The Fate of Progress at a Time of Crisis

The great German historian of culture Reinhart Kosseleck has pointed out that the concept of “progress” took its modern form at about the same time as that of “crisis”, with the latter term coming to mean a traumatic interruption to humanity’s onward march. For the ancients, “progress”, in the sense of growth and development, had as its inevitable counterpart senescence and ultimate decline. The moderns broke that link, making progress a process without an ending; but they coupled the unfolding of man’s capabilities to an evil twin of disruption, reversal and even collapse.

The fate of progress at a time of crisis was uppermost in John Maynard Keynes’s mind in 1930 as he put the finishing touches to a remarkable essay. We think of Keynes as the man who said that in the long run, we are all dead. But his purpose, in “Economic Possibilities for our Grandchildren”, was “to disembarrass myself of short views and take wings into the future”—and take wing he did, not to the world as it would look immediately after the cataclysm of the 1930s, but fully a century ahead. It is the mark of a great social scientist that he or she is precise enough to be wrong; at least in that essay, Keynes passed the test with flying colours. Examining what he got right, and where he went wrong, is not only interesting in itself, but casts considerable light on what our own grandchildren can fear, hope for and expect.

Keynes’s first and major prediction—and note the directness with which it is expressed—is that “the standard of life in progressive countries one hundred years hence will be between four times and eight times as high as it is today”.

Now, a four- to eight-fold increase implies an upper bound annual growth rate of 2.1 per cent. This is extraordinarily close to the unweighted mean of national annual per capita growth rates of GDP for the period from 1929 to 2006, which is 2.04 per cent. However, if we limit ourselves to the period from 1950, and calculate the mean annual average growth rate of per capita income on a population-weighted basis, the result is close to 2.9 per cent, which translates into a four-fold increase in living standards in less than fifty years and which, sustained for a full century, would increase living standards nearly twenty-fold. Keynes’s forecast was therefore too pessimistic, at least on experience to date. Yet how unbelievably optimistic it must have seemed to his British readers, coming after a decade of economic stagnation and in the midst of catastrophic economic collapse! Keynes may not have got it precisely right; but it is difficult not be to awed by the audacity and brilliance of his effort, especially when the credibility of our own economic soothsayers is more threadbare than ever.

Keynes erred, however, in assessing both the consequences of the increase in living standards and the conditions that would make it possible.

Turning first to the consequences, Keynes looked forward to a time when needs would be satiated—when our desire for greater consumption would finally meet its natural limit. The conclusion, which he described as “more and more startling to the imagination the longer you think about it”, was that with all major needs met, and a capital stock magnified by a century of capital accumulation, net savings could come to an end or at least be drastically reduced; and the very size and efficiency of the capital stock would allow all production to be undertaken “with a quarter of the human effort to which we have been accustomed”. Working time could therefore fall dramatically, to fifteen hours a week, leaving ample time “to pluck the hour and the day”.

Yet this was no joyful prospect: rather “there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread”. For “it is a fearful problem for the ordinary person, with no special talents, to occupy himself”, raising the spectre of widespread neurosis, anxiety and even misery.

Here Keynes erred in three respects.

First, he greatly underestimated the ability of markets to devise new goods and patterns of consumption. Capitalism’s capacity to generate not only entirely new goods but also goods of ever better quality (think of health services) seems unbounded; and though there may be limits to how many goods we can consume, there are no obvious limits to their quality and performance. Unbounded too is capitalism’s ability to devise new means of distribution that increase the efficiency with which we consume—that is, that reduce the time and effort required per unit of consuming. As the willingness of Australia’s population to engage in frenzied consumption all too clearly shows, satiation of human desires is therefore no closer today than it was in 1930, not merely in the many economies where poverty remains endemic but even in the world’s richest countries.

Second, the steady rise in living standards, far from bringing widespread misery, appears closely associated with sustained increases in perceived well-being. Thirty-five years ago, the economist Richard Easterlin contended that there was little or no evidence linking economic growth to human happiness. Now, scholarly opinion, drawing on ever larger and better data sets, largely supports three propositions: that wealthier countries have significantly higher levels of perceived well-being than poorer countries, in a pattern that persists across the whole wealth distribution; that perceived well-being rises when a country’s wealth grows; and that within countries, higher income people, and people experiencing income growth, have relatively high levels of perceived well-being.

Third and last, Keynes was badly wrong on working hours, which everywhere remain far longer than a fifteen-hour week. Of course, Keynes, in considering the consequences of higher incomes, took as his reference point the English gentleman, who had expensive, time-consuming tastes in leisure but (at least by today’s standards) little human capital. For such a person, an increase in income is likely to reduce work effort, as it increases the marginal utility of leisure by more than it reduces the net disutility of labour. It is unsurprising, therefore, that the closest contemporary equivalent to the behaviour Keynes had in mind is to be seen in the extended families of the Middle Eastern oil sheiks and of similar quasi-feudal despotisms. Elsewhere, sustained increases in human capital, which complement rather than substitute for labour, are part of the reason increases in wealth have not been accompanied by sharp falls in working hours.

