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The Economic History of the Twenty-First Century

 

J. Bradford DeLong

delong@econ.berkeley.edu

http://www.j-bradford-delong.net/

March 2000

--DRAFT--

Abstract

 

Odds are that by the middle of the twenty-first century the population explosion will be over. All save a very few countries--which may nevertheless have a substantial share of the world's population--will have completed or be on the verge of completing their demographic transitions, their attainment of a demographic regime of long life and low fertility. Thus it is unlikely that the world in the second half of the twenty-first century will feel "overcrowded"--although it may well feel "under resourced," or overly warm.

Odds are also that the world of the second half of the twenty-first century will appear to us to be remarkably, filthily rich. The problems of measurement that make us unsure today how much richer we are than our predecessors of a century ago will strike with equal force, and some things that we now take for granted--large houses within less than half an hour's commuting distance of metropolitan centers, for example--may become extravagant luxuries. But by 2050 a quarter (rather than a twentieth) of people in the world will have a material standard of living higher than that of the average citizen of Canada or the United States today; and by 2100 it is a good bet that half the world will live better than the average citizen of Canada or the United States today.

Odds are also that the world in 2100 will be, relatively, at least as unequal a place as the world today: the gap between rich and poor may even be an even greater multiple of the poor's income. To economists the growth of relative inequality in the world economy over the past century is astonishing, for the relative edge in productivity of the industrial core is due to its superior command of the technologies that have been invented since the start of the industrial revolution, and these technologies are by and large public goods open and accessible to all. Yet the relative technology gap between rich and poor continues to grow.

What remains to be determined is whether the largest income gaps are--as they are today--gaps between nations, or whether the "death of distance" will mean that gaps within nations and metropolitan areas will be of the same order of magnitude as gaps between national economies. What also remains to be determined is the collective use humanity will make of its wealth, and how--or if--the upward surge in wealth will transform human nature. And whether this relatively optimistic scenario that I have painted will be overturned by one of the several possible catastrophes--nuclear war, bioterrorism, ecological distress--that may take place in the next century or so.

 

Introduction

The past two centuries have seen a population explosion in the number of humans alive on this planet, a wealth explosion in humanity's power over nature, level of economic productivity, and possession of the necessities, conveniences and luxuries of life, and an inequality explosion as human societies worldwide have become more unequal in their relative economic productivity than ever--or at least than since the day when some tribes that knew how to use fire and others that did not. The first of these explosions--the population explosion--is about to come to an end. The second and third are not about to come to an end.

Barring any of the potential catastrophes--nuclear, epidemiological, or ecological--that may afflict the planet and the human race in the next century or so, the playing-out of these three explosions will dominate the economic history of the next century, and will probably dominate the rest of the next century's history as well.

Odds are that by the middle of the twenty-first century the population explosion will be over. All save a very few countries--which may nevertheless have a substantial share of the world's population--will have completed or be on the verge of completing their demographic transitions, their attainment of a demographic regime of long life and low fertility. Thus it is unlikely that the world in the second half of the twenty-first century will feel "overcrowded"--although it may well feel "under resourced," or overly warm.

Odds are also that the world of the second half of the twenty-first century will appear to us to be remarkably, filthily rich. The problems of measurement that make us unsure today how much richer we are than our predecessors of a century ago will strike with equal force, and some things that we now take for granted--large houses within less than half an hour's commuting distance of metropolitan centers, for example--may become extravagant luxuries. But by 2050 a quarter (rather than a twentieth) of people in the world will have a material standard of living higher than that of the average citizen of Canada or the United States today; and by 2100 it is a good bet that half the world will live better than the average citizen of Canada or the United States today.

Odds are also that the world in 2100 will be, relatively, at least as unequal a place as the world today: the gap between rich and poor may well be an even greater multiple of the poor's income. . To economists the growth of relative inequality in the world economy over the past century is astonishing, for the relative edge in productivity of the industrial core is due to its superior command of the technologies that have been invented since the start of the industrial revolution, and these technologies are by and large public goods open and accessible to all. Yet the relative technology gap between rich and poor continues to grow.

