Economic possibilities for our grandchildren

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down --at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.

I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick; the banking and monetary system of the world has been preventing the rate of interest from falling as fast as equilibrium requires.

-- John Maynard Keynes, 1930, Economic Possibilities for our Grandchildren

Excepting for the reference to the 19th century and perhaps the note about the rate of interest not falling fast enough, Keynes could be writing about today's economic situation. As I've written previously, I'm concerned about the role that automation will have on our economy (driven by advances in robotics and artificial intelligence), positing that while overall economic productivity will increase, on an individual level we'll see growing job losses and a widening of economic disparity. 

It's helpful at times of these worries to take a step back for perspective. Here Keynes continues in the aforelinked essay:

In spite of an enormous growth in the population of the world, which it has been necessary to equip with houses and machines, the average standard of life in Europe and the United States has been raised, I think, about fourfold. The growth of capital has been on a scale which is far beyond a hundredfold of what any previous age had known. And from now on we need not expect so great an increase of population.

(Keynes isn't right about the ensuing population growth: from the 1930s to present day, the population increased from around 2 billion to over 7 billion.)

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.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. 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 to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of afar greater progress still.

It's interesting to see Keynes introducing this term "technological unemployment" as it's clearly the term that's on our minds today. The other portion I've highlighted is troubling to economists as it's difficult to know what Keynes meant by "standard of life" in this essay. But we do know that by 2030 we'll have seen an eight-fold increase in per-capita output since 1930. So, if you'll allow equating productivity with standard of living (and there is a reasonable argument to do so), then Keynes was right.

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.

In the world that Keynes imagines, these gains are distributed fairly equally across the working population. But what he didn't foresee is the rise of income inequality. This animated graph from the FT illustrates this gap using data from the past 45 years:

Unfortunately for us, this data is a mixed bag: median income for the middle class rose 34% since 1970, but overall, we saw a shrinking middle class - with upper-tier income growing from 14% to 21% and the lower-tier income also growing from 25% to 29%. And notably, there is a dramatic rise of incomes over $200k doubling from 4% to 9%, which intuitively explains the widening gap between middle and upper-income earners.

In technology, we see parallels to this consolidation of mindshare and power: social media is trending towards a few, online retail is trending towards one big winner, mobile is consolidating on a few platforms, and so on.

From this, if the past is an indicator, we can take comfort in that over the last 100 years since Keynes wrote his essay the pace of productivity has increased and will quicken as technology advances continue. But on balance, current trends lead us to the conclusion that the wealth gains derived from these increases will be largely captured by a few.

Perhaps as technology leaders, we can take this as a call to action - versus passive acceptance.