But there is more to it than that, for, looking at the advanced economies, we see a marked divergence in working hours between Europe on the one hand and the United States, Australia and Canada on the other, with a sharp reduction in annual working hours in the former and relative stability, and even slight increases, in the latter.

For many on the Left, the cause of increased working hours in the so-called Anglo-Saxon economies is globalisation and an alleged race to the bottom; others, also largely on the Left, blame rising income inequality; many on the Right suggest that it is the European trend which is problematic, and point to the effects of high marginal tax rates.

It is easy to dispose of the globalisation claim, at least as interpreted by the Left. Thus, the divergence in working hours between the old world and the new is not a recent phenomenon: rather, the difference in trend is apparent from the 1920s, and annual hours of work in the new world exceeded those in the old as of the late 1960s, well before the most recent wave of globalisation and market-oriented reforms. Moreover, what we see is not rising hours among the unskilled, those whom globalisation could adversely affect. Rather, the increase in labour effort has come largely at the upper part of the income and skill distribution, with Keynes’s division between the idle rich and the exhausted poor being replaced by one in which the well-off, and those on the road to being well-off, work ever harder, juxtaposed against a deeply-entrenched underclass of the unfortunately idle poor.

Overall, what the evidence suggests is that work hours have remained high, or increased, in countries where two conditions are met: the return to work effort is high and rising; and work satisfaction is relatively high. These tend to be countries that have a culture of workplace informality, high levels of skilled migration, substantial social and personal mobility and a widespread sense of the legitimacy of personal betterment. They are, in other words, the countries that are most open to aspiration, entrepreneurship and risk-taking.

It is this element that Keynes completely missed—and nowhere more so than in considering the causes of the prosperity he believed lay ahead. Keynes had great confidence in technology; but he saw innovation, indeed social progress, as a result of the efforts of experts—scientists in white coats—which somehow combined with the magic of compound interest to create wealth. His view of business people was mixed at best, and much coloured by the image of the herd-like behaviour of speculators and investors. Although no supporter of socialism, his opposition to it came primarily from the threat it posed to freedom, rather than from an understanding of the inability of command economies to generate rising living standards.

It is for this reason that, in concluding his essay by considering the factors that will affect “the pace at which we can reach our destination of economic bliss”, Keynes made no mention at all of the importance of a market economy.

Yet it is impossible to survey the economic progress Keynes so presciently forecast without being struck by the contribution risk-taking, entrepreneurship and an orientation to the future have made to achieving prosperity. And the best hope for continued growth must be the evidence that risk-taking and entrepreneurship show every sign of being as strong as ever. But the battle is hardly won: it is surely striking that in the Pew Center’s 2009 survey of global attitudes, the strongest support for the proposition that “people are better off in a market economy” came not in the OECD countries but in Kenya, the Palestinian territories, India and China, followed closely by the United States and Israel.

The ease with which “neo-liberalism” has become a term of abuse is disturbing in this regard. This is not merely because it confuses for the hard work of serious analysis what are little more than irritable mental gestures that struggle to resemble ideas, but also and especially because it is both misleading and plays with fire. For the inescapable fact is that market economies, precisely because they are in a constant state of disequilibrium, are disruptive, uncertain and prone to sometimes severe fluctuations. What we learned, at great pain, in the 1970s and 1980s—the years the late Chris Higgins referred to as “the school of hard shocks”—is that wise governments focus on defining sustainable settings that can reduce the costs of those fluctuations by stabilising expectations and ensuring labour, product and capital markets are sufficiently flexible for relative prices, rather than quantities, to bear the brunt of adjustment. Yet the illusion that government can and should save us—an illusion bound up in a view of life as consisting not of opportunities to be welcomed but of dangers to be avoided—is now more widely held, not merely in this country but in many others, than it has been for many years. Such an illusion can only lead to policies that could not bear the weight of their own consequences.

Nowhere is the danger greater than in Australia. Time and again, we have squandered in foolish choices the enormous good fortune of location and resource endowment which nature has bestowed on us. Successive resource booms have saved us: in Gordon Barton’s famous phrase, like an idiot who keeps on winning the lottery. But sooner or later, the idiot comes to believe that his wealth results not from luck but from his brilliance in choosing the right ticket—and opts for policies, such as the Emissions Trading Scheme, the re-regulation of the labour market and the de facto dismantling of federalism, which not even a resource boom could save.

Even more terrifying than the policies themselves is the ease with which they have been accepted, not least by a business community that is as lacking in political courage as it is in intellectual rigour. The negotiations over the so-called compensation for the ETS, over the substance and phasing in of the newly resurrected industrial awards, and over the carving up of lucrative infrastructure contracts all point to an Australia in which it is the rent-seeker who is king and in which tainted bargains are yet again the order of the day.

What then of the economic prospects for our grandchildren? Can we retain global growth rates of per capita income in the order of 2.5 to 3 per cent? With current rates of savings and of technical progress, of course we can—indeed, we should be able to do better than that. But will we? That depends not on the gods, or the stars, or even the brilliance of our scientists and engineers, but on the strength of our commitment to a society open to risk-taking and based on a culture not of constraint, but of choice. Whether that commitment can be sustained is surely the greatest question that lies ahead.

Henry Ergas is the Chairman of the consultancy firm Concept Economics.