It’s very difficult to measure innovation and progress. One critique of Total Factor Productivity is that it undervalues consumer surplus. On the other hand, counting patents, as is so often done, is a fool’s game. In some sense, GDP growth should serve as a rough proxy, but GDP is largely dependent on labor and capital inputs.
For all these reasons, most of us have no concrete evidence on the rate of technological progress. Nonetheless, if innovation is alive in our time, then it should show up somewhere. Anywhere.
In this post, I’ll argue that if you want to measure innovation, you need only track the price of water.
Ehrlich versus Simon
In 1980 a famous wager took place. Essentially, an ecologist, Paul Ehrlich, bet an economist, Julian Simon, that the price of five selected metals would increase in the coming decade. The specific metals were Copper, Chromium, Nickel, Tin, and Tungsten. Although neither of the two men particularly cared about these metals, their bet represented something more. By betting on these metals, these two intellectuals were able to directly validate their opposite predictions about humanity’s future.
Essentially, Mr. Ehrlich’s held a pessimistic view for humanity’s future. Paul Ehrlich was convinced that as the Earth’s human population increased, the planet’s resources would struggle to sustain this growing population. One implication of his beliefs was that these metals he bet on would become more scarce and therefore more expensive.
Mr. Simon had a more optimistic view. Mr. Simon believed that although the population would increase, human ingenuity would solve the coming challenges and shortages. Consequentially, Mr. Simon held that technological innovation would either reduce our need for these specific metals or that technological efficiency would make us able to do more with less of them. As a result, Mr. Simon expected that the prices for these metals would decrease.
In 1990, a decade after the original bet was made, Mr. Simon was right and Mr. Ehrlich was wrong. A check was promptly sent Mr. Simon’s way. But, it’s important to contextualize the broader significance of this bet. Over the broad span of human existence on planet Earth, the prices of commodities have actually become cheaper instead of more expensive. In this long term view, technology has always beaten population growth and shortages.
For example, the chart above shows a commodity index from 1934 to 2010. As economist Mark Perry explains, “we see an overall significant downward trend in real commodity prices, despite an increase of more than 5 billion people in the world.”
The story for why this is true is actually quite simple. When something becomes scarce, we either invent cheaper ways of making more or better ways of using less. Historically, as John Tierney explains, “Often the temporary scarcity led to a much better substitute. Timber shortages in 16th-century Britain ushered in the age of coal; the scarcity of whale oil around 1850 led to the first oil well in 1859.”
Essentially, going short on commodity prices is a way to bet on innovation of two types. First, innovations that produce that commodity more cheaply. Second, innovations that allow us to more efficiently use that commodity (thus needing less). All of this context brings us to water.
The Water Doomster Narrative
The world is running out of fresh water. Or so I’m told. As a study from 2021 states, “Global water consumption has increased six fold in last century and in coming decades is expected to grow rapidly. By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world's population could be living under water stressed conditions.”
Basically, through a combination of climate change & expansions in the global human population, the gap between demand for fresh water and supply of fresh water is expected to increase. The result could be an apocalyptic nightmare of water wars, water scarcity, water rationing, and water poverty.
Of course, these are all real issues, and I don’t want to make light of the fact that many people around the world already suffer from a lack of water. However, I also don’t believe that mass death by thirst is the common destiny of all of humanity.
The Water Boomster Thesis
Solution 1: Making More Freshwater
The interesting thing about water is that we have no shortage of water on Earth. We have massive oceans full of it. Our issue is that 97 percent of the Earth’s water is salt water, and converting that salt water into fresh water through desalination currently costs a lot.
However, on the upside, this also means that there’s an upper limit to how expensive the price of fresh water can possibly become. After all, if the price of natural fresh water goes above the price of desalinated water, then more people will invest in increasing desalination capacity. In such a scenario, the cheaper desalinated water will steal market share until the price of freshwater drops to it’s maximum economic equilibrium at the cost of desalinated water.
This fact has an important implication. Essentially, the cheaper that desalination becomes, the cheaper the maximum price of water becomes. Therefore, if we can expect the cost of desalination to decrease, then we can expect the maximum cost of water to decrease also. If the cost of desalination decreases drastically due to some kind of breakthrough, then prices could even decrease to below the levels we are at now. It is not inconceivable that in the future, desalination will be cheaper than groundwater extraction is today.
Crucially, there is plenty of evidence that there is innovation already happening in desalination. For example, a rapidly developing idea is that of “seawater mining”. Seawater mining is the idea of separating and extracting the minerals contained in seawater to sell alongside the clean water produced. Process innovations like this are contributing to making desalination more affordable. But on its own, process innovations will only do so much. We need a more fundamental technological breakthrough.
There is some evidence of such fundamental technological breakthroughs. For example, there seems to be some progress in cloud seeding through nanotechnology in particular. If done in the right way, this could allow nations to capture water that would have fallen into the ocean through rainfall by making those clouds rain over land instead.
Also, innovations in other areas will impact the cost of desalination too. For example, one type of desalination is thermal desalination. This is when saltwater is heated up a lot in order to create clean water vapor which is then converted into fresh water. As you might imagine, heating up the water is super energy intensive. Because energy is expensive so is thermal desalination. But if there was some sort of massive breakthrough in the cost of electricity (nuclear fusion, space based solar energy, wireless transmission, etc), then thermal desalination might suddenly become attractive too!
Even if you don’t believe that we’re on track for a breakthrough in desalination presently, you have to admit that this is an area we can expect scientific effort to increase as the price of freshwater increases the market incentive for R&D. Plus, as Cold War Two heats up between the United States and China, jockeying over water resources will also increase state incentives to increase R&D in both countries (and probably many more).
Solution 2: Using Less Freshwater
Nearly 70 percent of the world’s freshwater is currently used by agriculture. Worse, water thirsty products like almonds soak a drastic amount of freshwater, and often much freshwater is wasted in the sector as a whole. Yet, as water becomes more scarce, we would expect to see innovations in this area also. One or more of those innovations might even be so drastic as to permanently change the magnitude of needed freshwater.
How could that be? Isn’t all life dependent on water? Yes, but not necessarily on freshwater. For example, humans eat seaweed, and that is produced in saltwater. One framing of eating wild fish from the ocean is that fish are a way to convert saltwater into food. We can imagine that as the costs of other types of food increase, foods produced in salt water will become relatively cheaper. Therefore, consumption habits will shift.
Yet, beyond changes in consumption habit there is plenty of innovation happening in production too. For example, one startup is trying to genetically engineer rice to grow in salt water. If efforts like this succeed, then we can begin to move more and more of our agricultural production into the oceans instead of on land. Farming in the future is likely to look radically different.
The Water Short
In a time of 9.1% inflation, driven in part by rising commodity prices, it can be difficult to imagine that commodity prices trend downwards over time. However, empirically they have. Why should we believe that a resource as essential as fresh water will buck that trend?
I believe innovations will increase our capability to convert saltwater into freshwater and use saltwater instead of freshwater. The question is when? When will these drastic shifts occur? It’s impossible to know the answer to that. Probably not so soon. But maybe sooner than we think.
For those interested in changing the world, please go figure out how to make fresh water cheaper.