Is It Time To Check Our Assumptions?
Share this

When it comes to how we think about the markets (and beyond), we must also think about the assumptions we’re making. Indeed, poor outcomes often result from misguided assumptions, sometimes adopted without question because “everyone knows” they’re true. Here, the Mark Twain quote comes to mind: “It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.”

As an economist, this is something that haunts me. Everything I do is based on an understanding of how the world works, and that understanding is based on a set of critical assumptions—that do not necessarily hold. Recent examples of assumptions breaking include that Europe was beyond warfare (see Ukraine), that medical science has put us past systemic risks (the Covid-19 pandemic), and that the global economy and modern financial management made inflation a risk of the past (see the most recent CPI and PPI reports).

A Reversal of Assumptions

All of these are examples of assumptions that reversed in the short term. But the flip side of this is that even as assumptions break, we can’t simply assume the reverse will now hold. The war in Ukraine will eventually end, and the cause (Russia) will be unable to do it again. The pandemic continues, after significant economic damage, but the damage going forward will be much less. Inflation, while very high and very real, is caused by an explosion of demand and a collapse of supply, both of which are now reversing. In all of these cases, the prior assumption reversed but is likely to re-reverse to the status quo ante in the next couple of years. We can’t simply take current conditions as a good guide to the future.

Opportunities Revealed

That means we need to look deeper. When we identify the assumptions, that is just the first step. Next, we need to understand the assumptions and where they come from. If we do that, we can understand what might go wrong—and identify opportunities.

China and Asia. One that comes to mind immediately is the primacy of China and Asia. China has been the driver of growth for much of the world over the past 40 years and has driven growth in the surrounding countries as well. The assumption has been that growth will continue—but why?

After all, the growth came from two things. First, the demographic trends provided endless very low-cost labor. Second, the open-world trade architecture allowed China to grow rich through exporting to the West. For the assumed growth to continue, either both of those must hold or new growth engines have to appear. In fact, of course, both of the original growth engines are, if not reversing, at least going neutral. China’s demographics are now mature and aging, not young and growing. The U.S. is now much less open to trade, especially to countries seen as strategic competitors. The assumption of continued growth looks less likely when you consider the underlying trends. This is the risk.

And yet—and this is the major point—looking at that assumption still has value, because the assumption really doesn’t have anything to do with China; it is about the primacy of demographic trends and trade. That points us in a different direction. What about Africa?

Africa. When you look at the demographic trends, Africa could be the new China with a large and growing young population available for hire at cheap rates. When you look at openness to trade, Africa is in a much better position with respect to the rich West than China now is. If you look at growth prospects, the assumptions that people think point to China now point much more directly to Africa. Is the assumption outdated? Not at all. But the interpretation certainly is. By identifying first the assumption and then the underlying reasoning, we can identify both the risks—and the opportunities.

A Time of Change

As the world changes, we need to identify what we know that simply isn’t so. That will be the big challenge for the next decade.

Share this
You May Also Like

Accelerate Growth by Seeing Your Business Through Your Clients’ Eyes

Opinions expressed by Entrepreneur contributors are their own. At this point in…

These 47 Dividends Are About To Plump Up

Whole grilled chicken with mushrooms and potatoes close-up in a baking dish.…

China’s Fast-Fashion Giant Shein Faces Dozens of Lawsuits Alleging Design Theft

HONG KONG—In just a few years, the Chinese apparel giant Shein has…

Luster LightTech Listing Adds China’s Latest Tech Billionaire

A security officer wearing a face mask walks in front of the…

Joey Chestnut Downs 63 Hot Dogs, Miki Sudo 40 To Win Nathan’s Eating Contest

Joey Chestnut (L) and Miki Sudo (R) hold 63 and 40 hot…

Circle looks to reaffirm commitment to transparency as USDC market share soars

The cryptocurrency market has experienced a turbulent period as of late, with…

Third Boris Johnson Cabinet Member Quits—But PM Resists Pressure To Resign

Topline Simon Hart—a member of the British Parliament who served as Secretary…

20 Thought-Provoking Journal Prompts for Success

Opinions expressed by Entrepreneur contributors are their own. If you have ever…