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Some thoughts about the economy of mid-21st century America

12 January 2009

Our lesson for today is an excerpt from “Economic possibilities for our grandchildren” by John Maynard Keynes, originally published in The Nation and Athenœum, 11 and 18 October 1930:

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth cen­ tury is over; that the rapid improvement in the standard of life is now going to slow down — at any rate in Great Britain; that a decline in prosperity is more likely than an improve­ ment in the decade which lies ahead of us.

I believe that this is a wildly mistaken inter­pretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another.

The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improve­ ment in the standard of life has been a little too quick; the banking and monetary system of the world has been preventing the rate of interest from falling as fast as equilibrium re­ quires. And even so, the waste and confusion which ensue relate to not more than 7½ per cent of the national income; we are muddling away one and sixpence in the £, and have only 18s. 6d., when we might, if we were more sensible, have £1; yet, nevertheless, the 18s. 6d. mounts up to as much as the £1 would have been five or six years ago.

… The prevailing world depression, the enormous anomaly of unemployment in a world full of wants, the disastrous mistakes we have made, blind us to what is going on under the surface-to the true interpretation of the trend of things. For I predict that both of the two opposed errors of pessimism which now make so much noise in the world will be proved wrong in our own time — the pessimism of the revolutionaries who think that things are so bad that nothing can save us but violent change, and the pessimism of the reactionaries who consider the balance of our economic and social life so precarious that we must risk no experiments.

My purpose in this essay, however, is not to examine the present or the near future, but to disembarrass myself of short views and take wings into the future. What can we reasonably expect the level of our economic life to be a hundred years hence? What are the economic possibilities for our grandchildren?

From the earliest times of which we have record — back, say, to two thousand years before Christ — down to the beginning of the eighteenth century, there was no very great change in the standard of life of the average man living in the civilised centres of the earth. Ups and downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive, violent change. Some periods perhaps 50% better than others — at the utmost 100% better — in the four thousand years which ended (say) in A.D. 1700.

This slow rate of progress, or lack of progress, was due to two reasons — to the remarkable absence of important technical improvements and to the failure of capital to accumulate.

The absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable. Almost everything which really matters and which the world possessed at the commencement of the modern age was already known to man at the dawn of history. Language, fire, the same domestic animals which we have to-day, wheat, barley, the vine and the olive, the plough, the wheel, the oar, the sail, leather, linen and cloth, bricks and pots, gold and silver, copper, tin, and lead — and iron was added to the list before 1000 B.C. –  banking, statecraft, mathematics, astronomy, and religion. There is no record of when we first possessed these things.

At some epoch before the dawn of history — perhaps even in one of the comfortable intervals before the last ice age–there must have been an era of progress and invention comparable to that in which we live to-day. But through the greater part of recorded history there was nothing of the kind.

The modern age opened, I think, with the accumulation of capital which began in the sixteenth century. I believe–for reasons with which I must not encumber the present argument–that this was initially due to the rise of prices, and the profits to which that led, which resulted from the treasure of gold and silver which Spain brought from the New World into the Old. From that time until to-day the power of accumulation by compound interest, which seems to have been sleeping for many generations, was re-born and renewed its strength. And the power of compound interest over two hundred years is such as to stagger the imagination.

… For I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her Budget, and found herself with about £40,000 in hand. This she invested in the Levant Company — which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment. Now it happens that £40,000 accumulating at 3¼ per cent compound interest approximately corresponds to the actual volume of England’s foreign investments at various dates, and would actually amount to-day to the total of £4,000,000,000 which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest!

From the sixteenth century, with a cumulative crescendo after the eighteenth, the great age of science and technical inventions began, which since the beginning of the nineteenth century has been in full flood–coal, steam, electricity, petrol, steel, rubber, cotton, the chemical industries, automatic machinery and the methods of mass production, wireless, printing, Newton, Darwin, and Einstein, and thousands of other things and men too famous and familiar to catalogue.

What is the result? In spite of an enormous growth in the population of the world, which it has been necessary to equip with houses and machines, the average standard of life in Europe and the United States has been raised, I think, about fourfold. The growth of capital has been on a scale which is far beyond a hundredfold of what any previous age had known. And from now on we need not expect so great an increase of population.

