Dear Friends,
The acute challenges that business leaders face today should not prevent them from thinking in terms of longer time horizons. From that perspective, one can build an argument that the toughest business challenges are not about dealing with today’s tariffs, ongoing geopolitical tensions, or other sources of economic volatility.
The toughest challenge is growth. And it seems that the developed economies – and the United States in particular – have forgotten how to grow.
The US economic data over the last 40 years support that hypothesis. Between 1980 and 2000, the US had nine separate years in which the GDP grew by at least 4% year-on-year, including four consecutive years to close the century. From 2001 to today, however, the US has seen that level of GDP growth in exactly one year (2021) and that was the bounce-back year after the first wave of the COVID-19 pandemic.
In this edition of the newsletter, my co-author Arnab Sinha and I explore some ideas about how developed economies can return to the kinds of growth rates that the US economy experienced in the latter part of the 20th century. We believe that pricing plays an essential role in setting any economy on a path to robust growth. Pricing helps grow markets, encourage innovation, and achieve rapid scale because it is a business’s way of creating and aligning incentives.
The misunderstood links between pricing and growth
Think of pricing not as the engine or fuel that drives growth, but as the combination of accelerator, clutch, and brake pedal that keeps individuals, businesses, and society aligned on a path forward. That’s one reason why we devoted Part IV of the Game Changer book to how pricing decisions can shape society. We covered topics such as access and fairness, and took a close look at health care, sustainability, carbon emissions, and non-profits.
A similar view of pricing is a strong undercurrent in the new best-selling book Abundance by Ezra Klein and Derek Thompson. Building on a deceptively simple thesis – “to have the future we want, we need to build and invent more of what we need” – they have written a book that is all about pricing challenges without being explicitly about pricing. Actual price points for goods and services are strongly influenced by other decisions that seem to have nothing to do with pricing, but whose effects have long-term implications on access, affordability, and fairness, and ultimately, on economic growth.
Some reasons why growth rates remain low
In Ezra’s and Derek’s view, the way the US economy operates often muffles or mangles the powerful effects that pricing should have. This is evident in how economies manage access and supply, allocate resources, and regulate themselves.
Access and supply
Housing, education, and health care consume trillions of dollars every year in the world’s largest economies. In the United States, as Ezra and Derek write, the government has tried to offset the scarcity of health care services by offering trillions of dollars in subsidies to help people afford them. They contend that “… giving people a subsidy for a good whose supply is choked is like building a ladder to try to reach an elevator that is racing ever upward.”
Pricing can help realign incentives to provide greater access. In Game Changer we used the example of cures for hepatitis C as a way to illustrate how a different pricing model – rather than higher subsidies under a per-patient model – could achieve a better societal outcome by making the drugs available to many more people without jeopardizing the profitability of the pharma companies.
Allocation of resources
Energy costs make up a significant portion of resource allocation for many businesses. Witness the requirements to operate artificial intelligence models, which have a huge energy appetite. That is why large AI companies are bringing alternative sources such as nuclear power back into the discussion
But what viable roles can other clean sources play? If someone tried to argue that “solar energy is cheap,” it would be no surprise if people call the statement inaccurate at best, and outright not credible at worst. Yet Ezra and Derek not only present data in their book that supports this statement, but they also advocate for a more affordable energy mix that depends on solar energy.
Citing an academic study on energy costs, they claim that the prices of fossil fuels (oil, gas, and coal) are about the same as they were 140 years ago, adjusted for inflation. The price for solar energy, in contrast, is falling much faster than even the rosiest forecasts called for. These trends strengthen the argument that clean energy sources make economic sense for companies seeking a competitive advantage and not merely to make a social contribution.
Regulation
Ezra and Derek note that in the time that California has tried (and failed) to finish 500 miles of high-speed rail, China has completed more than 23,000 miles. Regulation explains at least some of that discrepancy. Describing an author’s visit to California’s site, they wrote that “as Ezra walked the path of the track with the engineers who built it, he heard less about engineering problems than political problems.”
The responsibility for the political and regulatory issues is hard to pin down. Look at the two statements in the image below and try to decide which came from a left-leaning politician and which came from a right-leaning politician.
My hunch is that your hunch is wrong. The pro-business statement on the left-hand side is from George McGovern, the liberal Democratic candidate for the US presidency in 1972. He made that comment in a Wall Street Journal opinion piece in which he described his struggles to operate a small inn and restaurant after he retired from politics. The statement on the right-hand side – cited in Abundance – comes from Richard Nixon, the Republican candidate who defeated McGovern’s in that 1972 election.
The point is that the need for incentives to solve significant problems and re-ignite growth should come down to common sense that can transcend partisan politics.
Pricing enhances speed and scale
To be clear, we agree with Ezra and Derek’s main thesis that many structural factors heavily impact the balance of supply and demand and therefore both the availability and affordability of what we need. We have observed in our work and highlighted in our writing how the pricing of an offer – and therefore a company’s growth – are tightly connected to factors that go far beyond the remit of traditional short-term pricing decisions.
In Game Changer, we described how the breakthrough success of Ford Motor Company’s Model T resulted from pricing strategy choices – which led to the ideas for production at scale – and not the other way around. Instead of selling cars at the highest possible price, Henry Ford wanted to produce a car that his workers could afford.
The kind of rapid scale that Ford achieved brings two major benefits: it makes each incremental unit cheaper to produce and also makes each incremental unit better. The former principle is BCG founder Bruce Henderson’s experience curve, while the latter is Wright’s law, which Ezra and Derek describe in their book.
One way that governments can incentivize that kind of rapid scaling is by making “advance market commitments.” Ezra and Derek cite two examples. One is a joint effort by several countries to spend $1.5 billion on a pneumococcal vaccine for low-income countries allowing pharmaceutical companies to produce it at scale instead of trying to sell it directly in low-income countries. The other is the US government’s investment in Operation Warp Speed to develop mRNA COVID vaccines. One economic analysis estimated that the lives saved over eight months of vaccinations through that program were worth $6.5 trillion – an amazing return on an investment of less than $40 billion.
As always, please continue to share your thoughts and questions with us. If you haven’t ordered your copy of Game Changer yet, you can do that HERE. Thanks for your interest and support.
Original article can be found here.