The two twentieth centuries

The case against seeing the period from 1870 to 2010 as an economically coherent whole

Brad DeLong’s Slouching Towards Utopia (my official review of which can be found here) is an economic history of what he calls the long twentieth century, stretching from 1870 to 2010. When most scholars go about slicing up modern history, they tend to see a clear break in 1914, and perhaps another around 1989-91, and from a political or ideological perspective one can certainly see why. Brad, though, argues that the clearest lens through which to see the past century and a half is an economic one, and that upon peering through that economic lens one sees an era from 1870 to 2010 which is rightly characterized as a coherent whole. 

How so? Well, for one thing, 1870 was a watershed year in terms of the development and deployment of new technologies and the pace of economic growth. Before that, growth at the productivity frontier was just about fast enough to allow for sustained growth in real incomes; after that year, the world was off and sprinting away from its Malthusian past. And for another, the period 1870-2010 traces the arc of America’s rise to economic dominance and its subsequent humbling. The end-year choice of 2010 is a little arbitrary; arguably either 2008 or 2016 would have made more sense. But the message communicated by the end date is clear enough. Around that time, America’s economy sat wounded by the global financial crisis and its aftermath, its eclipse by China seemed certain and obvious, and its capacity to perform a critical role as global hegemon and democratic exemplar looked very much in doubt.

Now, let me say here that Slouching is a wonderful book and you should buy and read it. It should become one of the books that helps structure people’s thinking about the twentieth century. But because it is such a very good book by a very compelling thinker and writer, it deserves to be engaged with in a critical way. I will have some sweeping things to say about the book in a forthcoming dispatch, but before that I wanted to take a moment to reflect on the broader economic story that Brad is telling—and ask whether it is the right one. 

Brad has a primary narrative, which he structures as a push and pull between the ideas of Hayek and (Karl) Polanyi. Hayek stands in for the power of the market to harness distributed information and deliver Good Things, subject to certain caveats; from 1870 on, Hayekian forces transformed industrializing economies and led them down the path toward “economic El Dorado”. But Hayekian forces can easily trample rights that people feel quite strongly about: to have a say in society whether or not they own property, for instance, or to earn a stable and adequate income. And so the transformation wrought by the market repeatedly ran into Polanyian forces, in the form of efforts to preserve human communities and individual rights in the face of market disruption. People sought the franchise, and they voted for redistribution and regulation—and occasionally they went and had a revolution. 

After decades of back and forth between the Hayekian and Polanyian forces, the world, or parts of it, found their way to the happy middle ground of postwar social democracy. The marriage of Hayek and Polanyi that it embodied (combined with the Keynesian insight that governments should help the economy maintain full employment) allowed markets to do their work while preparing people to participate in the market and insuring them against its vicissitudes. Having found its way to that good place, the rich world enjoyed a generation of blistering, broad-based growth. 

That feels like a happy ending to the narrative, but of course there was more twentieth century left. And like the crummy last season of a beloved show, tacked on in a cynical effort to wring more profit from the fan base, the last few decades of the twentieth century were a disappointing muddle. Faced with the productivity slowdown and macroeconomic headaches of the 1970s, rich economies tried to bring back the glorious postwar economy by dialing down the Polanyi a bit and dialing up the Hayek. But this “neoliberal” turn didn’t bring back the scorching growth of the postwar era. Instead it contributed to rising inequality in the rich world (which amplified the pain that slower aggregate growth imposed on poorer households) and to financial excess, though also and more beneficially to a period of rapid growth in some emerging economies. The show then ends with the heroes wondering how they drove the economy into a major financial crisis, while previously peripheral characters in South and East Asia, seemingly introduced solely to lay the groundwork for a spin-off series, lecture the rich world about the weaknesses of western capitalism. 

Are there morals to this story? There are: that economic growth is powerful, that governments should let markets work where markets work well but also have critical roles to play in keeping an economy working well, and above all that material prosperity is a necessary but not sufficient condition for utopia—and we’re still trying to figure out what the other ingredients are. 

But maybe there is another moral, as well: that it is important to know when to conclude the narrative. 

The story above is the main one that Brad tells but it is not the only one. Why did growth accelerate around 1870? It did so because the nature of industrialization changed. For the first century of the industrial era, Britain led the way. The British industrial revolution was concentrated in a few key sectors, like textiles and iron production, powered by water and steam, and authored mostly by tinkerers on the make. But a major shift occurred around 1870. Then, technological leadership passed from Britain to Germany and the United States. As it did so, the pursuit of productivity-enhancing innovations became more purposeful; as Brad puts it, leading economies invented invention. 

So, societies which were investing heavily in education produced lots of engineers and scientists, who went to work in corporate research laboratories, whose innovations were exploited by sophisticated firms with complex bureaucracies that allowed for a high degree of task specialization. And while this was happening there was fantastic growth in the scale of the market thanks to globalization. Yes, people and goods and money and ideas had flowed around the world for ages. But in the latter third of the 19th century, transportation and communication costs tumbled, and cross-border flows of all of those things exploded. Growth in the size of available markets gave a spur to the resource-intensive, massive-scale industry that allowed productivity growth to rocket upward in places like America. This revolution physically transformed the world. Cities grew massively and became electrified. The pace of travel grew fantastically thanks to mass car ownership and commercial air travel. Mass education transformed society: from one in which almost no one had completed high school to one in which almost everyone had. 