If capital increases, say, 2% per annum, the capital equipment of the world will have increased by a half in twenty years, and seven and a half times in a hundred years. Think of this in terms of material things–houses, transport, and the like.

At the same time technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history. In the United States factory output per head was 40% greater in 1925 than in 1919. In Europe we are held back by temporary obstacles, but even so it is safe to say that technical efficiency is increasing by more than 1% per annum compound. There is evidence that the revolutionary technical changes, which have so far chiefly affected industry, may soon be attacking agriculture. We may be on the eve of improvements in the efficiency of food production as great as those which have already taken place in mining, manufacture, and transport. In quite a few years — in our own lifetimes I mean — we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.

For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come–namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of a far greater progress still.

Let us, for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day. Assuredly there need be nothing here to surprise us.

Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes — those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs–a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.

Now for my conclusion, which you will find, I think, to become more and more startling to the imagination the longer you think about it.

I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not — if we look into the future — the permanent problem of the human race.

Why, you may ask, is this so startling? It is startling because — if, instead of looking into the future, we look into the past — we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race — not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms.

Thus we have been expressly evolved by nature — with all our impulses and deepest instincts — for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose.

Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades.

{The following section discusses what comes after wealth.  It is brilliant but off-topic here, and hence not included}

… But, chiefly, do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists — like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

These posts discuss the good news for America, an antidote to the doomsters.

  1. Good news: The Singularity is coming (again), 8 December 2007 — History tends to look better over longer time horizons. Consider one bit of good news: the Singularity is coming.
  2. Some good news (one of the more important posts on this blog), 21 December 2007 –  I do not believe we need fear the future, despite the tough times coming soon.
  3. A crisis at the beginning of the American experiment, 27 December 2008 — Looking at the problems looming before us, it is easy to forget those of equal or greater danger that we have surmounted in the past.
  4. An important thing to remember as we start a New Year, 29 December 2007
  5. Is America’s decline inevitable? No., 21 January 2008 – Why be an American if one has no faith in the American people?  How can you believe in democracy without that faith?
  6. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008
  7. A happy ending to the current economic recession, 12 February 2008 — Sometimes we can see medium-term outcomes with greater clarity than short-term events or long-term trends.  So it is with the current economic down cycle in America.
  8. Fears of flying into the future, 25 February 2008 — Reasons we need not fear the future.
  9. Experts, with wrinkled brows, warn about the future, 2 May 2008
  10. Good news about the 21st century, a counterbalance to the doomsters, 9 May 2008
  11. “America’s Greatest Weapon”, 25 May 2008
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20 Comments leave one →
  1. Cycling in Hollywood permalink
    12 January 2009 2:08 am

    But what about peak oil?
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    Fabius Maximus replies: I don’t believe Keynes (1883-1946) thought much about peak oil. For articles on that topic, see the FM reference pages (on the upper right side menu bar):

    * Peak Oil and Energy – articles on the FM site
    * Peak oil and energy – studies and reports

  2. 12 January 2009 3:32 am

    Almost everything which really matters and which the world possessed at the commencement of the modern age was already known to man at the dawn of history

    His recitation of the history of technological progress is extremely simplistic and ultimately incorrect.

    The rest of his argument might still hold, but he’d have to rewrite it from a better starting point.
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    Fabius Maximus replies: I am always amazed at how easily people think they have found simple mistakes in the writings of great men. Rather than wonder if they have not understood his point, they think “this guy is not as smart as I am!” Bizarre, even sad.

  3. 12 January 2009 4:03 am

    “coal, steam, electricity, petrol, steel, rubber, cotton, the chemical industries, automatic machinery and the methods of mass production, wireless, printing, Newton, Darwin, and Einstein, and thousands of other things and men too famous and familiar to catalog.”

    And yet, the list coming out of WWII was more impressive albeit derivative of Keynes’s list;jet engines, nuclear power, synthetic polymers, and antibiotics, and computers all became large new segments of the post war economy. I believe before the war our problem was our list was not long enough or economically attractive enough to absorb available resources, thus structural unemployment and depression leading up to the war. What new list will we have after Washington spends the proposed trillions?

  4. 12 January 2009 4:10 am

    I am always amazed at how easily people think they have found simple mistakes in the writings of great men.

    Then enlighten me instead of merely appealing to authority.

