We find ourselves in the midst of the 2020s—a remarkable moment in time. Much like the «Roaring Twenties» a century ago, we are experiencing both a productivity boom and a free-market surge. This is the only time in the past hundred years that such a conjunction has occurred.
The productivity boom is now clearly evident in rising productivity growth, particularly over the past five quarters in the United States. From a European perspective, the free-market surge is less apparent, but it is unmistakably at the heart of the new American administration’s agenda. These developments mutually reinforce each other on a macroeconomic level, manifesting as higher economic growth and moderate inflation—a perfect environment for equity investors.
The original «Roaring Twenties» was a period of significant economic, social, and cultural change. Germany and France also experienced their own Glückliche Zwanziger Jahre and Années Folles, but even then, it was «America First.»
During the 1920s, the U.S. economy grew by a staggering 42 percent. For the first time, more people lived in cities than in rural areas, and productivity growth was unprecedented. It was the era when the fruits of the Second Industrial Revolution were finally realised. The telephone, light bulb, electric motor, airplanes, cars, radios, tractors, typewriters, and mass production all played pivotal roles. Together, they created enough critical mass to significantly increase network effects. It was the age when human labour began to be automated.
It was also the era of unfettered capitalism. During World War I, the U.S. had nationalised its railroads, but once returned to private ownership, profit-making was no longer taboo. The power of the «invisible hand» of the free market was evident, as the pursuit of self-interest contributed to the greater good—a phenomenon clearly visible in the 1920s.
The fourth industrial revolution’s harvest
Just as the 1920s reaped the benefits of the Second Industrial Revolution, we are now reaping the rewards of the Fourth Industrial Revolution. Instead of automating human muscle power, we are automating human cognitive power. As is often the case with new technologies, their potential is still grossly underestimated.
Similar to the productivity boom of a century ago, we can now expect a comparable surge. This may seem bold, given the many technological breakthroughs of the 1920s, but the improvements go beyond combining the brute strength of machines with artificial intelligence. This combination will lead to the widespread robotisation and automation of factories, and the most common male job—driver—will disappear.
These new productivity improvements will also become increasingly visible in the services sector, which constitutes a much larger portion of developed economies. According to McKinsey, 70 percent of office jobs will disappear within a decade.
The decline of the free market
Unlike the 1920s, it can no longer be argued that a true free market exists. It has succumbed to a multitude of regulations, which disproportionately benefit the largest corporations since they can afford compliance. The result is a growing number of oligopolies. Furthermore, disruptive innovations have created monopolies. While this may not be bad for shareholders, it is far from the ideal of free-market capitalism.
Keynesian economics has also gone too far. Nowadays, nearly every societal issue is addressed by throwing money at it. Citizens and businesses can count on unconditional government support. There is diminishing room for the free market. Companies no longer go bankrupt but persist as «zombies», hindering progress. Ironically, the free market is often blamed.
The solution to the disappearance of the free market lies in shifting focus from the demand side to the supply side of the economy. This has been seen before in the form of supply-side economics during the 1970s and 1980s, also known as Reaganomics, which was itself a reaction to overextended Keynesianism.
A return to supply-side economics
With Trump’s rise to power, the supply side of the economy has regained prominence. An ideal supply-side economy features a low, uniform tax rate, controlled government spending, sound monetary policy, free trade, and minimal regulation. Since Trump’s victory, his administration has aimed to revive the supply-side economics of the 1980s. Lower taxes and deregulation have long been Trump’s hallmarks. With Scott Bessent’s nomination, Jerome Powell’s retention, and Trump’s growing awareness that high inflation leads to election losses, the U.S. is likely to adopt a solid monetary policy. Admittedly, this is unexpected, but Trump’s second term bears little resemblance to his first.
In terms of productivity improvements driven by artificial intelligence and a renewed emphasis on supply-side economics, the United States is the clear winner. Stock markets, which always look ahead, reflect this: the weight of U.S. equities in the global index has risen from 30 percent in the 1980s to over 70 percent today. During the 1920s, this percentage doubled from about 25 percent to 50 percent, driven by a sixfold increase in the U.S. stock market. While relative growth is now limited, the absolute potential remains substantial.
Han Dieperink is Chief Investment Officer at Auréus Vermogensbeheer. Previously, he served as Chief Investment Officer at Rabobank and Schretlen & Co.