The Economic Possibilities of Our Grandparents

An Introduction to Keynes’s “Economic Possibilities for Our Grandchildren”

 

 

 

Karl Widerquist

The Department of Politics and International Relations

Oxford University

Karl@Widerquist.com

 

 

 


            Keynes presented the earliest version of “Economic Possibilities for Our Grandchildren” seventy-five years ago at several lectures in Britain in 1928. The final version appeared in print in 1930, when the world was in the grip of the Great Depression, but this essay bypassed the depression (which Keynes dealt with extensively elsewhere) to focus instead on a much longer outlook—the state of the world one hundred years in the future. We are still 25 years short of the date in question, but we are close enough to decide whether we are approaching the society Keynes envisioned for his grandchildren, and anyone of us whose grandparents were born after Keynes (1883) can claim to be of the generation in question. Reading this essay in 2003 reveals some good foresight, some glaring errors, and one surprising puzzle.

            Under the heading of good foresight, Keynes predicts that the Great Depression did not signal the end of the industrial revolution, but a minor dip in the centuries-old trend of gradual but substantial increases in productivity, wealth, and average living standards. He guessed that average living standards in Europe and the United States were 4 times higher than they were 250 years earlier and than they were at any time in history before that, and he guessed they would be four to eight times greater another century in the future. Despite depression, war, and the failure of much of the world to catch up, the growth of the European and North American economies in the following 75 years proved to be no disappointment.

            Another strikingly accurate prediction was that in the future people would hear a great deal more about “technological unemployment.” He defined technological unemployment somewhat differently than we do today: as economizing on our use of labor (to produce the goods we know) more rapidly than we can find new uses for it (to produce new goods). Today, technological unemployment is considered instead to be a mismatch of skills. New technology creates demand with workers for new skills, and reduces demand for workers of certain existing skills. Those with skills that are gradually being outmoded face three grim prospects: longer and longer periods of unemployment, difficult retraining, or movement to a lower-skilled, lower-wage sector of the economy. This definition of technological unemployment makes Keynes’s optimism that it was a temporary condition less warranted. As long as the pace of technological change increases, technological unemployment will continue to grow.

            Under the heading of glaring errors, economic historians today would not be impressed by Keynes’s analysis of why the growth in the standard of living occurred. He put too little emphasis on the increase in technology and too much on the accumulation of capital, which he erroneously attributed to the influx of gold after the conquest of America.

            These minor errors pale in comparison to the puzzle of the central claim of the essay, which somehow failed to come true, even though it rested on logical as simple as ONE + ONE = TWO. ONE: He correctly observed that economic productivity had already lifted the average person in Europe and the United States well above subsistence. ANOTHER ONE: He correctly predicted that average living standards would rise by another four- to eightfold in the next hundred years. ONE + ONE = TWO: Therefore, we should soon free ourselves from the struggle for subsistence, transforming the central problem of humanity from survival into how to meaningfully use our abundant leisure time. The little work that needed to be done would be spread out among the population in portions of perhaps 15 hours per week, merely because “everybody needs to do some work if he is to be contented.” Keynes spends a large part of the essay discussing the promise and difficulty of adjusting to life when we are freed from the struggle for subsistence, but this prospect sounds as much like the distant future to us today as it did to readers seventy-five years ago. Perhaps it seems even more distant now that we have seventy-five more years of experience showing that exponential economic growth can fail to bring us a change that was then had “already begun.”

            This prediction is not so much a glaring error is it is a puzzle: How can the one and one so correctly identified by Keynes have so miserably failed to make two? The premises on which Keynes derived his conclusion have come true, but his conclusion has not. He mentioned four things that could slow the pace toward economic bliss: uncontrolled population, war, arrested technological development, and a reduction in investment. All of these are things that could slow the rate of economic growth, but growth was not the problem. It didn’t seem logical to someone living in his time that the economy could continue to growth without freeing us from the struggle for survival. He was right in predicting that economic growth could free society from the constant struggle for survival, but he was wrong in predicting that it would without foreseeing that society could fail to live up to his vision even if the economy succeeded.

            It is this error that makes this essay so worth reading today. Not only do we need to consider Keynes’s question of how we will deal with a life freed from the struggle for survival, but we also need to consider why we have not freed ourselves from this struggle when it is so clearly within the grasp of our technology.

            Although average living standards have continued to rise, the living standard at the bottom of twenty percent of the income distribution have stagnated or declined for the last 30 years. The trend of the diminishing workweek came to an abrupt end in the industrialized nations about 30 years ago, and in the United States, the trend went nearly as rapidly into reverse, despite a continued healthy growth in national output. Most Americans work longer hours now than peasants did in the Middle Ages, and the working class does not seem to be on the verge of being freed from the struggle for subsistence. Many working Americans are constantly two paychecks away from homelessness. Some people can rise out of the working class with special skills or entrepreneurial ability, but there seems to be less hope now than 30 years ago that the living standards of the lower class will rise enough as a group to move the lower end of the income distribution out of poverty or out of the constant struggle to meet their basic needs.