What remains to be determined is whether the largest income gaps are--as they are today--gaps between nations, or whether the "death of distance" will mean that gaps within nations and metropolitan areas will be of the same order of magnitude as gaps between national economies.

What also remains to be determined is the collective use humanity will make of its wealth, and how--or if--the upward surge in wealth will transform human nature. And whether this relatively optimistic scenario that I have painted will be overturned by one of the several possible catastrophes--nuclear war, bioterrorism, ecological distress--that may take place in the next century or so.

 

 

Population

By the middle of the twenty-first century the population explosion will--in all except a few scattered countries of the world--be over. The world's population will then be roughly stable at perhaps ten billion people. The principal economic problem of population facing nations will not be educating the young and equipping a growing labor force with the nation's current capital-per-worker stock, but will be caring for the old. But the "aging" of human society will not be very far advanced: even in the U.S. and Canada the population toward the end of the next century is likely to be no "older" than the population of a country like Japan or France today (in large part because of the likely continuation of large-scale immigration into North America: by world standards it is and is likely to remain a very nice place to live).

The population explosion has carried us from a human population of 500 million in 1500 (in rough Malthusian steady-state) to a population of 750 million in 1750 (after the spread of New World food crops like maize and the potato) to a population of 1.6 billion in 1900 (by which time the industrialization of agriculture meant that the logic of Malthus's Essay on Population no longer applied) to a population of 6 billion today. Yet we can predict with confidence that the world's population has at most one more doubling to go through in the next couple of centuries.

We can make this prediction with such confidence because there are few regularities in social science stronger than the demographic transition: once the level of a country's agricultural technology progresses far enough that child labor no longer enables a large augmentation of the family's production--or once women learn to read, the exact causation in unclear--the high birth rates of 40 to 50 per thousand that generate rates natural increase in excess of one percent per year come to an end. You still can get baby booms (like the post-Depression post-World War II generation) or baby busts (like the 1970s in the United States, or Italy or Russia today). But the "explosion" part is over.

Over the past decade rates of national increase all over the globe have come down more rapidly than most people would have dreamed possible two decades ago. Current projections see population growth in excess of two percent per year over the next generation in only a few countries, like Iraq, Tanzania, Pakistan, and Nigeria. China's population growth over the next generation is currently projected to be the same 0.7 percent per year as the United States--though the first comes from natural increase, and the second primarily through immigration.

These population growth forecasts are forecasts, and are subject to immense error. But as far as demography is concerned ever since 1800 the more industrialized country has shown the less the image of its own future. There is good reason to think that the world's population has at most one more doubling to undergo before the population explosion becomes a thing of the past.

The slowing of the world's population growth rate does not mean that the population of North America--America north of the Rio Grande, that is--will rapidly stabilize. North America is now and will in all probability remain in relative terms a very nice place to live. Lots of people will try to move here, and many of them will succeed: immigrant societies like the U.S. and Canada are unlikely to generate the strict ethnic definitions of the "nation" and the sharp divisions between "us" and "them" needed for anti-immigration policies to be nearly 100% effective. Thus it is hard to see a future--barring some catastrophe--in which the population of North America does not double over the next century.

Immigrants will be on balance relatively young, and will keep the age distribution from developing an old-age hump. We have no good reason to think that rates of increase of life expectancy in North American in the next century will be slower than they have been in the past generation. We have some good reason to think that rates of increase of life expectancy in North America in the past century will be faster than they have been in the past generation: we are on the threshold of a biomedical industrial revolution whose magnitude we cannot chart. Nevertheless, the United States and Canada in the middle of the next century are unlikely to be "older" societies than Japan and western European countries like France are today.

