From Baillie Gifford

The lessons investors can learn from the economic lawgivers

March 2024 / 4 minutes

Key points

  • Investment managers are often guided by economic ‘laws’ – rules of thumb on how to approach growth investing

  • The Jevons Paradox, Henry Adams’ Law, Wright’s Law and Rachleff’s Law are useful aids to understanding change

  • Four Baillie Gifford managers explain how their favourite ‘laws’ have influenced decisions on companies such as Atlas Copco, Samsung SDI and Tesla

Mathematical equations scripted in chalk on a dark green blackboard

Please remember that the value of an investment can fall and you may not get back the amount invested.


Investment management is as much art as it is science. The quirks of human behaviour mean it doesn’t obey the strict formulae that govern maths and physics. But there are mental models investors can use as a guide. Along with experience, knowledge and intuition, these so-called ‘laws’ can help them navigate the complexities of companies and markets.

We asked four of our trust managers to pick the one they most often call on when deciding whether to invest in a company.

The Jevons Paradox

“In the long term, an increase in resource use efficiency will generate an increase in total consumption, rather than a decrease.”

Ben Durrant, Deputy Manager of Pacific Horizon Investment Trust

The Jevons Paradox, named after British economist William Jevons (1835–1882), explains why we never solve congestion by building highways. New roads just create new drivers.

Another aspect of the paradox is that businesses can grow revenues while driving down unit costs, because falling prices stimulate an increase in total demand. We find this across several sectors.

Samsung SDI, for example, has been instrumental in lowering the cost of electric vehicle (EV) batteries. Over the past decade, a fall of 80 per cent to $150 per kilowatt-hour has stimulated demand by making EVs more affordable. Despite this steep price deflation, Samsung SDI’s revenues have risen five-fold thanks to enormous volume growth.

The Jevons Paradox also underpins our investment in Delhivery, one of India’s leading logistics businesses. In India, logistics costs about twice as much relative to GDP than in other countries.

As Delhivery invests in more efficient infrastructure, driving down costs, we expect its use to increase disproportionately. India currently ships three billion ecommerce parcels a year. That sounds like a lot until you realise China ships 100 billion. Should India reach that level, even if per-parcel charges fall by two-thirds, revenue would increase 10-fold: that’s the Jevons Paradox in action.

US historian Henry Adams

Henry Adams’ Law

“Faced with dramatic shifts, humans tend to underestimate potential benefits and overestimate risks.”

Praveen Kumar, Manager of Baillie Gifford Shin Nippon

According to US historian Henry Adams (1838–1918), exponential change, when a process increases or decreases at an ever-faster rate, outstrips our ability to understand reality. Fear of the unfamiliar, he noted, makes human beings cautious.

To me, this seems to apply particularly to investing in Japan. The country is still riddled with inefficiencies, with most large corporations being domestically focused and conditioned to think about growth in increments rather than leaps. The slow progress of digitisation exemplifies this resistance to change – Japan is one of the last bastions of the fax machine. Market participants display a small risk appetite. Many struggle with big shifts.

I like to ask what other people are missing. With Japan, it’s often the need to embrace change and think several years ahead. That’s why Shin Nippon focuses on the myriad of small and medium-sized companies shaking things up. They’re piloted by young, creative founders with fresh business models.

Take real estate portal GA Technologies. It uses artificial intelligence to buy and sell properties and help customers apply for mortgages, facilitate rentals and track financial returns. Japan’s real estate sector is among the least developed in terms of use of technology, and GA is dragging the industry into the 21st century, so many still struggle to understand the company’s value proposition and raison d’être.

There are many others. Though Japan is a developed market, it sometimes resembles an emerging one, with lots of scope for exponential change. Adams’ Law helps us to understand why that makes it a growth investor’s dream.

Theodore Wright

Wright’s Law

“The more we make of a product the more we understand what it takes to make it better and thus cheaper.”

Lawrence Burns, Deputy Manager of Scottish Mortgage Investment Trust

Wright’s Law was developed by Theodore Wright (1895–1970), an aeronautical engineer who looked at plane manufacturing in the early 20th century.

He found a pattern: for each cumulative doubling of production, costs fell by a fixed percentage. This is known as a technology’s ‘learning rate’, which helps us to forecast the decreasing cost of technologies as a function of the volume produced.

Learning rates are a particularly powerful concept because they can be applied to a range of different technologies. Research by the Santa Fe Institute shows that many technologies exhibit a phenomenon whereby the more we make, the better we understand how to build them. Learning rates, therefore, provide a statistical basis for predicting technological progress.

When we first invested in Tesla, we took confidence in the high learning rates of batteries. This provided a strong basis to believe that electric vehicles would benefit from a far faster rate of improvement than internal combustion engine vehicles. It informed our view that cheaper electric cars were a nearly inevitable outcome. The falling costs for batteries continue and underpin the opportunity for other large holdings, such as the European battery manufacturer Northvolt.

Andy Rachleff

Rachleff’s Law

“When a great team meets a lousy market, the market wins. When a lousy team meets a great market, the market wins. When a great team meets a great market, something special happens.”

James Dow, Manager of The Scottish American Investment Company (SAINTS)

Many economic laws refer to technological or price-related phenomena. What they often ignore is the role of people in driving progress. This is why we like Rachleff’s Law, named after venture capitalist Andy Rachleff (b1960).

Good investments require a company to tap into an attractive market with the right products and services. But great investments demand more – the right people, processes and culture not just to survive but to thrive and even dominate attractive markets.

That’s why we’re dedicated to researching company culture: because we understand the role people have in the enduring success of a business. Atlas Copco is a good example. The Swedish industrial equipment company was founded in 1873 and the Wallenberg family has controlled it for most of the time since. Over their generations of ownership, a culture of continuous improvement has emerged.

Individual teams are empowered to find new avenues for growth. One of those has been the fast-growing semiconductor market, which requires vacuum-making equipment such as that made by Atlas Copco for use in chip manufacturing. The company’s continued entrepreneurialism has helped Atlas Copco stave off maturity and compound its earnings relentlessly higher – growth which may yet continue for years to come thanks to the “great team” that Rachleff champions.

Important information

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.
A Key Information Document is available by visiting