    Rather than wonder if they have not understood his point, they think “this guy is not as smart as I am!” Bizarre, even sad.

    It’s not about intelligence; it’s about bias, which is something that even the greatest of men are guilty of at times.
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    Fabius Maximus replies: What is the leap between the ape, scratching for bugs and killing small animals — and fire, agriculture, domestication of amimals, language, the bag, the bow-arrow, the stone ax? Then there are the inventions at the dawn of history: banking, statecraft, mathematics, astronomy. These are leaps of incredible range, the big innovations that distinguish us from animals. The tiny changes that follow these two great leaps are nothing in comparison.

    Consider a thought-experiment. Take an ancestor from pre-fire era and bring him to Bablyon circa 500 BC. He would be lost. Take a money-changer/lender from Bablyon and bring him to London in 1930. The adjustment would be fantastic, but the operation of a great city and its trading would probably be understandable to him, after a period of adjustment.

    “Economic possibilities for our grandchildren” is not an dissertation in physics, it is a speculative and motivational essay, written as the world spiraled into the Great Depression. Of course you might disagree (it’s not a debate that interests me). But Keynes’ meaning is not difficult to see, if one makes an effort — rather than the facile conclusions he’s “simplistic” and “incorrect”. Or saying “I don’t get it.” would be far superior, in my opinion.

  5. 12 January 2009 6:30 am

    Consider a thought-experiment

    I don’t dispute that experiment. Clearly those first few steps out of the wilderness were absolute game-changers. What troubles me is his implication that we’ve had similar game-changers recently and that the interval was relatively trivial.

    The absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable

    I submit that if you transported John the Baptist to modern America, he would have approximately the same sort of adjustment as your Babylonian money-changer.

    I’m inclined to believe that the pace of innovation has increased significantly in the last century or two, but not to the point that I’d pooh-pooh the shoulders on which we stand.
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    Fabius Maximus replies: I doubt that Keynes — or any historian — would disagree with your point about the near-zero rate of change between 500 BC and 0 AD. Or, for that matter, between 500 BC and 1400 AD.

  6. 12 January 2009 2:16 pm

    Then “I don’t get it.” What is the meaning of the following sentence?

    “The absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable”

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    Fabius Maximus replies: See comment #4 above.

  7. Erasmus permalink
    12 January 2009 2:19 pm

    Placing the current crisis (of 1930) in the long-term historical context was intelligent and insightful. I do not think he is correct that all previous eras were only about solving ‘the economic problem’ even though I believe he is/was correct that we could move beyond that sort of Darwinian dynamic soon. In fact, we already could.

    Two particulars sparked from reading this excellent excerpt:

    The little jig about what may or may not have happened before the last ice age. We have only very scattered evidence here and there with few societies having even oral records going back much before 18,000 BC. However, it seems reasonable to guess that a much larger population was greatly reduced and thus a much smaller one survived to provide the basis for the current crop of six billion. Much of our much-vaunted technological process has been in response to this ever-increasing population since that ice age (or flood/cataclysm whatever) as well as its contributing cause.

    The second thought is about how far we really can go population-wise. Could we realistically handle 30 billion people without critically compromising the environment? 60 billion? For that is where we are headed. I suspect not. More importantly, it seems that hardship is part of demographic vigor which is perhaps why so many advanced societies/classes see birthrates decline whereas those in poverty seem to thrive, like proverbial weeds. This implies that such struggle is deeply embedded in our instinctive core and that some sort of pan-harmonious apogee is not a likely outcome of further development, rather a continuation of cycles of creation and destruction.

    Perfection exists within more absolute realms (always available spiritually speaking), but on the relative level it is less likely so I suspect that we will not solve the ‘economic problem’ even though we could, as Keynes well pointed out above. So wars/destruction will continue, both intra and extra societal.
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    Fabius Maximus replies: Why do you expect population to skyrocket (30 – 60 billion) when fertility is dropping in most regions of the world — below replacement level in almost all developed nations (more so when excluding recent immigirants) and many of the less-developed nations (e.g., China).

  8. 12 January 2009 3:02 pm

    Great repost of Keynes. There’s also an interesting comparison of this recession to previous recessions done by the Minneapolis Fed: “the recession in perspective“, updated thru 9 January 2009.
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    Fabius Maximus replies: Thanks for the link to this!