And all of this did indeed usher in mass prosperity, or something like economic El Dorado: because Depression and war and high levels of taxation battered the fortunes of the rich, but also because the structure of the economy permitted it. Sophisticated, capital-intensive production at massive scale, undergoing rapid productivity growth, created the conditions for almost-utopia. Strong labor unions and governments committed to full employment helped workers capture a large share of the producer surplus generated across the economy. And a compressed distribution of income encouraged firms to produce consumer goods for a mass market, at an enormous scale which facilitated continued productivity growth. 

But it couldn’t last. That, I think, is the key point. Why couldn’t it last? For a few reasons. 

One very big one is that there was a tension between the rich world’s desire to maintain high levels of employment at good wages in mature manufacturing industries, the developing world’s desire to get rich, and the rich world’s commitment to an open global economy. Another was that the rich world had for more than a century achieved rapid productivity growth by augmenting the efforts of labor with ever larger amounts of energy and other resources, with little attention paid to environmental costs. But as societies grew richer, the environmental side effects of the prevailing growth strategy no longer seemed worth bearing, and the energy shocks of the 1970s led to a dramatic shift in attitudes toward energy consumption. 

But beyond that, the nature of technology was changing. Many of the key innovations which had powered growth over the prior century had matured, while other promising ones were in their infancy. And another very powerful general-purpose technology had by the 1970s grown beyond its infancy into an increasingly disruptive force. Intel was founded in 1968, Microsoft in 1975, and Apple in 1976. This new technological force, however, operated according to rules quite different from those of the golden age of industrialization. Looking back on the first few decades of the “new economy”, two insightful economists noted:

It is a fact that we today simply do not know yet how to make the intellectual property system work for the new economy. Back in the Gilded Age, intellectual property as such was not such an important factor. Industrial success was based on knowledge, but on knowledge crystalized in dedicated capital. Many people knew organic chemistry. Few companies—those that had made massive investments—could make organic chemicals.

Today, it appears that intellectual property is rapidly becoming a much more important source of value. One response would be to reinforce the rights of “owners.” The underlying idea is that markets work because everything is someone’s property. Property rights give producers the right incentives to make, and users the right incentives to calculate, the social cost of what they use. It is clear that without strong forms of protection of property rights, a great many useful products would never be developed at all. This principle applies as strongly to intellectual as to other forms of property. 

But with information goods, the social marginal cost of distribution is close to zero. One of the most fundamental principles of economics is that prices should be equal to social marginal cost. In this case, strong intellectual property rights have the potential to decrease economic efficiency by driving prices away from marginal social costs.

“New institutions and new kinds of institutions…may well be necessary,” wrote Larry Summers and Brad DeLong in that paper, before concluding:

What changes in the government-constructed underpinnings of the market economy are needed for it to flourish as the economic changes produced by computers take hold? How should governments deal with their possibly large distributional implications? And what failures to change or what changes made in support of vested interests would hobble the transformation now under way?

In Slouching, Brad argues that key institutional innovations were critical to unlocking the growth potential that was realized from 1870 on. That seems absolutely right to me. A few places, through luck and foresight, made critical policy choices and fostered the evolution of powerful corporate forms, which got things rolling in the last third of the 19th century. Governments then struggled mightily to manage what they’d unlocked, learning some incredibly tragic lessons along the way, but ultimately built up a social, corporate, governmental complex of institutions which yielded extraordinary prosperity.

That is the complete story of that era, which ended in the 1970s when a confluence of forces fatally weakened the economic basis of that complex. It isn’t a long century; it is just about one century exactly, albeit inconveniently misaligned with our preferred way of slicing time up. And the next chapter would ideally have been one in which societies really grappled with the difficult questions posed by the end of that era: and threw themselves into the job of achieving an energy revolution, and an information revolution and above all an institutional revolution which would have helped society continue down the path to economic El Dorado in a rapid and equitable way. But it wasn’t. The ideas simply weren’t there. As Brad writes, people looked in the store window for a new intellectual framework to replace the one that seemed to stop working in the 1970s and found such a dismal set of options that neoliberalism looked most attractive. 

It’s funny; in the book, Brad writes that he can very easily imagine how the critical innovations which enabled rapid growth after 1870 might never have come to pass. In that case we would have remained locked in what he calls a “Permanent Steampunk” world: in which we were much less rich than we could have been; in which new technologies, like the airplane, appeared but remained must less transformative than it seemed they should be, and in which a whole slew of other and older technologies simply remained a critical part of life for far longer than seemed appropriate—though it might not have seemed so to the people stuck in that world, who couldn’t know that an alternate future was possible, except perhaps through imagination and intuition.

But—isn’t that the world we’re in now? Aren’t we in a world in which it seems as though a hand-off from one set of marvels to another should have taken place but somehow…didn’t? Isn’t that the story of this unsatisfying new chapter of global economic history: this lackluster instantiation of the multiverse in which far too many people remain far too poor, and we seem more interested in recapturing the best bits of an older era than in constructing a wild new one?

In this interpretation, the bitter side-effect of the otherwise marvelous fall of communism wasn’t that it validated neoliberalism, as Brad argues, but that it validated the rich world’s broader approach to generating new ideas and turning them into higher living standards, which neoliberalism ultimately did not alter by all that much. And the missing piece to the puzzle of rich-world ennui isn’t just the One Weird Trick that will allow us to build a utopia out of the material prosperity we now enjoy; it’s a set of new institutional arrangements which will help us solve the very real and serious problems we continue to face globally and allow us to believe in a promising future once again.

I don’t know if that’s right, of course. But I’d be curious to know what Brad thinks, because I do feel that his book lends itself to this interpretation of recent economic history.