Keynes' error

Why was Keynes wrong? In his 1930 essay (pdf), Economic possibilities for our grandchildren he predicted that:

the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day.

This looks like being spot-on: real UK GDP per head is now 5.2 times what it was in 1930.

However, Keynes made another forecast that has been wrong - that the average working week would fall to around 15 hours. In fact, it is more than twice that. What's more, it is now falling much more slowly than it did in Keynes' time: in the last 20 years it has fallen by just 1.1 hours in the UK (3.3%) whereas in the 20 years to 1930, it fell by 8.25 hours (16%)*.

Why was Keynes so wrong about this? In a new paper, Benjamin Friedman suggests it is because of increased inequality. Since the 70s, he says, median incomes have grown much more slowly than mean incomes, so households have to work longer to get by.

Personally, I'm not so sure about this. Some of the longest working hours now are put in not by households on median incomes, but by those on high incomes, such as bankers and lawyers. This might well be due to increased inequality - younger bankers put in gruelling hours in the hope of joining the mega-rich 0.1% - but it's a different issue from the working hours of the median worker.

Instead, I suspect two other things have happened. One, as Friedman says. is that network effects have become more important. Now, more than in the 1930s, we want to spend more to keep up with the Joneses. The spread of TV might have exacerbated this process: there's evidence that this increases our material aspirations and reduces contentment with current income.

Another - which I can't quantify - is that technical progress has been more oriented towards consumption goods than Keynes anticipated. We want to work longer than he thought because there's more stuff to buy.

Both these theories are consistent with the fact that Keynes made another error. He thought that rising incomes would lead to bigger rises in savings. But in fact, the savings ratio has fallen in the last 30 years.

However, conventional economics - and indeed many forms of liberal democracy - tells us that, for policy purposes, we should take preferences as given. And many people's preference is to work longer hours. I'm thinking here not just of the unemployed and inactive but also of the 1.26 million people who are working part-time - Keynes' 15 hours a week - who want a full-time job. As Friedman points out, these preferences can best be met by more expansionary fiscal policy. It's a little paradoxical that some of the people who most strongly assert the importance of people's existing preferences - such as neoclassical economists and right-wing politicians - should be so loath to satisfy them in this regard. 

 * Source: Bank of England: three centuries of data, page 12.

Comments

[Steve]

We also need to save for a longer retirement

[David Comerford]

Keynes was wrong about this because of land values and house prices. We are in a zero sum competition to obtain monopoly rights on a particular plot of land. The rate of economic growth has almost nothing to do with the proportion of total resources we are willing to spend on this. And if the next guy works 40hrs a week and we're competing for land, then I better work 40hrs too.

[UnlearningEcon]

If I remember correctly, did Keynes not make the prediction with the proviso that there wouldn't be another war?

[Luis Enrique]

sometimes I think how we measure real incomes must be wrong.

Suppose the average person working full time (say 35 hour week) on the average wage today is 5 times materially better off than the equivalent in the 1930s, in some real sense, does that imply that if this person chose to work a 15 hour week today, they would still be roughly 2 times as well off as somebody working full time in the 1930s? Just how badly offer was the average person in the 1930s?

I think my quality of life would be really pretty low if I tried to support my family today on 15 hours of the average hourly wage - without access to subsidised housing - and I struggle to believe I'd still be twice as well off in a material sense than the average family in the 1930s.

So what's going on? Maybe I just don't appreciate how miserable life was in the 1930s? Or my perceptions of what a minimally acceptable lifestyle looks like are radically different compared with 1930s? Or maybe our data exaggerates changes in real incomes? How good a job do these data on real incomes do of covering housing costs?

[Metatone]

To build on Luis Enrique's point. Maybe my preference isn't to work long hours, but it's a certain amount of money? Or worse, maybe it's a certain package of benefits? (Could be pension, could be social security benefits - but not available with 15 hour a week jobs, often not even pro-rata.)

[Metatone]

Luis Enrique - perhaps part of the issue is public goods?

Maybe also we could define a set of "system goods"? System goods being the fruits of the system advancing technologically? I'm better off than my grandparents in part because my house has central heating - but it's not that I inherently have a better house than them, it's a shift in societal standards (enabled by technology)?

(Maybe not the best example, but I think there's something there.)

[THD Young]

Isn't the work preference part of keeping up with the Joneses?

