Keynes on prosperity and the Great Depression

by on November 8, 2010 at 6:29 am in Economics, History | Permalink

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.

Alexander Field, the economic historian, would one day argue much the same, with numbers behind it.  For Keynes even the Great Depression wasn't just an AD problem.  (Obama worries too.)

From Keynes, here is 7 pp. more, fascinating throughout, although mostly totally wrong and there is a naughty mention at the bottom of p.6.  It is his famous essay "Economic Possibilities for our Grandchildren."  Keynes argued we would one day (soon) have enough material prosperity to abolish scarcity.  Most importantly, from his Bloomsbury perspective, pro-commercial norms could fade away, as they would no longer be needed as an incentive.  Society would be much the better for it; Daniel Bell later turned this argument upside down by fearing the decline of this ethic.

More wealth brings, on average, greater happiness (see Wolfers-Stevenson for the evidence, Kahneman too), but often through indirect and circuitous routes, and without guarantees.  The bottom line is that most of us keep on striving for more.  Furthermore, happiness isn't the only end we desire, and money is a route to power and esteem as well, as distinct from happiness.  Material satisfaction isn't enough in life.  Unlike Keynes (and Bell), I expect that norms to both encourage and regulate avarice will be with us for a very long time to come.

1 philosophking November 8, 2010 at 3:06 am

What's perhaps even more astounding is that the same thesis of Keynes here can be found in the last part of the /General Theory/, "social implications of the GT" or something like that.

That is to say, Keynes really believed that his prescription for sound economic policy (the state as an conductor of investment activity through an "investment board") would be a real, long term solution to the "economic problem", where, as Marc Linder in /Anti-Samuelson/ put it, "capitalism could be cleansed of its 'objectionable' properties."

How laughable indeed.

2 liberalarts November 8, 2010 at 3:14 am

That "…Grandchildren" essay is a good one to assign undergraduates for discussion. In it he also predicts a continued shortening of the typical work day. There he is less off track than it might sound at first, because while we have not shortened the standard weekly working times much with our increased productivity, we have shortened the average percentage of lifetime working by starting to work much later (more education years) and then not working for decades at the end of life (much longer average retirement).

3 Jim November 8, 2010 at 3:55 am

Unfortunately we are unlikely any time soon to have enough material prosperity to abolish the scarcity of land (and, more abstractly, the scarcity of desirable locations), which might be the biggest reason we 'keep striving'.

4 Dan H. November 8, 2010 at 8:09 am

"How often does the "automation kills jobs" claim have to be debunked?"

About as often as having to debunk the myth that trade kills jobs. And for just as long – forever.

5 Barkley Rosser November 8, 2010 at 8:59 am

Wolfers-Stevenson is not a refutation of the Easterlin paradox worth a bean, despite all the publicity given to it. Here is the rank order of reliability of data sources for happiness studies: panel data on specific individuals, time-series data within a nation but not on the same individuals, and cross-section data across nations at the bottom. Wolfers-Stevenson relies on this latter, which is nearly worthless. That people in Denmark say they are happier than those in Chad proves that higher incomes make one happier?

The data that argues the contraray is the superior time-series data within a nation over time, the original source of the Easterlin paradox. We know that within a country at any time, higher income people tend to be happier than lower income people, a result that should not make it surprising that we see the same thing cross-sectionally internationally. But over time, rising income does not necessarily "raise all ships," to quote from the title of one of Easterlin's most cited papers. The US reached its highest level of reported happiness in 1956.

6 dirk November 8, 2010 at 10:03 am

"Homer, rich people aren't really happy. From the day they're born till the day they die they think they're happy, but they're not really happy." – Moe

7 Chris T November 8, 2010 at 11:32 am

Yes, there will be less jobs in manufacturing of SOME goods, but there will still be people involved (engineers, mechanics and electricians for maintenance).

Great, what do the people without enough intelligence to perform those tasks supposed to do?

The issue isn't that there won't be enough jobs, but that available jobs will be beyond the abilities of the unemployed.

8 Bernard Guerrero November 8, 2010 at 1:21 pm

"The US reached its highest level of reported happiness in 1956."

I'm not even sure what this means. What possible sense can it make to aggregate reported "happiness"? Never mind that my job here is to maximize my own happiness rather than the system's as a whole, the concept of aggregation itself is fraught with problems. A thief or thrill-killer is presumably happier upon having successfully committed their crime of choice. In what sense could you aggregate their increase in "happiness" with the concurrent decrease applied to the victims? Etc, etc.

9 John Dewey November 8, 2010 at 2:12 pm

Chris T: "The issue isn't that there won't be enough jobs, but that available jobs will be beyond the abilities of the unemployed."

That argument has been made many folks for many decades. Yet it still hasn't happened. Why is that? Because entrepreneurs and workers find ways to utilize labor – to design jobs so that the existing workforce can perform them.

We have high unemployment right now for basically two reasons. Workers have reality-avoidance methods – extended unemployment, food stamps, supporting relatives – which allow them to survive without a paycheck. Furthermore, government wage laws and benefits mandates prevent labor prices from adjusting to market-clearing levels.

Absent government and family interventions, the unemployed would do what they have to do to eke out a living. Many would suffer in the first round of such a tough-love world, just as many sufferred in the 1930's. But the long term impact of such sufferring would no doubt be a much higher national savings rate. People would learn in about one generation how to become self-reliant.

Bleeding heart liberals will likely continue to guarantee safety nets, though, and incentives to achieve self-reliance will be lost.

10 J Thomas November 10, 2010 at 7:27 am

Seriously, to a lot of people here's how the automation argument sounds:

Step 1. 50,000 jobs are permanently lost when Industry X automates.

Step 2. Industry X produces goods cheaper and better; industry X owners profit.

Step 3. ?

Step 4. ?

Step 5. ?

Step 6. ?

Step 7. 50,000 unemployed workers profit!

To many people, economists sound a whole lot like underpants gnomes.

I can easily imagine utilitarian arguments that when you look at the effect over the whole economy, the economy as a whole might get more good than the unemployed workers get bad.

But arguing that the jobs are not actually lost, when they are in fact obviously lost in the first step, is pretty cheesy.

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