Wednesday, February 22, 2017

Hold the Gloom. The Economy is Changing, not Dying

I've been working on some other projects recently, but I wanted to respond to some of the increasing darkness and pessimism about the future that is seeping into public discussion. Take this article in Commentary Magazine, "Our Miserable 21st Century," which attracted much attention this week.

It turns out that the year 2000 marks a grim historical milestone of sorts for our nation. For whatever reasons, the Great American Escalator, which had lifted successive generations of Americans to ever higher standards of living and levels of social well-being, broke down around then—and broke down very badly.

The warning lights have been flashing, and the klaxons sounding, for more than a decade and a half. But our pundits and prognosticators and professors and policymakers, ensconced as they generally are deep within the bubble, were for the most part too distant from the distress of the general population to see or hear it. (So much for the vaunted “information era” and “big-data revolution.”)

David Brooks reinforces the message in the NYT here.

 Of course, it's a good thing to highlight problems. Opioid addiction and people dropping out of the labor force to live on disability and daytime TV are serious issues.  

But the despair is not justified. Society and technology and customs and institutions are always changing. That means we have to be resourceful and creative in making the changes work for us. It means we have to change how we think and realize some major 20th century social institutions need to adapt as well. 

We might have said much much worse about the economy in 1820 or 1830, just before the world got an order of magnitude wealthier than ever before in the following decades.  Malthus told us the mass of the population would be immiserated and kept at starvation levels, forever. Engels noticed working life in Manchester was horrific. Marx argued this was inevitable and would lead to such pain and rage the whole social system would be overthrown. 

None of this came true. The economy didn't collapse. It went through a boom of  stupendous magnitude and duration.

Now the problem is too little dark satanic mills and too much uninspiring lower class leisure like daytime tv? 

The world got hit with two massive shocks in the last twenty years. 
  1. Global labor supply effectively doubled in the 1990s, both because of the entry of China and India into the world economy and because logistics and communication made it much easier to use remote labor.  The impact of that hit the American working class. A shock of that magnitude takes time to absorb.
  2. Most new innovations are free at the point of delivery (Github, Facebook, Dropbox ) or not excludable goods, like cleaner air. 

A Shift in the Boundaries of the Market

That means we are seeing a shift in the boundaries of the market economy. Relatively fewer things will be exchanged for money, because the marginal cost of many goods  will be zero and distribution costs will be near-zero. Automation and artificial intelligence will only accelerate that trend. 

The shift in the boundaries of exchange is also because most of the new needs people have as society gets wealthier - status, affiliation, stimulation, meaning - aren't as easily bought and sold as grain or port wine or mousetraps .  

That doesn't necessarily mean disaster, though.  Most human societies historically have always had a smaller market sector. The "commons" was larger. Gift exchange, feudal or hierarchical obligation, family ties or subsistence agriculture have been far more important than the labor market for most of human history.  Women  mostly didn't work in the moneyed sector at all until forty years ago.  Indeed, even England only became a fully market economy in the early 1800s when the old medieval commons were enclosed and labor forced off the land to the cities or colonies. And it was only the requirement to pay government taxes in currency that forced many groups around the world into the market economy at all. The current  bundle of rules that make up a "job" or "corporation" and legal framework and expectations that go with them are mostly only 150 years old at most, not eternal  facts of nature.

In 1800 over 95% of populations worked the land. Now in the US it's about 3%. We have more agricultural productivity than ever, by a massive margin. But it's less important to the whole economy and population. The same thing will happen to the monetized exchange sector of the economy. The goods and labor market will be more productive than ever,  but a smaller proportion of the whole. 

We have a motivational and moral problem, not an economic problem

But it takes a lot of time for culture and human institutions and values to catch up. (See Douglas North, for example, or Avner Offer's brilliant The Challenge of Affluence.)  The main issue now  for humanity isn't starvation. It's motivation and what makes for human flourishing and the good life.  (Probably not daytime tv and OxyContin.)  It's  very much as Keynes foresaw in his famous essay Economic Possibilities for our Grandchildren

We've now actually solved the original economic problem of raw economic scarcity, starvation and disease. The problem isn't 30% child mortality or famine, as for most of human history.  Survival is rarely the problem any more. Instead, it's purpose. It's value and reward and how people get respect. That's an institutional, social or moral problem more than an economic one, which is why many economists can't handle it.

That's an epochal shift. We just have to figure out what to do with it. 

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