Keynes' predictions on the money as excess breeds excess

John Maynard Keynes was right about the future. But he was wrong about how we'd be spending it.

John Maynard Keynes was right about the future. But he was wrong about how we'd be spending it.

"In the long run," Keynes famously wrote, "we are all dead." I rate that claim true. But it actually has little to do with Keynes' views on the subject.

Keynes was criticising his colleagues in the economics profession who minimised the import of deep recessions - and what governments could do to prevent and shorten them - by promising that wounded economies, if given enough time, eventually return to health. "Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again," he continued.

Keynes, however, was deeply interested in the future - even the part after he was dead. In 1930, he wrote a slim tract titled Economic Possibilities for our Grandchildren. What he got wrong is interesting. What he got right is remarkable.

Consider the context. The Industrial Revolution was a relatively fresh memory. The new economy, in which technological innovation raised living standards with remarkable regularity, was trapped in the throes of the Great Depression. And here came Keynes, promising "the standard of life in progressive countries 100 years hence will be between four and eight times as high as it is today".

Keynes was right. From 1930 to 2011 real per capita GDP in the US rose sixfold. "Would any economist today, even with the benefit of training in frontier growth theory, try to make serious economic projections 100 years out?" said UCLA economist Lee Ohanian in Revisiting Keynes.

"Very unlikely, but Keynes did, and did so remarkably well — in all honesty, much too well - given the available theory and the existing economic conditions when he was writing."

If this came to pass, Keynes said, humanity would have solved, or be quite near to solving, "the economic problem" that had bedevilled every generation before us: we would have enough. Perhaps not as much as we wanted to have, or as much as we could have, but enough to survive.

This was, Keynes recognised, a reality for which we were ill-prepared. "If the economic problem is solved, mankind will be deprived of its traditional purpose," he wrote.

The question Keynes set out to solve was how mankind would adapt to a world of abundance. "He saw two options," explains Nobel prizewinning economist Joseph Stiglitz. "One was that we could consume ever more goods. Or we could enjoy more leisure. What worried Keynes was that when you looked at how people in the British upper classes spent their leisure, he was not overly enthralled with what he saw."

By and large, we have chosen door number one and this would have devastated Keynes.

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