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Future Wealth

Alvin Toffler and his wife, Heidi, authors of the classic, Future Shock, argue that economists stink at forecasting, that wealth is moving from the West to the East

Alvin Toffler and his wife, Heidi, authors of the classic, Future Shock, argue that economists stink at forecasting, that wealth is moving from the West to the East and that the nonmoney economy is growing and will have a profound impact on the money economy, among other things. Recently, Alvin Toffler spoke to with Registered Rep. about these matters and the importance of outer space to the economy.

Registered Rep.: You argue that economists haven't done a very good job forecasting. But our financial advisor readers have to forecast everyday to do their jobs.

Alvin Toffler: I think the first thing is to be much more suspicious of conventional economic analysis. The point is that the economy is in the process of transformation. It makes many of the fundamental assumptions that we learned in Economics 101 obsolete.

RR: Such as?

AT: Such as that economics is the science of the allocation of scarce resources. The fact is that knowledge is increasingly the central resource, and it is not scarce. We can make it scarce, we can put a price on it, perhaps, if we could maintain intellectual property rights and so on. But, inherently, there's no limit. It's inexhaustible. So how do you deal with that if your economic mindset is that you're dealing with limited resources? We're not accustomed to dealing with resources that don't get used up. We are used to dealing with resources that if I use it, that reduces the sum total available whereas the reverse is true in a knowledge-based economy. So a lot of the basic rules of economics, as most of us were taught, don't fit the current situation.

RR: Please explain.

AT: A significant part of the book deals with what we call “prosuming.” Prosuming is the creation of wealth without being paid for it, doing it for yourself or to give it away. We do a very poor job of measuring the impact that kind of activity in a society has on money. There are two economies. There's the money economy that we measure, that's what we talk about. That's what financial advisors devote themselves to, and they're trying to figure out what the next market is going to be like for financial assets and so forth. That's what we've always done and that's fine.

But alongside this money economy that we focus on, there is a second economy that we call a “prosumer” economy. The reason we use that term is because it's the combination of producing and consuming. You may produce something for your own use and no money changes hands when you do that. The same thing is true when you do volunteer work, for example.

RR: I think you even lump in there do-it-yourself investing.

AT: Yes. That may be. I don't want to put your readers out of business.

RR: That's OK, we talk frankly to our readers about things.

AT: Yes, people are capable of doing more and more things for themselves, and the Internet and all that fantastic technology helps make that possible. So you do have people who are watching the stock market every minute on their laptop and they're investing for themselves. So the question is, what's the value that the advisor can bring? I think the advisor can bring to people new ideas, such as the whole role of prosuming and the concept of this wealth system. Your readers should be introducing customers to the idea that they're there to help you with not just economics, not just with the economy, but with the whole wealth system, including nonmoney transactions.

RR: So, a nonmoney job would be, say, being a stay-at-home mother.

AT: Yes, it would have been worth a lot to your readers and their customers to have understood the meaning of the little Finnish guy sitting outside his cubbyhole in Finland and, on his own time, writing Linux. Well, here's a guy who — without pay — on his own writes an operating system. He then puts the source code on the Web and invites anybody to voluntarily improve it. Lots of — hundreds, maybe thousands of programmers around the world contribute to making that a good system.

RR: Why would they do that? That doesn't make any economic sense.

AT: It doesn't make any economic sense, but there are a lot of things that make no economic sense. It [Linux] has enormous economic impact. It has Microsoft running scared. It has China passing a law that says all government agencies must use Linux instead of Microsoft. So activities that are not done for money have a big impact on money. They have not been tracked and have not been understood.

RR: Yes, I am sure our readers would have liked to have been in on Linux stocks.

AT: That's what I'm saying: Watch what's happening in the nonmoney economy and you'll get a lot of clues to what's going to happen next in the money economy. And that's why you need to understand the concept of prosuming.

RR: You say that Asia, particularly China and Japan, are going to lead the world economically in the future.

