|''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 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 ahead.”
These words might have been written about our own time, but in fact they are from the opening paragraph of “Economic Possibilities for our Grandchildren”, an essay penned in 1930 by the British economist John Maynard Keynes.
Rising above the prevailing mood of doom and gloom, he diagnosed the economic malaise of the time as “only a temporary phase of maladjustment”, and went on to predict that 100 years hence, living standards would be between four and eight times as high as they were then.
Keynes qualified this forecast against the possibility of major conflict and/or natural disasters, but he needn’t have bothered. In fact, he was if anything too cautious. Despite the intervention of a devastatingly destructive war, growth in living standards may have exceeded the top end of his range. The statistics don’t go back to 1930, but since records of household expenditure began in 1948, it has grown nearly sixfold in real terms.
As we think about the pessimism of our own age, it is well to remember these bygone times, when the usual assumption of economic progress was similarly swamped by a feeling of national despair. In the event, Keynes didn’t have to wait long for things to improve.
The following year, Britain left the gold standard and embarked on a period of relatively strong economic expansion. Indeed, the Thirties were the only decade in the modern era in which Britain saw superior rates of growth to those of the United States. It didn’t feel that way in the old rust-bucket industries of the North, but despite the protest of the Jarrow marchers and the pall of global depression, Britain was entering an age of dynamic change that gave birth to a raft of consumer-based industries.
Now fast-forward to the Seventies, and the grim reality of economic failure had once more settled like a sickness on the national psyche. Again salvation was at hand, this time in the shape of the Thatcher-era reforms and North Sea oil. In combination, these transformed the face of the UK economy, and for a while at least succeeded in significantly raising its trend-rate of growth. Throughout much of the Eighties, Nineties and Noughties, Britain outperformed major European rivals.
Nothing is for ever, and it’s reasonable to question how real these apparently superior rates of growth were. By the early Noughties, they had in any case given way to the candyfloss growth of excessive debt leverage, a phenomenon Mrs Thatcher instinctively and notoriously regarded as economically toxic. According to aides, she took a great interest in the growth in bank balance sheets, and thought of it as potentially very dangerous. She could not have been more right.
Indeed, one of the more facile narratives to have emerged from the great Thatcher love-hate fest of the past few days is that it is because of her that we have today’s financial crisis. The Big Bang stock exchange reforms to which the likes of Romano Prodi, a former Italian prime minister, seem to be referring were in fact only the culmination of a long legal battle, backed by Europe, to open up the City to competition that began some years before she came to office.
What’s more, it is quite wrong to think of these reforms as “deregulation”. To the contrary, they began the process of moving away from semi-corrupt standards of self-regulation to fully fledged statutory control of the type the Left is so enamoured with today. That these levers came to be so hopelessly misused can hardly be laid at Mrs Thatcher’s door.
In any case, the unchecked credit boom of the Brown years would have horrified her, and confronted by the banking crisis, she probably would have let insolvent banks go bust, regardless of the short-term economic and financial consequences.
Keynes’s essay wasn’t about such relatively short-term vicissitudes in a nation’s economic development. Rather, it concerned in a more generalised sense the power of technology in combination with capital accumulation to drive productivity and wealth creation.
There have been plenty of ups and downs along the way, but this transformational process has been going on pretty much unabated from the late 18th century, and despite today’s much higher levels of competition for scarce energy and an apparent hiatus in productivity improving technological innovation, there is no reason to believe it will stop.
The digital revolution is still essentially in its infancy, with the promise of unparalleled levels of automation yet to come. And eventually, possibly within the next three years, the capital destruction of the banking crisis will reverse. So somewhat presumptuously, I’m going to repeat Keynes’s famous prediction. Forget the present gloom: 100 years from now, living standards will be between four and eight times higher than they are now. What happens in between, and how societies choose to manage change on such an awesome scale, are of course much harder questions to answer.