I could hear the laughter from down the hall. “Cheeseburger,” cried Morty. Cheeseburger? I saw he was holding a back issue of the Financial Analysts Journal. (It’s no secret that we fall behind on our reading here during the busy months.)

“You’ve gotta interview this guy,” declared Morty. “Anyone who can work the word ‘cheeseburger’ into the pages of this esteemed journal… well… he likely has something interesting to say.”

William Bernstein did indeed have some very interesting things to say. The interview below is the vegan-friendly edition, though; if you want to see ‘cheeseburger’ in print you’ll have to catch up on your reading, too!

Q: Your paper, “The Paradox of Wealth” (Financial Analysts Journal, vol 69 no 5, 2013), is about the effect of rapid technological advances on financial wealth. What spurred your interest in this topic?

A long-term fascination with the explosive nature of modern economic growth and what I see as an overall very long term decline on the return to capital, and the belief that there’s a relationship between the two. In 2004 I published a book on the former that also touched on the latter, The Birth of Plenty, and I’ve been fascinated by it ever since.Paradox of Wealth_bookcover

Q: Your paper makes the point that rapid technological advances result in a decrease in security returns. Were you surprised that advances were negatively correlated with returns?

No, not at all; it falls right out of finance theory. First, there’s supply and demand. In a subsistence society, by definition there’s almost no excess capital, but there’s still a need for it, so the equilibrium favors the seller of capital; as the relative supply of capital increases with societal wealth, that balance shifts in favor of the buyer. Second, as people live longer, their demand for consumption slowly shifts from the present to the future; that also decreases the demand present capital. Finally, as societies advance, the quality of intermediation improves, and that also brings down the cost of capital.

Q: The article explains that big advances “reduce impatience” for consumption. Would you elaborate, please?

As Dr. Johnson famously put it, the knowledge that one is to be hanged in a fortnight clarifies the mind. So too does it increase the demand for present consumption, i.e., what Irving Fisher called “impatience”; if your life expectancy is only a decade or two at age 20, as it was before the modern era, you don’t worry so much about deferring consumption, i.e., saving. If your life expectancy at age 20 is 6 or 7 decades, you’re liable to save more. When large numbers of folks increase their savings, that increases the overall supply of capital, and thus decreases the overall return on it.

Q: You state that rapid technological advances shift the supply-demand dynamics of capital in favor of the consumers of capital. How and why does this occur?

At base, it’s technological advance that makes us more productive and thus wealthier. Let me give you a very simple example. When I was a kid, the garbage men had to heave the individual trash cans with their arms and backs into the truck bin. Today, a two-man crew using specialized vehicles can do the work of 5 or 10 of those old crews. On the service side, ask yourself when was the last time you talked to an airline representative, let alone a telephone operator. Managing airline sales and telephony is now done by technicians who each are responsible for orders of magnitude more traffic than the old representatives and operators.

Q: The article takes a very long-term view—the economics of the Stone Age, Mesopotamia, the Roman Empir, and the Dark Ages are not commonly featured in the FAJ. Did you have trouble locating reliable and consistent data?

Not at all. Homer and Sylla, in A History of Interest Rates, did most of the heavy lifting on returns. On the wealth side, a few years ago I might have used the Maddison database, but instead I chose to use Ian Morris’s series on long-term energy consumption, which I think is a more reliable measure of “wealth” than is GDP, which is a highly flawed measure of long-term change in well being.

Q: Last, a more personal question. Your Wikipedia entry mentions you hold a PhD in chemistry. Do you miss the world of quantitative science?

Well, I practiced medicine until relatively recently, and that’s scientific enough. Yes, I do miss the hard sciences, but I’m also rather risk averse, and a career in the sciences is not for the faint of heart. ª

Click here to visit the website of William J Bernstein.