. I was listening to Cat Stevens on youtube (ie. the universal juke box) and wanted a listing of tracks on a cassette tape that I likely lost five years ago; I wanted to listen to the songs on YouTube in the same order as the album/cassette.

What did I do? Until recently, I would have gone to hmv.com, because that's a Canadian website at the online source for physical music media. But before I started typing,  I realized that Amazon is better than HMV. I don't really care that much that it's in the U.S.

I don't care about the more local option; all that I care about is the one big answer that I can store in my head. I can keep a few dozen URLs in there, and Amazon.com covers off a lot of products.

So, as far as the web goes, maybe things are spiky and not flat. Maybe there's only room for one Amazon, and one eBay and one Google, etc. The Network Effect supports this, too.

But the flat Earth argument would be that sophisticated searches could flatten all of the Amazon competitors and provide me with a list of prices. So Amazon becomes where I research and price determines where I buy. But maybe Joe the plumber/surfer doesn't use that type of thing.