Look all that guff advertising that's a bit like this: "As our lives get busier and busier, we've found a way to make yours just a little bit easier...so you can spend a bit more time doing the things that matter ..."(picture of hamster frolicking in fluff)

[Luke]

Luis, how about healthcare being an area you're much better off than a 1930s family? Treatments available must be better than the '30s.

I think Mr Worstall argues that one reason for stagnation in wages in the US is that (most) workers are actually getting pay increases via employer sponsored healthcare. (Not sure if his argument is that they are getting better healthcare, or that it would be costing them more if they bought it themselves.)

[Jim]

You've forgotten non-compensated work. The average person had a huge amount of work to do to keep their household together - cooking, cleaning, shopping, heating. All of that took a lot of labour, the vast majority of which we no longer have to do. The washing machine, the tumbler dryer, the dishwasher, the vacuum cleaner, the microwave, the ready meal, the gas central heating boiler, all of these mean that we have vastly more leisure time than our 1930s counterpart did.

[Dave Timoney]

The correlation of high hours and high-status jobs reflects the courtier principle: you must maximise the time you are in the presence of power. It's also worth remembering that a lot of the "work" is actually disguised leisure/consumption (London is still full of daytime restaurants, bars and member clubs).

The comparison of living standards needs to isolate the cost of necessities, chiefly food, shelter and clothing (pre-NHS healthcare was not a "necessity" because you could take the risk of not saving or taking out insurance). The falling cost of food and clothing since the 30s, together with wider commodity deflation, has resulted in more income being diverted into housing.

The irony of Keynes's vision is that it has been achieved not by grandchildren but by grandparents - i.e. those with paid-off mortgages, who were able to fatten up private pension funds in the 90s/00s, and are now able to "live wisely and agreeably and well" due to the wonders of science and compound interest. The future is never evenly distributed.

[Nick Rowe]

Good post until the last two sentences. What do people want to do with their extra income from extra hours of work? Spend it on consumption goods, or have the government spend it? Not obvious. What about using monetary policy instead? (No, it's not tapped out, until it runs out of paper and ink or assets to buy). And maybe the inflation target needs to be swapped for an NGDP target?

[An Alien Visitor]

"We want to work longer than he thought because there's more stuff to buy."

I would word this slightly differently. Because some greedy bastards want every new piece of shit the private sector produces, even though their existing product is fine, I have to get up at 7 and don't get home until 5 and when I get home I have to make the frigging tea/supper/dinner, let it settle and by that time I am off to bed.

[Bob]

"No, it's not tapped out, until it runs out of paper and ink or assets to buy"
That's just fiscal policy but "trickle down" "rich man's pawnbroker" version.

Talking about shuffling interest rates when you have 5% of your productive capacity sat idle *as a matter of design* is the stupidest idea ever created.

The job of spending money and setting taxes is with the elected state.

[Bob]

The incumbent philosophy should be familiar to everybody:

* A central bank ensures there is sufficient borrowing in the economy to maintain 'aggregate demand' at 'full employment' where 'full employment' is defined as a few million people out of work give or take a few million more.
* The central bank is supposedly independent, but is really politically homogenous.
* Activity is based entirely upon the private sector, under roughly 'free market' rules, operating exclusively and having access to all the resources of society.
* In this model the government is just another actor in proceedings that has to carve out its space 'competitively' with everybody else by taxing, spending and borrowing.
* The push is for ever smaller government with the state constantly deferring to private interests and binding its own hands ever tighter (although the undemocratic 'big government' central bank spending and military spending are exempt. Notice Obama cutting disability payments and raising military spending in the latest 'budget deal' and Hollande abolishing SGP EU targets.)
* If anybody is left behind it is their fault, not the fault of a system incapable of maintaining real full employment - where everybody has a job and an income.

The result of this philosophy is all around us - vast inequality, massive private debt burdens, wage shares on the floor, insufficient investment, productivity trashed, and millions of people without a living income to sustain them and the resultant slow tortured deaths of individuals due to these policies. And of course eight years after a collapse we're still not back on our feet. It simply doesn't work for the majority.

The new philosophy is very different.

1. the state, as representative of us all, takes the resources necessary to create the critical public infrastructure and basic functions - all those that are a natural monopoly or are best treated as a natural monopoly, plus whatever is required to fulfil the critical public purpose of the people who elect them (a health service, education, etc). And central bank policy *is to let them do that*
2. the private sector is then allowed to play with the rest of the resources as it sees fit.
3. the state then takes what the private sector decides it doesn't want to use and deploys them sensibly for the 'nice to have' public purpose (mainly labour via the Job Guarantee)

Within this philosophy the free market private sector is bookended by the public sector and sensibly contained - like any good nuclear reactor should be. Here the public sector gets first dibs at the resources of society and maintains the structures necessary for the private sector to operate at optimal efficiency and maximum output (for example, removing the need for 'jobs' in the private sector allows it to press on with automation).