    Note however that this data is very misleading. Data for this recession is likely to be revised, perhaps substantially, almost certainly down. GDP is esp prone to large revisions many quarters afterwards. The employment data for December was bad — but November and October lost another 150 thousand jobs. Over the past 3 months there have been downward revisions totaling 475 thousand jobs, a third of the total 1.5 million jobs reported lost.

  9. 12 January 2009 3:40 pm

    Thanks, FM, fantastic and inspiring selection of Keynes.

    Yet I disagree with JMK about the magic of compound interest as compared to the more important innovation. His key remark implies my own proposed cause for progress: “This she invested in the Levant Company — which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment.

    The Enlightment cause of progress — limited liability companies, who combine Land, Labor, Capital … AND peaceful, voluntary, contractual-based Organization. The voluntary Company Contract, changing ‘work’ into a ‘job’, was the organizational leap which allowed the capital to be invested profitably (with profit being a measure of wealth-capital increase).

    Most previous mass organization of human effort was based on force — lords forcing the peasants to do/ build something, with little choice, and little capital accumulating for additional profitable investment. While corporations were not above using bribing gov’t to use force on their behalf, the companies usually didn’t have the right to use force directly.

    And yes, with capitalism, free markets, democracy, and human rights respected by all governments (a world without dictators!), the evolutionary economic survival problem can be solved, altho there is never a solution which lets more than half the people live ‘above average’.

  10. Duncan Kinder permalink
    12 January 2009 4:08 pm

    What can we reasonably expect the level of our economic life to be a hundred years hence? What are the economic possibilities for our grandchildren?

    That depends upon which parallel universe we are talking about.

    Seriously.

    One of the problems we are talking about is that our political, legal, and economic ideas, institutions, and general world view remain Newtonian while our technology, science, and intellect are quantum mechanical and relativistic.

    As such, we are more like the early modern era, when the Copernican system challenged the Ptolemaic. What’s more to the point, all of the quasars and black holes and quantum mechanical paradoxes are downright weird and quasi-magical – much like the astrology, alchemy, and cabalistic lore of that era.

    Much has been written on the Renaissance mind, but Dame Frances Yates’ books are a good place to start.

  11. 12 January 2009 4:34 pm

    Fabius Maximus replies: See comment #4 above.

    Either #4 doesn’t answer my question or your insight is beyond the comprehension of my feeble mind. I get that it’s a “speculative and motivational essay”, but if it’s based on a faulty premise, there’s little reason to buy what he’s selling. It’s possible that his point is still valid — as I acknowledged in #1 — but until someone corrects the premise of the essay, it’s completely unfounded.

    Again, this “The absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable” implies that the modern pace of inventions rivals that of the prehistory, while the pace of inventions during the interval does not. That’s simply not true, as you seem to agree in #5.
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    Fabius Maximus replies: My statement in #5 says nothing of the kind, only that there was little progress by most measures (in the West, at least) between the “classical” and “modern” eras.

  12. Erasmus permalink
    12 January 2009 5:17 pm

    Re the Fed recession study: we should really go back to pre-Glass Speagal days, i.e. the late 1800′s. They had far more volatile rides. Also, one could argue that the current debt bubble burst is from the past 50+ years or even since the Federal Reserve system so it could be a real whopper. We’ll see soon either way!

    “Why do you expect population to skyrocket (30 – 60 billion)?”

    Well, I don’t necessarily. However, I am sure a simple graph plotting post ice-age populations from 10000 BC to present will present a steady increase. 30 billion is only 5 times the current population. What year was it when the population was 5 times less then the present one, i.e. around 1.2 billion? Not so long ago! Furthermore, current economic models depend upon continual expansion. That is perhaps a failing, but we have yet to change it.

    Re compound interest. I also thought this was an over-simplification for reasons Keynes hinted at in his own article, namely the mining of gold and silver in the New World which was used for trade arbitrage in the Far East whose wealth and populations dwarved the West’s until only a couple of centuries ago. Merchants from the 1400s on were stunned by the scope of cities and populations in Asia compared to their own. It was not so much compound interest as simple trade volume expansion with capital formation along with credit etc. being a means to rapidly expand to meet demand as new markets opened up worldwide and the West used mechanical means to achieve favorable wages to underprice the vast labour pools in Asia. The history of exactly why the spinning Jenny was developed is fascinating in this regard (it was deliberately conceived and designed for a British enterprise to be able to sell into the Asian markets which otherwise they could never have done).

