Economic Possibilities

One of the biggest themes I want to discuss in this blog is a set of questions raised in a short essay written in 1930 by John Maynard Keynes, Economic Possibilities for our Grandchildren. An online copy is here, only seven pages long.

Importantly, this is NOT about the topical but stale debate about smoothing recessions with fiscal deficits."Keynesian economics" has become a shorthand, indeed almost an insult in Washington for demand management and terrifyingly huge fiscal deficits.

I'm not so interested in that debate, which is essentially about the size of the state and the efficiency of markets in isolation. Nor is this about more recent "neo-Keynesian" thinking, about rigid wages or sticky prices and how they gum up market equilibrium.

And in any case, it is wrong to see Keynes as anti-market. His purpose later in the 1930s was to rescue capitalism when much of the western policy elite thought it was doomed, as they nervously watched the rise of communism and fascism.

Instead, see this as a starting point - intuitive long-range questions asked by among the most brilliant economists of the 20th century, agree with him or not.

I've long been fascinated with this essay because it asks what the economy and the economic process is for. It is about the ends, the purpose of economic activity in long range view. It is about the far future, not the business cycle or the next data point. Writing in the teeth of the Great Depression, Keynes was still optimistic about the future, foreseeing incomes would increase between four and eight times over in the next century. But that would mean basic needs could be met.

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.

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.

That far future he wrote about is now. And we indeed increased incomes by about six times over. But few would argue, especially this week with markets fragile and the eurozone on the brink, that we have solved the economic problem. Keynes was right about growth and wealth, but evidently wrong- as we shall see - about what we would do with it.

Why not? Why hasn't the vast increase in productivity and wealth relieved us from economic problems? What is the economy for?