 

 

 

Wealth

The Twentieth Century

Standard estimates reported in the historical statistics compiled by national and international statistical agencies and academic scholars tell us that the rate of increase of economic output per capita in North America has averaged about 1.7 percent per year over the past century--a fivefold multiplication of material standards of living over the course of the past century.

But are these statistics accurate? William Nordhaus says not. He attempts to calculate the real price of illumination--not the price of a good, like, say, a light bulb, but the price of the service that the good is used for: casting light into dark corners. Nordhaus's conclusion is that traditional measures of economic growth that focus on falling prices of goods miss the extraordinary upward leaps in real incomes that take place whenever one good is succeeded by another.

The upshot is that if my wife and I go away to the beach at Monterey for the weekend, and if we by accident leave our normal daytime lights on, by the time we come back we will have blown the entire lighting budget of an early-nineteenth century American family--an early nineteenth-century American family that spent perhaps five percent of its cash income on illumination. And we will not notice our weekend splurge's effect on our PG&E bill. There is substantial evidence that we talk and think about the past century or two, we grossly underestimate the magnitude of the economic growth that went on and is still going on--even though our standard estimates of economic growth over the past century are quite high.

(Let me note, parenthetically, that the twentieth century's large upward jump of productivity and wealth has not been confined to the industrial core of the world economy. In 1987, 97 percent of households in Greece, not usually considered one of the world's industrial leaders, owned a television set. In Mexico in that same year there was one automobile for every sixteen people, one television for every eight, one telephone for every ten.)

We take the numbers from the historical statistics that tell us of a fivefold increase over the century--from annual output per worker of perhaps $12,000 in today's dollars in 1900 to annual output per worker of $60,000 today--to mean that their average material standard of living then was about equivalent to what our material standard of living now would be if we had $12,000 per year per worker to spend. But that is not the situation people were in back in the past. The indices have a hard time figuring out how to include inventions: new goods and new kinds of goods. Perhaps a better way of thinking about it is that their average material standard of living then was about what we could obtain now if we had $12,000 to spend but were required to spend it all on commodities that have been around for more than a century: no modern entertainment or communications or transportation technologies; no modern appliances; buildings, roads, bridges, and other infrastructure built using century-old technologies. $12,000 that must be spent exclusively on commodities that were produced in the late nineteenth-century is, for all of us, worth a lot less than $12,000 without this peculiar restriction.

You all know that the people who make the historical national income accounts estimates know that increasing technological capabilities have amplified our real productivity more than standard calculations suggest. They know that the area under the demand curve for the first few units produced may well be quite large, and that even relatively rapid inclusion of new goods and new kinds of goods in indices misses the initial surplus from invention. Griliches, Hausman--a large number of economists have produced estimates of benefits from new innovations that are so large I can scarcely credit them. Yet government statistical agencies are in the business of producing numbers that nearly everyone will accept. They cannot get into the business of making guesses, even informed guesses, if only because our political masters will then start thinking that their guesses should count too.

So how much are the central heating, electric lights, fluoridated toothpaste, electric toaster ovens, clothes-washing machines, dishwashers, synthetic fiber-blend clothes, radios, intercontinental telephones, xerox machines, notebook computers, automobiles, jet aircraft, internal combustion engine vehicles, and steel-framed skyscrapers that I used yesterday worth?

It is here that I think we can gain more insight by looking not at what economists look at but at what literary critics look at, in this case at one of the top ten best-selling novels of the 1890s, Looking Backward. Looking Backward is a wooden novel that sold extraordinary numbers of copies in the 1890s because it struck a utopian cord. In it the narrator, thrown forward in time from 1895 to 2000, is asked by his hosts in the year 2000--more than a century in his future--the question: "Would you like to hear some music?"