Correctly configured this philosophy actually creates a private sector that is larger than the original structure because, of course, it can maintain more of the population at a higher level of economic activity. However what it does do is remove political power from bankers and corporate leaders and we've known for decades they don't like that idea.

[Steve Roth]

"Some of the longest working hours now are put in not by households on median incomes, but by those on high incomes, such as bankers and lawyers."

This is widely believed, but it's a misconception.

High-income folks work more hours during their prime working years, but in the the course of their lives people in high-income families (>$150K) work less.

http://www.asymptosis.com/no-rich-people-dont-work-more.html

[Bob]

"And many people's preference is to work longer hours. I'm thinking here not just of the unemployed and inactive but also of the 1.26 million people who are working part-time - Keynes' 15 hours a week - who want a full-time job. "
Yep. That doesn't mean you we can't push for basic income or other ideas. But getting this in place *first* is important.

The JG gives people who want something to do something to do, which we then call a 'job'. It's the only idea that prevents the destructive effects of boredom and isolation, as well as neutralising resentment.

However it still requires a certain amount of social change. For example the job of looking after children in society is created the instant that a child is born. We apparently have no trouble with the state paying people to look after other people's children, but we have huge problems with paying people to look after their own. Yet the job is essentially the same in both cases.

That dilemma becomes even more stark when you have a state run Job Guarantee. Is it really rational to pay a third party to look after the children so that you can pay the parent to work in a created job? It is clearly cheaper to pay people to look after their own children if that is what they want.

[Steve Roth]

Basically we need to overcome people's widespread objections to (other) people leading easy lives. That's the whole point and value of increased productivity. As a country we (should) want to work smart, not hard.

[chairman]

But there doesn't even seem to be any option for people who WOULD like to work much shorter hours and consume fewer goods. Personally I don't have a great demand for many consumer goods. I want a place to live, a computer with a good internet connection, a small wardrobe and super-cheap used books from Amazon. I could easily satisfy this for about, I don't know, $20,000 yearly income -- but what is the job that allows me to work 15 hours a week for 20k a year? There are jobs that will allow me to work long hours for 20k a year, and there are jobs that will allow me to work 40 hours for more than 20k -- probably to the point where if I did only work 15 hours at these jobs for the same hourly compensation, I could get around 20k, but that option isn't offered.

[Luis Enrique]

Alien Visitor do my eyes deceive me? Did you mistype? Are you really complaining about getting up at 7, home at 5 and having to cook your own dinner?

[Tim Worstall]

Jim has it. In 1920s took 60 hours or so a week to run a household. Today, maybe 15?

That's where the reduction in hours has been.

[andrew curry]

Of course, since Keynes was writing about 2031, he still has some time on his side.

[Igor Belanov]

I'm afraid that Jim and Tim forget certain other features of life that have changed since the inter-war era.

For one, most people would have had to make do with fewer items of clothing, therefore we're not talking about as much labour saving there as you would think.

More importantly, there is the extra time spent travelling to work and shops. Most people lived close to their place of work to avoid travel time and costs. Now many people would need to add at least a couple of hours to their working day travelling to and from work.

There would have been fewer goods available for 'ordinary' people to buy, and most shops were situated close to where people lived. Even villages had a full range of shops. These days many people have to take the car or a bus to shop for anything, including even milk or fags.

'Labour-saving' may have avoided some arduous activities, but it also opened the door for increased participation in the labour market and greater opportunities for private consumption. It wasn't intended as a social benefit!

[Doc at the Radar Station]

"Keynes made another forecast that has been wrong - that the average working week would fall to around 15 hours..."

Judging by how much work gets done in my office in the last several years, I think his insight is ironically quite correct, haha

[Steve Roth]

@chairman: "But there doesn't even seem to be any option for people who WOULD like to work much shorter hours and consume fewer goods."

Exactly. This is not a choice that we have collectively made available.

Choice is GREAT! But no individual gets to choose what choice set is available. We make that choice collectively.

[Steve Roth]

So, make this choice part of the available choice set for many more people in our country: "Live a secure, comfortable, easy life without working insane hours."

