One of the 20th century’s top minds sees a great 21st century for humanity

Summary: As part of our holiday festivities, here’s an article by one of the great intellects of the 20th century.  John Maynard Keynes made seminal contributions in statistics, risk management, and (above all) macroeconomics. Here he looks at our future, seeing things already happening yet about which we remain unaware — with even better news in our future.

Comet 's office of the future

“Economic possibilities for our grandchildren”
by John Maynard Keynes,
The Nation and Athenœum, 11 and 18 October 1930.

 

Today’s economic pessimism

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 cen­tury 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 improve­ment 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 improve­ment 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 re­quires. And even so, the waste and confusion which ensue relate to not more than 7½% 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 5 or 6 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?

John Maynard Keynes

The long stagnation

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.

Progress

The long slow start of the singularity

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% 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.

Key to bright future

Looking ahead to 2030

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.

{US real GDP is up over 9-fold since Keynes wrote this.}

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.

Conclusions: about the good news

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 next section discusses what comes after wealth.  It is brilliant but off-topic here.}

…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!

———————————————————–

For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about forecasts,  about good news about  America, and especially these…

  1. Good news: The Singularity is coming (again).
  2. Let us light a candle while we walk, lest we fear what lies ahead.
  3. Fears of flying into the future — Reasons we need not fear the future.
  4. We have endemic terrorism – but few wars and epidemics. That’s good news!,
  5. The good news of history: it’s a story of less violence & better societies.
  6. Good news from the IMF about feeding the world’s people.
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6 thoughts on “One of the 20th century’s top minds sees a great 21st century for humanity

  1. pluto99

    Keynes was amazing. Someday somebody with an equal intellect and perspective is going to write the definitive book on the current economic experiments. I hope I am alive to read their conclusions.

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    Reply
    1. Editor of the Fabius Maximus website Post author

      Pluto,

      That’s a point I frequently made during the 2008-09 crash: Hoover responded to the Great Depression according to the established economic theory of his day. FDR, appropriately, responded to that failure with an aggressive program of trying a wide range of programs.

      Neither could respond effectively — the GD was “cured” by our WWII mobilization — because Keynes published his great General Theory in 1936, and it took years for economists and policy-makers to understand it.

      Our response to the crash and subsequent “great stagnation” is similarly constrained by a lack of relevant theory. Politics prevented a sustained fiscal response, so mainstream experts (economists, Wall Street gurus) assumed that monetary policy would suffice. From 2010-2015 I said that was not and could not suffice — to which good liberals confidently posted hundreds of comments saying that was false, I was ignorant, and growth was (or soon would) accelerate.

      In fact macroeconomic theory provided no basis for that belief, as Krugman now explains. But we still lack a sound theory explaining why growth slowed and how to restart it.

      Breakthroughs in science come in their own time, not when we need them.

      Like

  2. Haymarket8 (@Haymarket_eight)

    One possible reason for the “great stagnation” was described by John Maynard Keynes himself:

    “At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”
    — John Maynard Keynes, “The Great Crash 1929.”

    If Keynes is correct, then the conventional equation for GDP is wrong. The conventional equation is GDP = Y = C + I + G + (X-M), where C is consumption, I is corporate investment, G is government spending, and X-M = exports minus imports. The actual equation should instead be GDP = Y = C + I + G + (X-M) + B, where B equal the “bezzle,” John Maynard Keynes’ term for monies looted and hidden away in global tax shelters, undetected, by financial & corporate chicanery.

    Gabriel Zucman’s 2013 paper — “The Missing Wealth of Nations: are Europe and the U.S. net Debtors or net Creditors?” in he Quarterly Journal of Economics, August 2013 — estimates the size of B as 40% of all international direct investment.

    If the variable I (investment) is actually only 40% of the true value, than the actual value of the missing amount of investment must be 250% of its current estimated value. That’s an amount large enough to explain the allegedly missing productivity which supposedly leads to the “great stagnation” since productivity = GDP output divided by worker hours. If large amounts of GDP are not accounted for, then it necessarily follows that productivity will be drastically underestimated.

    Zucman directly addresses this issue in his 2013 paper:

    “…Observers have grown accustomed to the view that external assets are now in poor countries and debts in rich countries. In the public debate, the view that `China owns the world’ has become particularly popular. Should it be correct, the implications for policymaking and open-economy modeling would be far-reaching.

    “My paper challenges this view. The negative net foreign asset position of the rich world, I argue, is an illusion caused by tax havens. International statistics fail to capture most of the assets held by households through tax havens: they overlook the portfolios of equities, bonds, and mutual fund shares that households own via banks in Switzerland and other countries with strict bank secrecy rules. This coverage gap explains many of the long-standing anomalies in global data…”

    — Zucman, Gabriel, 2013, op. cit.

    As Keynes remarks, under normal economic circumstances the value of B, the bezzle, is small. Only in dysfunctional economic circumstances, where financial crimes are not punished by sending the bad actors to prison, and where stringent accounting is not used to detect financial fraud and tax evasion, will B, the bezzle, grow large enough to distort the equations of conventional economics. As everyone knows, Barack Obama’s refusal to send any Wall Street crime lords to jail embodies a resolute refusal to punish financial crimes in any significant way.

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    Reply
    1. Editor of the Fabius Maximus website Post author

      Paolo,

      ”assuming no important wars”

      Conventional wars have not even slowed progress in the West, and have acellerated tech progress. Let’s restate that as “no large nuclear wars”. My guess is that we have passed the point of maximum danger of atomic war.

      “and no important increase in population” population increase from 2 to 7 billion.

      The world population now is aprox 7.4 billion. UN demographic forecasts show a likely rise to 9 billion, perhaps higher (details here). Why do you believe that is incomparable with continued economic growth?

      Like

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