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Economic possibilities for our grandchildren
Samuel Brittan: Financial Times 03/01/02

A long term growth slowdown might be more of an opportunity than a tragedy, so long as we are prepared for it.

After the destruction of the New York Twin Towers last September 11 the immediate advice of the American administration to their US citizens to carry on spending. This was good emergency counsel. An economic depression in the West would have been a triumph too far for Moslem fundamentalism. But the official advice might not look so good from a longer term perspective. If Western citizens became less keen on buying more and more goods and services and earning enough to pay for them, the development might not be entirely bad.

To see why it is worth going back to an essay completed in 1930 by the great British economist John Maynard Keynes, entitled Economic Possibilities for our Grandchildren. It could equally have been called "The Miraculous Properties of Compound Interest".

The essay was published as the Great Depression was gathering force. But he asked his readers to stand back and note that In the 4,000 years up to around 1700, there had been no great change in the average standard of living. There had been ups and downs and golden intervals, but no progressive improvement. The Industrial Revolution transformed the picture. Despite the enormous growth in population, average living standards had since 1700 risen fourfold in Europe and the US. Compound growth could, he propounded, make us four to eight times better off still in a further hundred years.

Keynes concluded that mankind was well on the way to solving its economic problem and thereby ending the struggle for subsistence which had hitherto been its most pressing problem. He viewed this prospect with delight. Eventually we would realise "that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow...We shall honour those who can teach us to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin."

Keynes believed that the pace which we could reach this destination of economic bliss would be governed by four factors:- success in limiting the growth of the population, avoiding wars and civil dissension, willingness to entrust to science its proper role, and an adequate rate of capital investment. The last would easily look after itself given the first three.

He anticipated the criticism that human needs were insatiable and divided such needs into two classes:- the absolute ones, such as food and shelter, that do not depend on what other people are achieving; and the relative ones which we feel only if their satisfaction "makes us feel superior to our fellows".

In the future to which he looked forward there would still be people under the influence of the second kind of artificial need who would blindly pursue wealth. "But the rest of us would no longer feel under any obligation to applaud and encourage them." His real worry was that little thought had been given to educating people for this new world of leisure; and there was a danger they would not be able to use their opportunities.

On the arithmetic Keynes has proved right, despite World War Two, rearmament drives and occasional slumps. He probably took as his base year, 1929, the last before the Depression. Between then and 2000 real UK GDP per head grew at a compound annual rate of nearly 1.9 per cent; and the actual level of output per head was about 3.8 times as high in the later year. If growth continues at this rate, output per head in 2029 will indeed be around six or seven times the 1929 level or bang in the middle of Keynes's estimate.

Keynes did not of course envisage the many new applications of science and technology which would give people fresh material aims, quite apart from the drive to feel superior. Some of these, such as television and compact discs, provide not merely opportunities for emulation but the possibility of mass access to the arts which meant so much to him.

Nevertheless the appetite for such gadgets may have its limits. There could yet be a change of tastes away from the ultra-consumer society and towards a quieter lifestyle with more emphasis on leisure and personal enjoyment and less on take-home pay and what it can buy. This has not happened yet. Once the recession is over, Americans are likely to return to their old habits, assuming of course there are no further terrorist outrages on the scale of September 11.

That of course is a very big assumption; and without being too alarmist one can imagine enough tremors occurring to make Americans and other Western citizens a little reluctant to heed their leaders' exhortations to carry on consuming for the sake of the economy.

A slowdown in economic growth which reflects a change in taste is a very different animal to one which reflects a deficiency of purchasing power. If people want to buy less, they should - ultimately and rationally - also want to work less. A structural growth slowdown need not therefore be accompanied by a large increase in involuntary unemployment. Instead of balancing at a high rate of growth, the economic system would balance at a low rate or at zero. In the extreme case people would envoy the benefits of technological progress entirely in the form of reduced working hours rather than in increased take-home pay. The efficient organisation of production would mean supplying static wants with the minimum of working hours.

The real difficulty is that, coming in response to shocks, a structural slowdown would hit different industries very differently. We have already had a foretaste of that in the misfortunes of the aviation and travel industries, far exceeding those of the rest of the economy. The policy problems are the familiar ones of how to compensate the victims of economic misfortune without putting a brake on all structural change.

There will be for a long time opportunities for business expaansion iexpansioneeting the growing needs of the Third World. And even in a static Western economy there might still be a good deal of investment and entrepreneurial action. Consumer desires, even if modest, might still be subject to changes of taste; the fashionable clothing "gear" might change; or trips to old coalmines might alternate with visits to the Himalayas, or painting one's home in a novel manner, as ways of spending leisure.

Even in a world of slow or zero growth a competitive market economy would still be best for satisfying people's choices. A profit making businessman need not be interested in the private values of his workers. If they wish to work fewer hours for less money or only one week in four, it is their affair. If irregular and unpredictable working habits impose difficulties in keeping up a smooth flow of production, the rate for the job would simply be less than for workers willing to work in a more regular way.

Although the resulting system would not look much like capitalisiscapitalismwe know it, there would still be great advantages in retaining competitive markets. People who did not share the anti-consumption, anti-work ethos could - as Keynes indicated so long ago - opt in to the consumer society without disturbing their neighbours; and there could still be luxury hotels or ocean cruises for those who wanted them and who were prepared to work more than average to obtain them.

John Stuart Mill, rather prematurely, looked forward to this state of affairs in the middle of the 190th Century when he wrote that a "stationary state", so far from being a tragedy, would be highly desirable. He considered that "elbowing and treading on each other's heels" were only a stage in human development and not the final end of civilisation. The transition will not be an easy one and will be accompanied by slumps and booms of a traditional kind. But it may help our sanity if we discern in them the silver lining that Keynes and Mill so long ago discerned.

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