Where Keynes got it wrong, and why

And what we might glean from the "why":

Paul Mason: what would Keynes do?
The revolution in IT and how it is transforming our world in ways that even economists are struggling to understand.

In 1930, while the world was still reeling from the impact of the Wall Street crash, John Maynard Keynes published a remarkable essay: in “Economic Possibilities for Our Grandchildren” he imagined a world where, as he put it, mankind’s “economic problem” has been solved. By 2030, barring unforeseen wars and given the population did not rise too fast, a combination of technological advance and rising wealth could leave enough for everybody.

This would be quite a big change, he pointed out, because the entire history of humanity has been determined by there not being enough for everyone.

“For the first time since his creation,” Keynes wrote, “man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

[...]

Keynes imagined and fought for a society based on liberalism and aesthetics. The market would eventually provide for all and create a confident, socially adventurous leisure class, whose purpose was to understand and create beauty – and to work as little as possible. That view had been dented by the First World War and would now be shattered by the Depression. So the “grandchildren” essay stands as almost the last utterance of Keynes’s pre-Depression world-view.

[...]

So, as with all insights into the future, Keynes’s essay is full of misunderstandings about the present. (In 1930 the great wave of bank insolvencies that triggered the Depression lay 12 months ahead. Herbert Hoover was in the White House, no developed country had yet left the gold standard, Ramsay MacDonald was still in Downing Street and the Nazis held just 12 of the 491 seats in the Reichstag.) Its underlying tone is: don’t worry, these are growing pains; the market will – with the help of governments – create the solution. And that was wrong.

Yet there is something breathtakingly far-sighted about the “grandchildren” essay. At its heart is the proposition that one day:

• capitalism will grow into something else;

• if that happens the cause will probably be technology;

• we will have a major psychological problem adjusting our lifestyles to a situation where money is not important;

• the love of money will come to be seen as a disease;

• economics will become as mundane as dentistry.

Keynes looks into the future using three yardsticks: the rate of technical innovation, the growth of population and the growth of capital through compound interest. He estimated that productivity would safely grow at least 1 per cent per year, and that capital would grow by 2 per cent per year. If so, it was safe to assume that by 2030 the standard of living in advanced countries could be four to eight times what it was in 1930 – and if technology improved faster, eight times could be an underestimate.

[...]

The idea was that technological progress would create fresh demand, so that even as the price of today’s goods got cheaper (because of productivity) there would always be new, more complex human needs created that require higher-valued things and a higher-skilled workforce to create them. That has been capitalism’s get-out-of-jail card for 200 years, confounding Malthus, Ricardo and Marx, each of whom in his own way believed there were limits to capital.

It happened spectacularly in the Progressive Era, the second industrial revolution, when Victorian-era cities were suddenly populated with Arts and Crafts-style pubs, cinemas, libraries, automobiles, electric lighting . . . prompting Virginia Woolf to declare that “on or about December 1910, human character changed”. And sure enough human character is changing again, under the impact of technology. This third industrial revolution is having a different effect, however: certainly there are more complex needs being created, but it’s not obvious how they will be commercialised.

“Information wants to be free,” said the hippie-ideologue Stewart Brand – to which the open-source movement added: “free as in freedom”. If physical goods are getting cheaper the drivers of demand are of course energy (which has to get dearer) or services. But services, too, can be automated. And so what we may be left with is the nightmare the French writer André Gorz envisaged: that just as it tried to privatise water in the 1980s, capitalism is forced to privatise and commodify simple human interaction. That just as we have sex work now, we might have affection work, sympathy work, anti-loneliness work in the future.

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The present situation breeds not only a widening inequality of wealth but an inequality of power not seen in Keynes’s time except in Fascist Italy or Stalin’s Russia. I think it may all end in tears again – with unchecked oligarchic governments such as those of Vladimir Putin and Recep Tayyip Erdogan repressing their population with tear gas and arbitrary detention, while the democratic-world elite stands by, once again convinced that its economic interest lies in supporting dictators against their own people, and increasingly prepared to use repression, surveillance and arbitrary power against their own populations.