That sure sounds like liberty and prosperity to me...

[An Alien Visitor]

"Are you really complaining about getting up at 7, home at 5 and having to cook your own dinner?"

erm, yes. But I am complaining at the amount of free time and the reason I have to work longer is to fulfill other peoples insatiable appetites, which I do not share.

"In 1920s took 60 hours or so a week to run a household"

But 40 hours is waiting for the food to cook! Leaving plenty of time for knitting and other such pleasurable pursuits. And in those days someone was always in the home. Now the time available for the jobs to get done has shrunk markedly.

So let us do a few calculations:

The year 2015:

Hours taken to do the housework = 15 hours
Available hours to do that housework (working week only) = 5 days X 3 hours per night = 15 hours

Ratio for 2015 = 15/15 = 1

The Year 1920(assume someone is home full time):

Hours taken to do the housework = 60
Available hours to do that housework (working week only) = One full time person at home (50 hours) + 2 people at home for 2 hours per night (20 hours) = 70 Hours

Ratio is 70/60 = 1.17

Therefore we are worse off now than back then in terms of available time. And if we factor in the cooking taking up 40 of those hours we are a lot worse off!

Given the staggering levels of technological development since 1920 I am personally disappointed that my free time is so minimal. Certainly is the last 30 years there seems to have been little or no progress.

I would say this is a huge sign that capitalism no longer delivers the goods. Even the supporters of capitalism now accept that it can no longer provide the level of public services it once did. Even Tories tell us capitalism has run out of money!

When the advocates of a system are telling us how shit it is we should really start to look for alternatives.

[Bob]

"Even the supporters of capitalism now accept that it can no longer provide the level of public services it once did. Even Tories tell us capitalism has run out of money!"
It hasn't "ran out of money" though it is just the people in power are idiots. Don't listen to the Tories. They are liars.

[An Alien Visitor]

"It hasn't "ran out of money" though it is just the people in power are idiots. Don't listen to the Tories. They are liars."

I know that Bob. It was a bit tongue in cheek.

[Nanikore]

The process of writing the General Theory seems to have changed Keynes himself. I doubt he would have said that after 1936.

https://radicalsubjectivist.wordpress.com/2012/09/18/keynesian-uncertainty/

[Staberinde]

I wonder if the big thing Keynes missed was the massive increase in women's participation in the workforce?

A bigger labour supply should depress wages. Hence two people working today to pay the mortgage rather than one person previously?

[Dave Timoney]

Working people have little free time because the better sort are terrified at what they might do with it. The Devil finds work for idle hands, etc.

Declining productivity is a contradiction of capitalism. Technology has increased productivity but class relations prevent us evenly remitting that in reduced hours. The consequence is bluecollar unemployment and whitecollar makework and waste (Doc at the Radar Station is observing a real phenomenon).

[George Carty]

Maybe Keynes didn't count on the Town and Country Planning Act 1947, which allowed the parasitic rentier elite to come roaring back with a vengeance?

It is notable that even now, houses built in the 1930s (after the masses became more mobile -- although more due to trains and buses than cars at this stage -- but before the T&CPA) are especially prized in Britain.

[Calgacus]

Bob: "The JG gives people who want something to do something to do, which we then call a 'job'. It's the only idea that prevents the destructive effects of boredom and isolation, as well as neutralising resentment."

Damning with faint praise. It is the only idea that does not make the lives of the unemployed and their dependents living hell, by the simple and easy device of making unemployment = 0. BIGs can't do that because as Wray says, people that think BIGs can work are a lot worse at economics than mainstream economists. And that is saying quite a lot. Some JG supporters unfortunately grossly overemphasise appearances and emotions like boredom and resentment, instead of reality and justice, common sense and logic. Arguing that there needs to be a "job" component of a JG because of people's need to see other people working, need to see other people reciprocate is very, very wrong and not thought out. "Nice to have" ? - perhaps from a collectivist perspective. For individual freedom and justice to individuals, a JG is an absolute, logical necessity, for which there is no conceivable alternative or substitute.

A JG is the most essential part of a sane national economy, a whole society run the way everything else is run. The point is that of the 2 philosophies above, the second is and always was right. The first is utterly illogical and incoherent - unintelligible. That's is why it cannot and never has worked for its putative purposes.

Bob:"That dilemma [uncompensated child-care] becomes even more stark when you have a state run Job Guarantee."

One reason why Lerner & Minsky strongly supported "Children's Allowances" as they called them.