Economic Possibilities for Ourselves

May 2 JDN 2459335

In 1930, John Maynard Keynes wrote one of the greatest essays ever written on economics, “Economic Possibilities for our Grandchildren.” You can read it here.

In that essay he wrote:

“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.”

US population in 1930: 122 million; US real GDP in 1930: $1.1 trillion. Per-capita GDP: $9,000

US population in 2020: 329 million; US real GDP in 2020: $18.4 trillion. Per-capita GDP: $56,000

That’s a factor of 6. Keynes said 4 to 8; that makes his estimate almost perfect. We aren’t just inside his error bar, we’re in the center of it. If anything he was under-confident. Of course we still have 10 years left before a full century has passed: At a growth rate of 1% in per-capita GDP, that will make the ratio closer to 7—still well within his confidence interval.

I’d like to take a moment to marvel at how good this estimate is. Keynes predicted the growth rate of the entire US economy one hundred years in the future to within plus or minus 30%, and got it right.

With this in mind, it’s quite astonishing what Keynes got wrong in his essay.

The point of the essay is that what Keynes calls “the economic problem” will soon be solved. By “the economic problem”, he means the scarcity of resources that makes it impossible for everyone in the world to make a decent living. Keynes predicts that by 2030—so just a few years from now—humanity will have effectively solved this problem, and we will live in a world where everyone can live comfortably with adequate basic necessities like shelter, food, water, clothing, and medicine.

He laments that with the dramatically higher productivity that technological advancement brings, we will be thrust into a life of leisure that we are unprepared to handle. Evolved for a world of scarcity, we built our culture around scarcity, and we may not know what to do with ourselves in a world of abundance.

Keynes sounds his most naive when he imagines that we would spread out our work over more workers each with fewer hours:

“For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich today, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter-to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!”

Plainly that is nothing like what happened. Americans do on average work fewer hours today than we did in the past, but not by anything like this much: average annual hours fell from about 1,900 in 1950 to about 1,700 today. Where Keynes was predicting a drop of 60%, the actual drop was only about 10%.

Here’s another change Keynes predicted that I wish we’d made, but we certainly haven’t:

“When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession—as distinguished from the love of money as a means to the enjoyments and realities of life—will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.”

Sadly, people still idolize Jeff Bezos and Elon Musk just as much their forebears idolized Henry Ford or Andrew Carnegie. And really there’s nothing semi- about it: The acquisition of billions of dollars by exploiting others is clearly indicative of narcissism if not psychopathy.

It’s not that we couldn’t have made the world that Keynes imagined. There’s plenty of stuff—his forecast for our per-capita GDP was impeccable. But when we automated away all of the most important work, Keynes thought we would turn to lives of leisure, exploring art, music, literature, film, games, sports. But instead we did something he did not anticipate: We invented new kinds of work.

This would be fine if the new work we invented is genuinely productive; and some of it is, no doubt. Keynes could not have anticipated the emergence of 3D graphics designers, smartphone engineers, or web developers, but these jobs do genuinely productive and beneficial work that makes use of our extraordinary new technologies.

But think for a moment about Facebook and Google, now two of the world’s largest and most powerful corporations. What do they sell? Think carefully! Facebook doesn’t sell social media. Google doesn’t sell search algorithms. Those are services they provide as platforms for what they actually sell: Advertising.

That is, some of the most profitable, powerful corporations in the world today make all of their revenue entirely from trying to persuade people to buy things they don’t actually need. The actual benefits they provide to humanity are sort of incidental; they exist to provide an incentive to look at the ads.

Paul Krugman often talks about Solow’s famous remark that “computers showed up everywhere but the productivity statistics”; aggregate productivity growth has, if anything, been slower in the last 40 years than in the previous 40.

But this aggregate is a very foolish measure. It’s averaging together all sorts of work into one big lump.

If you look specifically at manufacturing output per workerthe sort of thing you’d actually expect to increase due to automation—it has in fact increased, at breakneck speed: The average American worker produced four times as much output per hour in 2000 as in 1950.

The problem is that instead of splitting up the manufacturing work to give people free time, we moved them all into services—which have not meaningfully increased their productivity in the same period. The average growth rate in multifactor productivity in the service industries since the 1970s has been a measly 0.2% per year, meaning that our total output per worker in service industries is only 10% higher than it was in 1970.

While our population is more than double what it was in 1950, our total manufacturing employment is now less than it was in 1950. Our employment in services is four times what it was in 1950. We moved everyone out of the sector that actually got more productive and stuffed them into the sector that didn’t.