  13. electrophoresis permalink
    13 January 2009 1:37 am

    Erasmus makes an excellent point. The year in which the world population was 1.2 billion was 1850. Not that long ago.

    However, current evidence appears to suggest that population growth rates plunge when countries’ GDP rises to first-world levels. Europe is alrady below replacement population growth rates except in France; America is at or slightly below ZPG and our population would decline if not for immigrants. Current projections show a global population much more than 9 billion to be most unlikely. However, that does raise other important concerns: as the population growth rate tails off, many countries will stagger under the demographic burden of huge numbers of older retirees (40 or 50 years from now) and too few younger workers to support them. I.e., China’s one-child policy will bite them in the ass in about 40 years, and Brazil, with 50% of its population now under age 18, is headed for trouble in another 50 years.
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    Fabius Maximus replies: Erasmus forecast of continued and massive population growth was absurd. There is no need to guess, as these things have all been extensively studied. Due to the slow-moving nature of demographic trends, we can accurately forecast population several generations into the future.

    Also note that income is not the only factor depressing fertility. To give a few examples,
    * China’s fertility collapsed due to government policy.
    * Fertility in Eastern Europe and Russia (esp ethnic Russians) has collapsed due to social factors.
    All are far below replacement levels.

    For a look at research on this, see the FM Reference Page “Demography – an archive of resources“.

    For a deep analysis of this, see George Magnus new book “The Age of Aging: How Demographics are Changing the Global Economy and Our World”. See this shallow review in The Economist.

  14. 13 January 2009 4:12 am

    Follow on to Minneapolis Fed link Comment 8.
    It’s very difficult to know what’s happening at the time it’s happening. Maybe I’m naive, but I do believe the Fed tries to put out accurate data about what’s happening. Is their outlook flavored by their perceptions? Greenspan proved that. However, two reasonable people can look at the same set of data and draw completely different conclusions.

    Finding data in an accessible format without losing your life to the effort is a struggle. That’s why I enjoy your blog so much. It’s a daily intellectual vacation.

    You may well have already seen it, but in case you haven’t. Brad Setser, from the Council on Foreign Relations published an amazing and accessible post on who’s buying US Treasuries and the economics surrounding the sale of Treasuries (here).

    Brad’s blog is an enlightening regular read that I enjoy almost as much as yours.
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    Fabius Maximus replies: It is not that the US government’s agencies are corrupt or incompetant. They are neither. But this is a large, complex, and rapidly evolving economy — and our data collection agencies are grossly underfunded. We get the numbers we pay for, and must be aware of these limitations when using them.

    Brad’s blog at the CFR is on the blogroll of the FM site; as he is one of the top experts on international capital flows.

  15. Erasmus permalink
    13 January 2009 4:14 am

    FM: I was not forecasting anything. I also think it’s absurd. However, the point is that the current economic system – including that espoused by Keynes in the lead article in this thread – depends upon continuous growth. Perhaps what I am saying is that such growth has not only come about through ‘compound interest’ and various forms of fancy financial footwork – although they have no doubt contributed mightily – but also simple demographics, aka a population boom. If you are right that population growth is about to taper off generally, then perhaps our economic models have to learn to become more ‘self-sustaining’. This will require an enormous shift in our entire view of how economies work, along with more important re-evaluations of our societal value systems, i.e. how we define ‘success’, ‘progress’, ‘civilisation’ and so forth. And within that emerging context, the role of ‘compound interest’ and other financial contributions will also have to be re-evaluated.
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    Fabius Maximus replies: All excellent points, well worth considering! It is difficult to see how our economic system can adapt to declining population, or the high levels of immigration necessary to manitain our numbers — let alone increase them. Yet at some point we must make this transition.

  16. OldSkpetic permalink
    13 January 2009 8:38 am

    Good old Keynes, a true child of the Enlightenment.

    Yep we have problems (ponzi economies, peak ol/gas/decline of technical education collapse, global warming, etc) but they can be overcome (though for some we are really leaving it to the last minute).

