A Balancing Act: Wealth Creation and Equality

by Joseph Shieber

Paul Klee, “Tightrope Walker” (1923) Cleveland Museum of Art

In his (1930) essay “Economic Possibilities for our Grandchildren,” John Maynard Keynes suggests that the stage has been set to alleviate the threat of material uncertainty for large portions of the world population. “The course of affairs will simply be,” Keynes writes, “that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed.”

The reasons Keynes cites for this blissful state are twofold: “the power of compound interest” and “technical improvements in manufacture and transport.” Keynes writes “Economic Possibilities” recognizing that his readers will likely see his prognostication of future material comforts for all (or most) as bordering on fantasy. For Keynes, however, the more bewildering fact seems not the explosion of growth that occurred beginning in the second half of the 19th century, but rather the LACK of growth that preceded that period.

“From the earliest times of which we have record,” Keynes notes, “back, say, to two thousand years before Christ – down to the beginning of the eighteenth century, there was no very great change in the standard of life of the average man living in the civilised centres of the earth. Ups and downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive, violent change. Some periods perhaps. So 1 per cent better than others – at the utmost 1.00 per cent better – in the four thousand years which ended (say) in A. D. 1700.” Keynes continues with the observation that the “absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable.

Almost everything which really matters and which the world possessed at the commencement of the modern age was already known to man at the dawn of history. Language, fire, the same domestic animals which we have to-day, wheat, barley, the vine and the olive, the plough, the wheel, the oar, the sail, leather, linen and cloth, bricks and pots, gold and silver, copper, tin, and lead – and iron was added to the list before 1000 B.C. – banking, statecraft, mathematics, astronomy, and religion. There is no record of when we first possessed these things.”

Keynes’s concern in “Economic Possibilities” is not to explain why it took so long to discover compound interest and the technological and transportation innovations that spurred such remarkable growth. Rather, it’s to speculate about what the longer term implications of such growth might be for “our grandchildren”: a future without fear of want, in which daily toil will be minimal and the most pressing concerns will involve how to fill the leisure hours that comprise most of their lives.

In a recent essay for The New Republic, “Why Isn’t Everybody Rich Yet?”, Timothy Noah points out that Keynes actually UNDERSOLD the magnitude of the growth presaged by the advances in the second half of the 19th century: “… much of Keynes’s reasoning was correct. He estimated that, over the next century, annual economic growth would average, globally, 2 percent. That must have seemed insanely optimistic at the start of the Great Depression. But it was too low. The Yale economist Fabrizio Zilibotti has calculated that since 1930, annual growth has averaged, over the long term, closer to 3 percent. Keynes predicted the standard of living within the more advanced economies would increase by a factor of eight. In fact, according to Zilibotti, it increased by a factor of 17. Keynes was even right, up to a point, that the number of hours worked would fall, and that people would find other things to do.”

Noah introduces Keynes to frame a review of Brad DeLong’s new book, Slouching Towards Utopia. Although Noah clearly admires the book (read the whole review), he does quibble that:

What DeLong self-consciously calls his “grand narrative” falters as he shifts into the postwar years. He lays in a lot of Cold War history that, while fascinating in itself, is related indirectly at best to the economic story, and he gropes for a satisfactory answer—maybe there is none—to why postcolonial regimes in the global south have stumbled politically and economically. DeLong’s book is, in fact, fairly undisciplined throughout. It’s loaded with infelicitous witticisms; variations on “blessed be the market” appear no fewer than 16 times. For pages on end, DeLong argues with himself. For even longer stretches, the economic thread vanishes completely. There are many fascinating trees—intriguing facts and sharp insights—but not much forest. That’s especially true of the book’s second half.

In a recent Substack post, DeLong addresses Noah’s essay, and – as you might expect – his sharp eyes focus on the paragraph with the quibble. Delong laments that, “The one thing disappointing to me in Tim Noah’s review is that he does seem to have missed the forest. He wants to claim that the 20th century really came to an end in 1980 with the Neoliberal Turn and the rise of the Neoliberal Order, as that was when, as Eric Hobsbawm put it in his 1977 lecture, ‘The Forward March of Labour Halted’. But a forward march toward greater equality and greater prosperity is profoundly not the story of the 20th century, at least not of my 20th century.”

