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A Theory of Accumulation and Secular Stagnation. 2016. Daniel Aronoff.
Reviewed by Todd Wenning, CFA
Open up the Wall Street Journal or the Financial Times, and you will likely read at least one story addressing the frustratingly sluggish economic backdrop. Opinions on stubborn real wage growth and depressed capital spending certainly lack a consensus view and can be emotionally and politically charged.
College macroeconomics textbooks suggest that ultra-low interest rates paired with low unemployment, tame inflation, a healthy housing market, and vigorous technological innovation should be a cocktail for robust growth. Yet these conditions have not produced such economic expansion. Indeed, the US Federal Reserve is currently concerned that raising rates might even derail a recovery.
In times that seem unprecedented or confusing, it is instructive to turn to history for insights. There is nothing new under the sun, after all, and although the players change, the stories and lessons do not. In A Theory of Accumulation and Secular Stagnation, industrialist and author Daniel Aronoff intelligently looks back to the works of early 19th-century “classical growth” economist Thomas Malthus. With an academic approach, he draws on these ideas for a framework to better understand today’s economic conundrum.
At first glance, Malthus may seem an odd choice to address the topic at hand. In the past generation or so, Malthus’s most popular theories (e.g., rising populations will be kept in line by famine or plague), developed in a more agrarian, early industrial era, have taken a backseat to the “new growth” economic theories that emphasize technology as a means of driving economic growth. The latter approach seems to more tidily explain the modern world of dazzling innovations that rapidly transform our way of life. Consequently, some economists and investors have dismissed Malthus’s work as too pessimistic or from a bygone era. Despite some truth to these critiques, Malthus was brilliantly insightful in understanding stagnation, the very problem policymakers are trying to solve today.
Malthus’s key insight, Aronoff stresses, is his theory of accumulation, the state in which “economically significant” entities, such as wealthy individuals, corporations, and countries with mercantilist policies (Aronoff points to China as a prime example), hoard financial assets, intending never to spend a good portion of them. A prominent assumption of economic theory is that savers will eventually need to spend their money, whether to fund retirement, invest in growth projects, build infrastructure, or serve some other purpose. Take away this important assumption, however, and the rest of the theory loses much of its value as an explanatory instrument.
At the micro level, accumulation is a logical action if one expects deflation in the future. If many wealthy individuals, corporations, and governments adopt this tactic, however, massive repercussions could arise throughout the global economy, creating a self-fulfilling prophecy. Aronoff does not contend that accumulation will always lead to deflation, “just that it will create a force pushing the economy in that direction.”
Aronoff does a laudable job of showing how Malthus’s theories might apply to the current economic environment. The book is at its best when it illustrates how accumulation has negatively influenced the US economy since 2000, noting particularly the Fed’s inability to contain the housing bubble by steadily tightening credit from 2004 to 2007. Aronoff argues that the Fed was overmatched by the powers of accumulation, as evidenced by the market-determined rate on 10-year Treasuries remaining within a 4%–5% range throughout the rise in the federal funds rate.
In the end, markets and economies are complex adaptive systems that no single model can explain comprehensively and consistently. As such, readers should view Malthus’s accumulation theory as a tool for understanding today’s big economic questions rather than a complete explanation.
Curiously, this book was published concurrently with The Financial Crisis Reconsidered, also by Aronoff, which takes a more detailed look at the housing boom and subsequent financial crisis using the same Malthusian accumulation framework. Unlike this volume, The Financial Crisis Reconsidered does not include historical background on Malthus and such contemporaries as David Ricardo and Adam Smith. Readers may wonder, however, why the two relatively slim books could not have been combined.
Investors interested in economic theory and history will enjoy the first part of this book, which details Malthus’s case for accumulation and how it differs from Ricardo’s and Smith’s approaches. Unfortunately, A Theory of Accumulation and Stagnation ends somewhat abruptly after a series of helpful case studies, just as it begins to become valuable from a practitioner’s standpoint. Nevertheless, as investors continue to evaluate potential implications for zero and negative interest rates, weak capital spending, and deflationary pressure, they will find it useful to include Malthus’s theory of accumulation as part of their mental models.
More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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