Is Moore's Law dying?
I'm referring, of course, to the famous prediction Gordon Moore (the co-founder of Intel Corp. INTC) made in the 1960s that the number of transistors fitting on a given computer chip would double every two years. His law has held up impressively well ever since.
Until recently, perhaps. And if hasn't died, it will soon.
That is the implication of an academic study that is forthcoming in the prestigious American Economic Review. Entitled "Are Ideas Getting Harder To Find?," the study was written by three researchers at Stanford University (Nicholas Bloom, Charles Jones, and Michael Webb) and one at the Massachusetts Institute of Technology (John Van Reenen).
It's hard to overestimate the significance of this new study. Moore's Law has been one of the major engines of productivity growth over the past 50 years. As Intel puts it on its website, Moore's Law "became the golden rule for the electronics industry, and a springboard for innovation."
Why has Moore's Law died, or if it's not yet passed, is it on life support? Because it's becoming harder and harder to produce the innovations necessary to keep the law alive. "The number of researchers required to double chip density today is more than 18 times larger than the number required in the early 1970s," the study's authors write. "Research productivity in [the semiconductor industry] ... is declining sharply, at a rate that averages about 6.8% per year."
To put this finding in another way: Companies are getting less and less bang for their buck in R&D. They were able keep Moore's Law alive for as long as they did by devoting ever more resources to R&D. But at some point in the near future, if it hasn't happened already, companies will be unable to devote the exponentially growing resources necessary to keep the innovations coming.
It would be bad enough if this trend were confined just to the electronics and semiconductor industries. But it's not. In fact, the researchers find, the decline in productivity growth has been even more pronounced in other industries.
To be sure, Bloom said in an interview that he and his co-authors are prepared to be ridiculed. Almost all of us have heard of, and made fun of, the comment attributed to the commissioner of the U.S. Patent Office in the late 1800s that "everything that can be invented has been invented." (As an aside, I should point out that it's doubtful that he ever said that.)
Bloom told me, however, that engineers in Silicon Valley have confirmed to him that the phenomenon documented by this study is genuine as far as their companies are concerned. He added that, furthermore, confirmation of their study's conclusion comes from the slowing pace of productivity growth around the world, not just in the U.S.
The investment implications of this study are profound, needless to say. One such implication is that global interest rates will remain low for the foreseeable future. "This is simply the flip-slide of falling growth," Bloom said. "Interest rates are an excellent predictor of long-run growth potential, and their moribund level reflects the markets' expectation of sustained low future growth."
If so, we can kiss goodbye the expectation that the stock market over the long-term future will equal its historical average annualized return of around 10%.
Bloom referred me approvingly to a study from a decade ago by Northwestern University economist Robert Gordon. In that study, Gordon predicted that "future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades."
Ten years ago, Bloom says, "some people saw Robert Gordon as a crank, but now I think he's been pretty much proved right."
This new study reminds me of the tyranny that the urgent has over the important. Wall Street devotes virtually all of its attention to the urgent, of course -- the latest presidential tweets about the trade war, earnings forecasts from widely-held stocks such as Apple AAPL or Facebook FB, and so on.
In the process we ignore, or go into denial about, profoundly important long-term trends such as slowing productivity growth -- which, if true, will have far more impact on our lifetime financial well-being than all of Wall Street's "urgents" combined.