Discontinuity Ahead – Oil Limits will Adversely Affect the Economy

What will the world economy be like ten years from now? Or fifty years from now? Is it something that we can forecast by looking at the past, assuming that past tends will continue?

GDP Assuming 3pct Annual Growth

Figure 1

Most economists today seem to think we can rely heavily on past patterns. If we can really assume that the economy will grow at 3% per year (over and above inflationary increases), then in 50 years, GDP (Gross Domestic Product) will be 4.38 times as high as it is today. Economists might assume a 3.0% growth rate in a developed country, like the US, and a higher annual growth rate in a country like China, India or Brazil.

It seems to me that this standard view is incorrect. There is a substantial chance of a sudden shift toward a less favorable growth pattern (which I refer to as a “discontinuity”). This possibility is not obvious though, if a person bases his models on the growth that took place between 1940 and 2000, as economists today often seem to. In this post, I describe an alternate view showing how such discontinuities can occur.    Continue reading