In 1930, as the world toiled through the Great Depression, John Maynard Keynes wrote an essay, Economic Possibilities for our Grandchildren, to allay people’s fears about their economic future and, as he so eloquently put it
to take wings into the future” in order to ask: “What can we reasonably expect the level of our economic life to be a hundred years hence?”
In other words, he was peering into a crystal ball to imagine what things would be like in 2030.
As an aside, reading this essay is a little like going back and watching Back to the Future II, in which Marty McFly is transported to the future….to our very own 2015. It’s interesting to see all of the technological progress they envisaged for October 2015. Some of it was way off (hydrating pizza?) but in other ways it was quite accurate (3D movies at the cinema; video chatting with several people via computer).
In his essay, Keynes made two famous predictions:
- that the world in economic terms would be eight times better off (projecting into the future the growth rates from the early part of the 20th century).
- And that this would mean that his grandchildren would only have to work 15 hours per week.
I mention this now because a famous UK economist, Tim Harford, author of The Undercover Economist, revisited Keynes’ famous speculations in the Financial Times.
Here is what he had to say:
Keynes was half right. Barring some catastrophe in the next 15 years, his rosy-seeming forecasts of global growth will be an underestimate. The three-hour workday, however, remains elusive.
Harford then goes on to explain why this might be the case. He puts it down to two main reasons:
- We like to work hard.
- We like to earn more than our neighbours so we can spend more than them.
There may be something in this. But please note – he misses the main point. (As an aside, I’ve given up expecting such figures to “get it”).
The fruits of economic development always increases the price of land, which far outstrips the growth in wages. This is called the Law of Economic Rent.
This is an invariable, immutable and permanent law of economics. Write it down. Commit it to memory. This is what drives the cycle. Increased rents attract capital; and then invite speculation as people chase something for nothing.
In economies (such as ours) where the rent is privately captured, those who own the rent can work less and less – because as the economy grows the value of the rent increases.
But those who earn wages will see much less growth – while the rent (or mortgage payments) they will have to pay for a place to live or work will go up by much more.
It used to be possible for a family on a single income to own a proper house in London and not to be mortgaged more than a decade. Now, it’s unlikely to happen for a two-income professional couple both working 40 plus hours a week and repaying the loan over three decades. A small flat is probably all they will be able to afford – after several years saving up for a deposit.
This is because there is an abundant supply of people wanting jobs which puts pressure on wages and what people are prepared to do to earn them.
And note another thing: Tim Harford is a very widely-read economist, especially here in the UK. But he doesn’t talk about or understand the land dimension.
This is one of the reasons why there will never be any widespread understanding of the 18 year cycle. Find out more about it here..