AT: The wealth has been shifting from the U.S. and Europe, and other parts of the world, to Asia. This has been going on since the 1970s. That is an enormous historical change. There are many others important changes. Each individual, we all have a reach, we telephone our friends who happen to be in Singapore this week, or we buy a product that has come from some very remote place. So all of our geographical relationships have changed. And finally we come to the one that people pay the least amount of attention to and yet the one that in some ways may ultimately, historically turn out to be the most important of all.

RR: Which is?

AT: [Outer] space. If you go a thousand years into the future and ask yourself what will the people of that time, assuming there are people at that time, look back on this era and remember. Are they going to remember George Bush or John Kerry? No. Are they going to remember the Iraq war? No. One thing, however, they will remember is that during this lifetime, for the first time in the history of our species, human beings went off our planet into space and created wealth out there. We are no longer a species bound to the Earth and now we create wealth out there. Every time you use an ATM machine and every time you turn on satellite television and every time you do a bunch of other things, you are, in fact, dependent on outer space. That will be remembered because it is just such a fantastic change from everything in human history that preceded it.

RR: Let me ask you more about China. Can a country like China — which is less free than the Western world — really create wealth and have these sort of despotic regimes that tell everyone else what to do? Doesn't that tend to severely dampen investment in that country?

AT: I think that at the moment, they're riding high and they're generating engineers and scientists by the barrelful. And they're extremely smart. However, they're trying to do something that is very hard to do. They're trying to raise a billion people out of poverty in 20 years or 30 years. Now, that, in my judgment, is exceedingly dangerous. It is not, I think, possible to do that without a lot of internal instability. So, we wouldn't expect China to grow by leaps and bounds in a straight line for the next 20 or 30 years. But China is on its way to becoming what we call a Third Wave economy, with high-tech, knowledge-based jobs even as much of the population remains in low-wage agricultural and industrial jobs.

RR: What do you think are the biggest threats to the financial system?

AT: Let me answer that by bringing up globalization. I'm not against globalization, but it's not going to keep the financial world safe. Back in the late 1880s and turn of the century, economic globalization was on the rise. And everybody thought that this was going to continue and you were going to get a smoothly integrated global economy. That was an article of faith back then. And, in fact, it did just look inevitable.

But the fact of the matter is, suddenly, in 1914, a world war breaks out. That was followed by the Communist revolution, which takes a huge piece of the world out of the market to begin with, and that was followed by the Great Depression of the 1930s, which was followed by World War II. Well, there's not much left of that globalization process. Then globalization starts again after World War II. But, as I say, I don't believe in straight lines and I can't tick off for you what the specific threats are. But just because something is rolling along in one direction, it does not persuade me that it's going to continue.

RR: Yes, in 1900, people were saying that there would be no more wars, that everyone's too integrated.

AT: Yes, that was Wilson in about 1918 — the war to end all wars. I think straight-line trend extrapolation is a very misleading form of forecasting.

The China Card

Funds that will ride the Asian boom. (Please note: Alvin Toffler did not choose these funds; Registered Rep. asked Morningstar to screen for a handful of outstanding funds, on a risk-adjusted basis, that invested in Asia.)

Fund Ticker Strategy 3-Year Return Standard Deviation Sharpe Ratio
Aim Asia Pacific ASIAX Large growth. A Big stake in hardware. 24.9% 13.64 1.50
DWS Pacific A SPAOX Favors Hong Kong telecom and hardware. 24.2 14.84 1.35
Fidelity Southeast Asia FSEAX Stakes in Hong Kong and China, telecom and hardware. 27.2 16.90 1.35
Ivy Pacific Opportunity Advisor IPOVX Large blend, with big stake in Hong Kong. 26.2 15.86 1.37
T. Rowe Price New Asia PRASX Growth fund with holdings in India, Hong Kong. 24.9 15.80 1.31
Source: Morningstar. Returns through 9/30/06.
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