Philip Kotler: Predicting the American Economy Is a Self-Fulfilling Prophesy

The following is a guest post by Philip Kotler, author of CONFRONTING CAPITALISM, on how economic forecasters affect the economy.

Over the course of my long business career, I’ve watched how economic forecasters try to predict the future. These forecasters fall into two distinct camps: optimists and pessimists. Now that we are entering the process of presidential candidate vetting, what’s at stake is more than just “perception.”

Since my training is in economics and marketing, I strongly believe that the optimistic forecasters are the better predictors. What’s behind the optimistic forecasters? A leading optimist is Peter H. Diamandis, founder of the X prize. The X prize is given when some individual or team develops a powerful solution to a major problem. No one has yet figured out how to drive a car 100 miles on a gallon of gas, but if someone figures it out, the prize will be $10 million dollars. Recently, an X prize was announced to go to a group that could double the speed at which an oil spill can be cleaned up. Thirty groups undertook researching this, and the winner found a way to improve the clean-up rate at six times the old speed. They won that X prize of $10 million dollars.

Besides X prizes, Peter helped found the new Singularity University in the San Francisco Bay area. Its list of advisors and supporters is striking: gifted individuals such as Larry Page (Google), Elon Musk (Tesla Motors and SpaceX), and Ray Kurzweil (all around genius), for example. According to Bloomberg TV, Singularity University is “where the world’s brightest minds convene to attack the world’s toughest challenges.” The concept of Singularity itself is that it is that time in history when a machine learns to think, now estimated by Ray Kurzweil as the year 2034.

It is no wonder that Peter and his peers see a bright future made possible by new technology and software and sensors. Peter and coauthor Steven Kotler published the book Abundance: The Future Is Better Than You Think, which outlines how the world’s standard of living will inevitably improve. They argue that the planet can grow enough food and desalinize enough water for the world’s expanding population. “We will soon be able to meet and exceed the basic needs of every man, woman and child on the planet. Abundance for all is within our grasp.”

Now to the pessimists. Larry Summers, former president of Harvard and advisor to President Obama, recently said: “I think growth probably is going to be slower in terms of aggregate GDP over the next 50 years than it has been over the last 50 years.” He thinks that we are not going to get as much quantitative improvement to the labor force, let alone qualitative improvement until education gets better. He expects diminishing returns to innovation and a diminishing level of business investment.

Professor Robert Solow, the Nobel Prize winner and my former professor who recognized the growing role of technology in driving economic growth, distinguishes between technology that ends up producing physical products like refrigerators and stoves and technology that produces information but far fewer jobs. He worries that companies will continue to hoard cash or buy back stock. He thinks that interest rates will have to remain toward zero to motivate enough large businesses to invest.

The arch pessimist is Professor Robert J. Gordon, my colleague in Northwestern University’s economics department. His paper, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” is described by one writer as the most depressing economic idea of 2012. Gordon believes that the big gains in productivity that supported an expanding middle class and the modern welfare state won’t be repeated in the future. He sees technology continuing to grow but not being likely to bring about new breakthroughs on the scale of the steam engine, the internal combustion engine, indoor plumbing, electricity, the railroad, automobiles, airplanes, computers, and the Internet. Each of these created spin-offs, such as highways, air-conditioning, and efficient factories that kept the economy growing for several decades. Gordon admits that the Internet and the digital revolution still has plenty of growth potential left, but he doesn’t expect it to have an impact on the scale of previous major innovations.

Gordon sees six forces in the economy that are likely to dampen U.S. growth:

  • our aging population,
  • our faltering education system,
  • growing income inequality,
  • rising foreign competition,
  • the inevitable impact of global warming, and
  • the need to eventually pay down our debt.

From 1891 to 2007, the nation achieved a robust 2 percent annual growth rate of output per person. Gordon estimates that these six forces will cut down half of the annual GDP income per capita to a 1 percent growth. And he thinks innovation will be less than that which produced our annual growth in the past. Putting these factors together, he thinks that our economy will grow at best by 0.5 percent per year for the next few decades. He sees these forces combining to lead to economic stagnation and a decline in living standards. Moreover, he suggests that the rapid growth achieved in the past 250 years could well turn out to be a unique episode in human history.

It is my belief that each type of forecast, whether optimistic or pessimistic, leads to a self-fulfilling outcome. If most of us are optimists, we will do things to bring about more economic growth. If most of us are pessimists, we will refrain from doing things to produce strong economic growth. Let’s side with Peter Diamandis and his team and give economic growth a chance. And let’s keep this in mind when choosing our presidential candidates. Our future depends upon it.

Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management, Northwestern University. Although best known as a marketing guru, Kotler trained as an economist. He received his Master’s in Economics at the University of Chicago under famed Nobel laureate and free-market evangelist Milton Friedman before pursuing his Ph.D. at MIT under Paul Samuelson and Robert Solow, two Nobel Prize–winning Keynesian economists. He is the author of more than 50 books, including CONFRONTING CAPITALISM: Real Solutions for a Troubled Economic System.

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One response to “Philip Kotler: Predicting the American Economy Is a Self-Fulfilling Prophesy

  1. Pingback: Philip Kotler: “Predicting the American Economy Is a Self-Fulfilling Prophesy”

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