If we avoid this dire outcome, it will because the forces for good, for understanding and knowledge and restraint are also being strengthened by technology. I think we should imagine new technology creating the world of abundance Keynes longed for, but it is likely to be decoupled from the question of pure GDP growth and compound interest.

It won’t happen by 2030. It will not be the transition Marxists imagined, led by the state suppressing market forces, but a transition based on the controlled dissolution of market forces by abundant information and a delinking of work from income. I call this – following economists as diverse as Peter Drucker and David Harvey – post-capitalism. In making it happen, the main issue is not economics but power, and it revolves around who can envisage and create the better life.

Keynes’s critique of Marxism was that by basing itself on the working class it asked too much of the intelligentsia. He wrote in 1925: “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above bourgeois and the intelligentsia, who, with whatever faults, are the quality of life and surely carry the seeds of all human achievement?”

Well, now (thanks to education and technology), we have a mass intelligentsia: yes, for sure, spoon-fed tick-box learning on degree courses whose intellectual level Keynes would have scorned. But they have shown themselves willing to stand somewhere between the mud and the fish, and able to create science and art and ideas that make this a thrilling time to be alive. It was they who launched the Arab spring, the Quebec spring, Occupy, Taksim Square and the Russian democracy movement.

When I look at the picture of the miner’s relative and the man kicking him, I find it hard to prefer the fish to the mud. I suspect that Keynes, placed for one hour in a Rolex store, or in any of the yachting ports where British politicians frequent the vessels of Russian oligarchs, might also begin to find this whole “fish v mud” thing not so useful. But we have gone beyond the proletariat and the bourgeoisie. We have an educated demos alongside an underclass, and we are all toiling in a social factory where every act of production, consumption and leisure sucks us into a system of value creation based on debt, finance, monopoly.

By 2030, according to the Oxford Martin School, 47 per cent of all US jobs, mainly in retail and services, will be automated. Automation used to mean the replacement of physical labour by machines; now it means the replacement of mental labour by software – and software is just a machine that never wears out and costs nothing to reproduce. Unless whole new industries based on whole new sources of economic demand grow up, the purchasing power of the majority will fall; and ultimately there is only so much money you can print, and only so many asset bubbles you can stimulate, until it comes to a full stop.

Keynes imagined a future where rising wealth led to falling inequality. Instead, economic wealth has grown more slowly than he imagined but physical and information wealth has grown faster and begun to detach itself from the value system. The moment is coming where we have to recognise this and redesign society as boldly as Keynes’s generation did in the mid-1940s.

I think a modern-day Keynes would be obsessed with how to decouple work from income, production from price, organisation from ownership. We know what he achieved in practice: a workable system that revived global capitalism. But he also dreamed of something better than a system based on the pursuit of money. [...]

Yeah, dreamed is exactly the right word. And what is this: "That just as we have sex work now, we might have affection work, sympathy work, anti-loneliness work in the future." WTF?

This article does have some interesting parts, and parts of it seem to be backed up with some pretty good arguments and observations. But it's got it's weak spots too.

The author says "Even as we grapple with the aftermath of our own Wall Street crash, we are facing a new problem: the rise of information goods whose abundance is probably the indirect cause of – and solution to – our current state of low growth, high inequality and growing social unrest." And tries to explain why. Some of his arguments are convincing. But others, not so much. And I have to say, I'd like to hear more about how the abundance of information goods is "the solution to".

He does an excellent job of explaining the failures of Keynes predictions, but then seems to go on praising Keynes's vision as some how achievable anyway, due to some vague "post-capitalist" society that we need to become.

I don't object to the discussion of this. But I've heard plenty of people fantasize about a "post-capitalist society", yet they never show you the beef; it just sounds life a fantasy. And since Keynes HAS been proven wrong about so many things, you have to wonder if it isn't a mistake to keep holding on to the future-fantasies he envisioned as well?

This article identifies a lot of problems, but it seems unfirm and vague about solutions. I can't get excited or enthusiastic about vague references to a "post-capitalist" society, without it being explained how such a society would actually work. It's been tried before, with dismal, even deadly, results. So any talk about a "post-capitalist" society should, IMO, provide the details and prove itself to be something other than another deadly experiment in social engineering.