    Gut feel? We have 20 years of absolute rubbish to go through. Whether or not things start to get better after that is, as I have posted before, a choice. A clea and simple choice. About what world we all want to live in.

    Lots of hard work ahead, tough decisions to be made, but if we all stick to the priciples of the Enlightenment we’ll all make it through (plus no more management drones … whoopie do … heck its nearly worth a depression just to get rid of those clowns .. no more ‘stratagizing meetings’ no more ‘value proposition’ statements, etc).

  17. seneca permalink
    13 January 2009 1:38 pm

    Thanks Old Skeptic! IMO Keynes was over-optimistic here. The 30′s economy, even with Keynesian intervention, did not overcome the Depression. War did. That’s not an encouraging precedent. Today, we are clearly in an era of war over resources, which has taken precedence over the ordinary needs of citizens. One could say that war is even the leading sector of the economy — not an encouraging sign.

    Keynes most interesting point, IMO, is that capital in 1930 (through improvements in productivity) had outstripped its labor base, which also means it had outstripped its markets. This is, I think, the driving force of the last 90 years — acutely obvious in the last 20 years of bubble economies.

    FM used to say, probably still does, that we will all have to live more humbly in the future. Capital will have to live more humbly too, with lower rates of profit, and greater social responsibility.
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    Fabius Maximus replies: In what way was Keynes “over-optimistic here”? Note the topic sentence:

    My purpose in this essay, however, is not to examine the present or the near future, but to disembarrass myself of short views and take wings into the future.

    Considering the progress of the global economy since 1930, I believe he was correct.

  18. electrophoresis permalink
    14 January 2009 12:24 pm

    Sorry, but the data fail to support the claim that WW II overcame the Great Depression, rather than the New Deal. See this reference for details.

    The popular misperception that the New Deal “didn’t work” or “didn’t work well enough” may result from FDR’s ill-advised attempt to balance the budget in 1937. The American economy accelerated nicely out of the Great Depression until that mistake put the brakes on growth. However, FDR learned his lesson, as did congress, and by the early 1940s the U.S. economy was doing much better than in the nadir years of 1932-1933.

    One issue that frankly worries me about Keynesian stimuli right now is outsourcing. Keynes’ economy didn’t have the ability to ship high-wage white collar skilled middle class jobs overseas via the net, but today American corporations are doing that just as fast as their consultants can hire Chinese and Indian PhDs for 1/5 of the wage of an equivalently skilled American PhD. No evidence suggests that people in the third world have lower IQs than Americans — if anything, the standardized IQ tests seem to show that Asians score slightly higher than Americans on Stanford-Binet-type tests. Plus, many of those highly skilled workers in Asia and India got their PhDs at Caltech or MIT before returning home. So any U.S. company that fails to outsource high-skill high-wage jobs like engineer or programmer or bichemist or materials scientist suffers a competitive disadvantage and gets driven out of business.

    Problem is, that leaves America with only two kinds of jobs: low-wage service jobs like Wal*Mart associate, and licensed jobs that are basically part of a medieval-type guild. We all know about the licensed jobs — lawyer, doctor, plumber, machinist, carpenter, electrician, airline pilot, basically a job in which you need a guild certificate to work in the profession regardless of your actual skills. Such jobs are of course an anti-competitive restraint of trade, but the hammerlock of lawyers and doctors on their respective guilds seems in no danger of loosening. However, I can’t see how America maintains a middle class with only those two kinds of jobs. That kind of society looks more like Brazil: cities with a vast mass of favela shanties surrounding a few super-luxury high rise penthouses.

    What would Keynes suggest about outsourcing? We might want to start asking ourselves that question. It’s a real issue, and may help explain why TARP and the stimulus package don’t seem to be doing much good.

  19. Eman permalink
    15 January 2009 9:34 am

    Blah, blah, blah…

    What we suffer from now economically is the same thing as the 1930s…it’s simple: overproduction/oversupply of goods and services because of the efficiency of capitalism and rising unemployment because of labor mechanization (labor oversupply – i.e., we are producing more goods with less workers).

    That’s it. That’s the problem boiled down – capitalism suffers from its own success. It’s too bad that capitalism’s success has come at the expense of the workers who can no longer afford to buy the oversupply of goods. There is only so much stuff people need or want, ya know.

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