Civilization, Modernization, Value Investing and China

4 ideas

1. Civilization 1.0, 2.0 and 3.0

   Human history divides into three phase changes: hunter-gatherer life (1.0), agricultural society (2.0) and, from roughly the 18th-century British Industrial Revolution, the fusion of modern science with free-market economies (3.0). In 1.0 and 2.0, output per person barely rose over millennia because any surplus was absorbed by population growth or taken by force. In 3.0, per-capita output compounds for the first time, at roughly 2–3% a year, sustained over centuries.

2. Science plus markets form a self-reinforcing loop

   Modern growth continues without stalling because science and the market feed each other. Markets reward anyone who turns knowledge into products, which funds and directs more discovery. Science keeps expanding the set of things worth exchanging, and knowledge does not deplete when it is used. Because this feedback loop is non-zero-sum and spreads by imitation, any society that adopts both elements can enter the compounding regime, and none that has fully entered has fallen back out.

3. China's modernization still has room to run

   Li Lu places China, since the 1978 reforms, above Civilization 2.5 but still approaching 3.0, with per-capita output well below developed-country levels. He argues the remaining gap leaves substantial room for further growth, but that sustaining it depends on continued changes to markets and innovation.

4. Value investing as a way to share modernization

   Li Lu compares asset returns and argues that owning shares in businesses has let savers share in a modern economy's long-run compounding, while cash and hoarded assets have lagged. He holds that this works when a stock is treated as part-ownership of a real business, bought with a margin of safety below intrinsic value, with Mr. Market's moods used rather than followed, and within one's circle of competence. Speculation on prices, by contrast, trades volatility rather than tying returns to the underlying growth.

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