In that post, DeLong responds to Noah by attempting to highlight the underlying thread of argument in Slouching Towards Utopia, the thread that he thinks that Noah misses:

  • The forces-of-production underlying hardware is being replaced every generation.
  • Thus the economic-sociological software—the rough running code of society—needs to be rewritten on the fly every generation.
  • Cobbled-together so that it will not crash, for whatever worked well a generation ago will not work well, or not work at all, today.
  • This rewriting takes place in tension between von Hayek and Polanyi
  • Von Hayek: the market can give us wealth but not fairness or justice. But reaching for fairness and justice will destroy the wealth-creation and put us on the Road to Serfdom: “the market giveth, the market taketh away: blessed be the name of the market” is the best we can do.
  • Polanyi: the market says the only rights that matter are property rights, but people think they have and demand other rights: comfortable communities, economic stability, the proper allocation of incomes to the deserving. Tell people the only real rights are property rights and they will revolt, and the system will crash.
  • Polanyi: government must recognize and accomodate the fact that “the market was made for man, not man for the market”.
  • It is this unresolvable tension in how to rewrite the software economic-sociological code every generation on the fly that has caused the problems of slicing and tasting the economic pie—of equitably distributing it so that everyone has enough, and of using our technological powers to enable us all to live our lives wisely and well—have flummoxed and continue to flummox us.

Slouching Towards Utopia is on my to-read list, so I’m going here by what DeLong highlights as the central argument. The crucial step in that argument seems to be this, from the lesson that DeLong draws from Hayek: “reaching for fairness and justice will destroy … wealth-creation.” 

That’s because, although the lesson that DeLong draws from Polanyi is that people demand the recognition of rights other than the property rights recognized by the market, the only reason why Polanyi’s lesson would lead to problems is if the recognition of such additional rights were not only not countenanced by the market, but rather – as the Hayek lesson suggests – actually INIMICAL to the market’s functioning as an efficient engine of growth.

As DeLong’s own research demonstrates, however, Hayek’s lesson that “reaching for fairness and justice will destroy … wealth-creation” is simply false. Turning to Thomas Piketty’s new book, A Brief History of Equality, for support, Noah observes that:

Piketty trumpets the societal benefit of imposing “confiscatory” (his unapologetic term) top marginal rates of 80 to 90 percent in the United States. These put an end to “the most astronomical remunerations.” There was no reason for companies to push a top executive’s wages above the threshold for the top marginal tax bracket, because the federal government would collect nearly all that additional cash in taxes. That helped prompt companies to spend any surplus on the rank and file instead. Conservatives today argue that when marginal tax rates rise too high, that chokes off innovation. But through the 1950s and 1960s, “confiscatory” taxes choked off only excessive wage growth at the top. Productivity climbed briskly anyway, and so did per capita income. (Emphasis mine)

The thirty glorious years of the post-WWII period pretty decisively demonstrate that remarkable growth IS in fact compatible with equality-boosting measures. This means, however, that – as a statement of ironclad law – the idea that DeLong attributes to Hayek, that reaching for fairness is incompatible with growth, is just not true.

So what might be the lesson that DeLong wants us to derive? I think it’s rather, as he says before he provides his summary of the thread of his argument, that “a forward march toward greater equality and greater prosperity is profoundly not the story of the 20th century.” If THAT’S the lesson, however, then DeLong sabotages it by overstating the Hayek point.

What DeLong actually needs is the weaker claim that growth is COMPATIBLE with inequality, rather than that growth REQUIRES inequality, the latter being the lesson that DeLong takes from Hayek. And, of course, plenty of data points illustrate that growth is compatible with inequality! 

Here are two, both from Noah’s essay.

First, Nazi Germany before the start of WWII: “After Adolf Hitler became German chancellor in 1933, he pulled Germany out of the Depression faster, DeLong reports, than any other nations save the Scandinavian countries and Japan. ‘With the Gestapo in the background to suppress agitation for higher wages, better working conditions, or the right to strike,’ DeLong explains, ‘and with strong demand from the government for public works and military programs, unemployment fell during the 1930s.’ Fascism worked, until it didn’t.”

Second, the computer economy at the end of the 1990’s and the beginning of the 2000’s: “The computer boom mimicked the effects of the Industrial Revolution but fell well short of its breadth and magnitude. The wealth it created boosted middle-class incomes for a few years in the late 1990s, but it boosted incomes for the superrich much more, and, after 2000, pretty much exclusively.”

Indeed, DeLong’s underlying point – that the complex and delicate machinery driving economic growth needn’t always sync in tandem with the kludgy strategies available to policy makers to further equality and justice – is one that Noah seems to share! He ends his essay on a solemn note:

… whatever our next grand narrative turns out to be, the economic problem won’t be solved. How can it be, when inequality is still rising throughout the industrialized world, and when most of the global south hasn’t even started to address the economic problem? We’ll all be richer, but to vastly unequal degrees. Even if we succeed in reversing the trend toward growing economic inequality, and even if we find ourselves speaking, in awed tones, of the tiger economies of Africa and Latin America, the economic problem will remain unsolved because today’s notions of sufficiency will (one hopes) be too stingy to serve a more prosperous future.