S Education Expenditure (logarithmic plot)

Another implication of the law of accelerating returns is exponential growth in education and learning. Over the past 120 years, we have increased our investment in K-12 education (per student and in constant dollars) by a factor of ten. There has been a hundredfold increase in the number of college students. Automation started by amplifying the power of our muscles and in recent times has been amplifying the power of our minds. So for the past two centuries, automation has been eliminating jobs at the bottom of the skill ladder while creating new (and better-paying) jobs at the top of the skill ladder. The ladder has been moving up, and thus we have been exponentially increasing investments in education at all levels (see the figure below).93

U.S. Education Expenditure (logarithmic plot)

Oh, and about that "offer" at the beginning of this précis, consider that present stock values are based on future expectations. Given that the (literally) shortsighted linear intuitive view represents the ubiquitous outlook, the common wisdom in economic expectations is dramatically understated. Since stock prices reflect the consensus of a buyer-seller market, the prices reflect the underlying linear assumption that most people share regarding future economic growth. But the law of accelerating returns clearly implies that the growth rate will continue to grow exponentially, because the rate of progress will continue to accelerate.

MOLLY 2004: But wait a second, you said that I would get eighty trillion dollars if I read and understood

this section of the chapter.

RAY: That's right. According to my models, if we replace the linear outlook with the more appropriate

exponential outlook, current stock prices should triple.94 Since there's (conservatively) forty trillion dollars in the equity markets, that's eighty trillion in additional wealth.

MOLLY 2004: But you said I would get that money.

RAY: No, I said "you" would get the money, and that's why I suggested reading the sentence carefully. The

English word "you" can be singular or plural. I meant it in the sense of "all of you."

MOLLY 2004: Hmm, that's annoying. You mean all of us as in the whole world? But not everyone will read

RAY: Well, but everyone could. So if all of you read this book and understand it, then economic

expectations would be based on the historical exponential model, and thus stock values would increase.

MOLLY 2004: You mean if everyone understands it and agrees with it. I mean the market is based on

expectations, right?

RAY: Okay, I suppose I was assuming that.

MOLLY 2004: So is that what you expect to happen?

RAY: Well, actually, no. Putting on my futurist hat again, my prediction is that indeed these views on

exponential growth will ultimately prevail but only over time, as more and more evidence of the exponential nature of technology and its impact on the economy becomes apparent. This will happen gradually over the next decade, which will represent a strong long-term updraft for the market.

GEORGE 2048: I don't know, Ray. You were right that the price-performance of information technology in

all of its forms kept growing at an exponential rate, and with continued growth also in the exponent. And indeed, the economy kept growing exponentially, thereby more than overcoming a very high deflation rate. And it also turned out that the general public did catch on to all of these trends. But this realization didn't have the positive impact on the stock market that you're describing. The stock market did increase along with the economy, but the realization of a higher growth rate did little to increase stock prices.

RAY: Why do you suppose it turned out that way?

GEORGE 2048: Because you left one thing out of your equation. Although people realized that stock values

would increase rapidly, that same realization also increased the discount rate (the rate at which we need to discount values in the future when considering their present value). Think about it. If we know that stocks are going to increase significantly in a future period, then we'd like to have the stocks now so that we can realize those future gains. So the perception of increased future equity values also increases the discount rate. And that cancels out the expectation of higher future values.

MOLLY 2104: Uh, George, that was not quite right either. What you say makes logical sense, but the

psychological reality is that the heightened perception of increased future values did have a greater positive impact on stock prices than increases in the discount rate had a negative effect. So the general acceptance of exponential growth in both the price-performance of technology and the rate of economic activity did provide an upward draft for the equities market, but not the tripling that you spoke about, Ray, due to the effect that George was describing.

MOLLY 2004: Okay, I'm sorry I asked. I think I'll just hold on to the few shares I've got and not worry about

it.

RAY: What have you invested in?

MOLLY 2004: Let's see, there's this new natural language-based search-engine company that hopes to take

on Google. And I've also invested in a fuel-cell company. Also, a company building sensors that can travel in the bloodstream.

RAY: Sounds like a pretty high-risk, high-tech portfolio.

MOLLY 2004: I wouldn't call it a portfolio. I'm just dabbling with the technologies you're talking about.

RAY: Okay, but keep in mind that while the trends predicted by the law of accelerating returns are

remarkably smooth, that doesn't mean we can readily predict which competitors will prevail.