This is why the productivity statistics are misleading. Suppose we had 100 workers, and 2 industries.

Initially, in manufacturing, each worker can produce goods worth $20 per hour. In services, each worker can only produce services worth $10 per hour. 50 workers work in each industry, so average productivity is (50*$20+50*$10)/100 = $15 per hour.

Then, after new technological advances, productivity in manufacturing increases to $80 per hour, but people don’t actually want to spend that much on manufactured good. So 30 workers from manufacturing move over to services, which still only produce $10 per hour. Now total productivity is (20*$80+80*$10)/100 = $24 per hour.

Overall productivity now appears to only have risen 60% over that time period (in 50 years this would be 0.9% per year), but in fact it rose 300% in manufacturing (2.2% per year) but 0% in services. What looks like anemic growth in productivity is actually a shift of workers out of the productive sectors into the unproductive sectors.

Keynes imagined that once we had made manufacturing so efficient that everyone could have whatever appliances they like, we’d give them the chance to live their lives without having to work. Instead, we found jobs for them—in large part, jobs that didn’t need doing.

Advertising is the clearest example: It’s almost pure rent-seeking, and if it were suddenly deleted from the universe almost everyone would actually be better off.

But there are plenty of other jobs, what the late David Graeber called “bullshit jobs”, that have the same character: Sales, consulting, brokering, lobbying, public relations, and most of what goes on in management, law and finance. Graeber had a silly theory that we did this on purpose either to make the rich feel important or to keep people working so they wouldn’t question the existing system. The real explanation is much simpler: These jobs are rent-seeking. They do make profits for the corporations that employ them, but they contribute little or nothing to human society as a whole.

I’m not sure how surprised Keynes would be by this outcome. In parts of the essay he acknowledges that the attitude which considers work a virtue and idleness a vice is well-entrenched in our society, and seems to recognize that the transition to a world where most people work very little is one that would be widely resisted. But his vision of what the world would be like in the early 21st century does now seem to be overly optimistic, not in its forecasts of our productivity and output—which, I really cannot stress enough, were absolutely spot on—but in its predictions of how society would adapt to that abundance.

It seems that most people still aren’t quite ready to give up on a world built around jobs. Most people still think of a job as the primary purpose of an adult’s life, that someone who isn’t working for an employer is somehow wasting their life and free-riding on everyone else.

In some sense this is perhaps true; but why is it more true of someone living on unemployment than of someone who works in marketing, or stock brokering, or lobbying, or corporate law? At least people living on unemployment aren’t actively making the world worse. And since unemployment pays less than all but the lowest-paying jobs, the amount of resources that are taken up by people on unemployment is considerably less than the rents which are appropriated by industries like consulting and finance.

Indeed, whenever you encounter a billionaire, there’s one thing you know for certain: They are very good at rent-seeking. Whether by monopoly power, or exploitation, or outright corruption, all the ways it’s possible to make a billion dollars are forms of rent-seeking. And this is for a very simple and obvious reason: No one can possibly work so hard and be so productive as to actually earn a billion dollars. No one’s real opportunity cost is actually that high—and the difference between income and real opportunity cost is by definition economic rent.

If we’re truly concerned about free-riding on other people’s work, we should really be thinking in terms of the generations of scientists and engineers before us who made all of this technology possible, as well as the institutions and infrastructure that have bequeathed us a secure stock of capital. You didn’t build that applies to all of us: Even if all the necessary raw materials were present, none of us could build a smartphone by hand alone on a desert island. Most of us couldn’t even sew a pair of pants or build a house—though that is at least the sort of thing that it’s possible to do by hand.

But in fact I think free-riding on our forebears is a perfectly acceptable activity. I am glad we do it, and I hope our descendants do it to us. I want to build a future where life is better than it is now; I want to leave the world better than we found it. If there were some way to inter-temporally transfer income back to the past, I suppose maybe we ought to do so—but as far as we know, there isn’t. Nothing can change the fact that most people were desperately poor for most of human history.

What we now have the power to decide is what will happen to people in the future: Will we continue to maintain this system where our wealth is decided by our willingness to work for corporations, at jobs that may be utterly unnecessary or even actively detrimental? Or will we build a new system, one where everyone gets the chance to share in the abundance that our ancestors have given us and each person gets the chance to live their life in the way that they find most meaningful?

Keynes imagined a bright future for the generation of his grandchildren. We now live in that generation, and we have precisely the abundance of resources he predicted we would. Can we now find a way to build that bright future?