The End of Scarcity and other fairy tales

Keynes, the Future and Present Austerity

by Chidem Kurdas

In 1930, John Maynard Keynes dashed off an amazing prophecy. Extrapolating from the productivity gains of the past centuries, he came to the bold conclusion that the fundamental economic problem of scarcity would fade away in 100 years or so. Thanks to technological innovation and the accumulation of capital, the ancient condition of limited resources to satisfy competing wants would give way to a new age of plenty. Human beings would then face a very different quandary, namely what to do with themselves once they no longer have to work in order to survive.

Eighty-one years into the timeline Keynes suggested in his article, “Economic Possibilities for Our Grandchildren,” scarcity shows no sign of disappearing. Where did he go wrong?

He did hedge his bet by making it conditional on there being no important wars and no major increase in population. One reason we continue to experience a dearth of means to pursue the ends we desire is that wars absorb immense resources. Thus the $1 trillion spent on the Iraq war could have instead been used to satisfy myriad needs.

But aside from that, Keynes made a mistake in his reasoning. He argued that some high level of output be sufficient to meet needs because these will not grow as much as the ability to produce. He thought a point may soon be reached where what he called absolute needs – in contrast to relative needs or conspicuous consumption – will all be satisfied.

This notion of “absolute need” comes from a limited view of technological change as improving productivity while preferences for goods and services remain relatively stable. But in fact technology creates new products and tastes, working on the demand side as well as the supply side. It is not the case that there is a fixed basket of wants. We now want MRIs and smart phones; in the past there was no such need since we had no conception of these things.

That Keynes postulated less long-term growth in demand compared to supply fits in with his later theory that deficiency in aggregate demand causes recessions. Hence his argument that government spending can alleviate the down part of the business cycle by creating demand—the main rationale for large-scale stimulus programs, including the Obama administration’s questionable projects.

In a sense Keynesian policies reduce the possibility of the age of plenty that the man himself foresaw. Besides the question of the effectiveness of such programs – click for one of the posts on the subject by Mario Rizzo –  there is the matter of runaway government spending.  Keynes himself favored budget surpluses in good times to balance deficit spending in recessions.  Over the cycle surpluses would make up for deficits. But that is not the way it worked in reality.

A recent piece by Steven Horwitz in the Freeman reminds us of the seminal 1977 critique by James Buchanan and Richard Wagner, who pointed out that Keynes and the Keynesians removed institutional and moral impediments to deficit spending, thereby freeing politicians to spend without limit and rack up debt. No matter how huge the resources, the black hole of government spending can absorb it all.

Hence the current European debt crisis, brought on by various governments’ improvident spending.  Austerity is the word that dominates European policy discussions, the belt tightening necessary to counter past profligacy.  So Keynes provided governments with the excuse to run deficits with consequences that now threaten to create painful scarcity.

Almost certainly he would not have liked this unintended result. The end to the economic problem looks further off than ever.