            One could argue, mistakenly, that Keynes simply didn’t understand people. An increase in wealth can be enjoyed in two ways: in the form of increased leisure or the form of increased consumption. Perhaps, Keynes simply failed to envision that we could chose to take our increased wealth in the form of increased consumption. A large part of the increase in productivity over the last seventy-five years has been in the form of new products, many that people of Keynes’s time barely have dreamed of: Television, computers, mobile phones, and air travel are only some of the most conspicuous examples. Many of these new products are in demand by people even at the lower end of the income distribution. If this fact is all there is to the failure to reach the 15-hour workweek predicted by Keynes, his essay was simply a bad prediction, and it deserves to be forgotten, but there are three reasons why individual choice is not the only explanation why we haven’t freed ourselves from the struggle for survival.

            First, on matters of individual choice, it is unlikely everyone would make the same choice. If we were all free to live off 15 hours of work a week, we would all know or know of someone who did it. We would at least be aware that it was an option, yet the 15-hour work week sounds as futuristic today is it did 75 years ago when our national output was less than one-fourth what it is now.

            Second, part time jobs generally aren’t available except in the low-wage sector where they do not provide enough to live on. Would legal profession be better or worse off if there were three million lawyers each working 20 hours a week than one million working 60 plus hours a week (even at the same hourly rate)? Few professionals could even ask for a part time job without sacrificing their chances for advancement. If the willingness to work relatively long hours is used as a test of dedication, the leisure time of professionals will be squeezed and there will be a wider divide between professionals and laborers in terms of both income and opportunity.

            Third, Keynes did recognize the possibility that there would be new products to consume, but his prediction rested on a relative diminishing of the cost of our “absolute needs.” He describes two kinds of needs: Relative needs are the things we need to make ourselves feel equal or superior to others. Absolute needs are things we need regardless of our situation relative to others (i.e. physical needs). Keynes did not mention “wants” at all, as if the desire to feel superior to others motivates all of our material wants aside from those directly related to our physical needs. Whatever explains why we want more than our absolute needs, there is clearly a distinction between physical needs (for food, shelter, clothing, medical care, transportation, and protection from violence) and all other wants. Once the portion of our time devoted to meet our absolute needs is significantly small, we are freed from our struggle for survival in the sense that making a living does not need to be the focus of our life. Whether we would behave as Keynes predicted when that point is reached is open to question, but the puzzle in this essay is why the great increase in national output has not succeeded in making necessities a small portion of the budget of most workers—especially at the lower end of the income distribution.

            It is undeniably possible that using our current technology, we could work much less and live at a material standard of living significantly higher than the living standard of 1928, but few of us actually have that option. Rent, food, medical care, and transportation still take up almost all of the disposable income of people in the bottom fourth of the income distribution in the United States. Working class incomes have failed to increase as fast as national income and the price of necessities has failed to decline relative to income and the price of other goods. Some necessities, such as housing, have increased substantially in relative terms. Part of the explanation for the increase in the relative price of necessities is that we are consuming better necessities. Our homes are larger and better provisioned with plumbing and electricity; our food embodies more labor and capital than before; most of us use cars for transportation; and we have access to expensive medical procedures that did not exist in 1928. But these improvements cannot explain all of the increase in the cost of necessities. Much of the increase in the cost of homes—especially for the inner-city poor—stems from increases in land values rather than from larger or better homes. Much of the increase in the cost of medical care comes from the increase in the price of doctor’s time because their skills are in demand as specialists for elective procedures.

            Often the increase in the cost of necessities occurs because we have new needs. People have to have houses with electricity and plumbing because fireplaces are not available, apartments without hot running water are illegal in most areas, and candles have become an expensive decoration. In most of the United States people have to have automobiles because they are the only viable form of transportation, and they are forced to live a long distance from their workplace, spending more of their leisure time in transit. In other words, coping with the modern world requires a new list of necessities that pre-industrial people simply did not need. Although these new needs count as part of a higher standard of living, they help keep necessities from becoming a small part of the budget of lower income people.

            With the decline in the cost of new technology and the increase in the cost of necessities, it is not surprising that the working class consumes new and better luxuries than before, but they are also just as dependant on their fulltime jobs as ever. Conserving on new technology won’t give them the freedom from work Keynes envisioned. And the day that it will doesn’t seem like it is right around the corner either. If it didn’t happen in when our living standards were at least 4 times the Medieval level, and it hasn’t happened now that living standards are 16 to 20 times the Medieval level, there isn’t any particular reason to expect that it will happen when living standards are 30 or 40 or 50 times the Medieval level, unless there is some kind of societal change.

            More than the increase in the relative cost of necessities, the central problem keeping wageworkers from enjoying the freedom Keynes envisioned is the failure of their wages to keep pace with economic growth. For the last 30 years the benefits of economic growth have been concentrated heavily on the people in the top 10 to 20 percent of the income distribution. The mistake in Keynes’s prediction stems from the belief that more capital and technology inherently increases wages. It might increase wages, but recently the benefits of growth have been concentrated on the owners of capital, and the upper end of the increasingly hardworking professional class. There is no level of national wealth, no matter how high, that necessitates some of that wealth trickling down to the common wageworker. This fact can be shown by the commonly cited thought experiment: what would happen to wages if capital became so productive that it could produce everything with no aid from labor? Wages would then be zero, and labors would have no other means of survival but the charity of capital owners. When we read “Economic Possibilities for Our Grandchildren” today, we cannot dismiss Keynes’s vision as far off or fanciful, but neither can we simply wait for the inevitable to arrive. The possibilities are there for us now; they may have been there for our grandparents, but it will take a conscious effort by society to free workers to take advantage of these possibilities.