He expects his host to play the piano--a social accomplishment of upper-class women around 1900. To listen to music on demand then, you had to have in your house or nearby an instrument, and someone trained to play it. It would have cost the average worker some 2400 hours, roughly a year at a 50-hour workweek, to earn the money to buy a high-quality piano, and then there would be the expense and the time committed to piano lessons. Now the labor-time value of a Steinway piano has fallen in price from 2400 average worker-hours a century ago 1100 average worker-hours today. But if what you value is not the piano itself but the capability of listening to music at home, the cost has fallen from 2400 average worker-hours a century ago to 10 hours today (240 dollars for the boom-box plus 10 dollars for the CD).

Bellamy's protagonist is stupefied to find his host "merely touched one or two screws," and immediately the room was "filled with music; filled, not flooded, for, by some means, the volume of melody had been perfectly graduated to the size of the apartment. 'Grand!' I cried. 'Bach must be at the keys of that organ; but where is the organ?'"

He learns that his host has called the orchestra on the telephone: that in Bellamy's utopia you can dial up a live orchestra, and then put it on the speakerphone. You even have a choice of orchestras. There are four playing at any moment. Bellamy's protagonist then says that:

To Edward Bellamy--a self-described utopian visionary, a late-nineteenth century minister's son from western Massachusetts--a speakerphone that could connect to any of four orchestras is "the limit of human felicity."

We do not think of our modern ability to cheaply listen to high-fidelity go-anywhere listen-to-anything music as a remarkable or even a notable part of our economy. We do not daily give thanks for our cassette players and genuflect in front of our CD collections. We do not reflect that they have brought us to the limit of human felicity. Mostly, we do not think about it at all. One way to view it is that we are far beyond what the late nineteenth century would have seen as "the limit of human felicity"--at least as far as material commodity production is concerned.

So I find myself taking the Boskin Commission's estimate that inflation has been overstated and real growth understated by between 1 and 1.5 percent per year very seriously, in which case our best guess is that material standards of living have grown not sixfold but thirtyfold over the past century.

Note, however, that such enormous estimates of the increase in wealth over the twentieth century apply only to those of us in the middle class of developed industrial democracies, or above. The invention of the internet or the passenger jet doesn't add to your material well-being at all if you cannot afford it.

 

 

The Twenty-First Century

So if the twentieth century has seen an explosion of material wealth to such a degree that middle-class citizens of the industrial core at its end would not have traded places with anyone at its start and regarded themselves as better off (medical technology alone is decisive in my view), what can we expect in the twenty-first?

One answer is "more of the same." Information and communications technologies have in the past two decades vastly outstripped our expectations. The fly-by-wire systems of Airbus Industrie are today more advanced than the twenty-fourth century control systems imagined for the starship Enterprise. Biotechnology looks likely to do the same in the next two generations. Beyond that we do not know what our leading sectors will be, but we can guess that we will not forget how to invent.

A second answer--that favored by the late Herman Kahn in his The Next Two Hundred Years--was that the right analogy to the industrial revolution was the neolithic revolution: a burst of invention based on applying a few big ideas--agriculture, sheepherding, beer, mud-baked bricks, astronomy, thugs-with-spears--that eventually petered out. I think that this view misconceives what was most remarkable about the industrial revolution, and does not see the long-term significance of the invention of innovation. But this is a possibility. It suggests that invention should soon begin to approach some kind of asymptote.

And a third answer is that we can expect "more of the same," but that optimistic beliefs about the value of new goods that have been and will be invented are overestimates, and that standard measures of real GDP per capita are doing a pretty good job of capturing improvements in material standards of living. Call this the "conventional" view.

 

Assuming no further large increases in relative productivity inequality between nations, we can project forward world average annual GDP per capita from its current value of some $6000. Our "Nordhaus" estimate reaches $60,000 by the end of the next century. Our "Kahn" estimate reaches more than $25,000--even if invention comes to a near-stop, a lot of the world has immense room to grow. Our "conventional" estimate of world average GDP per capita reaches some $23,000: total factor productivity growth and capital accumulation work even without extra value from increases in ranges of choice and human capabilities.

Thus the odds are that the human race in the second half of the twenty-first century will appear to us to be remarkably rich. The problems of measurement that make us unsure today how much richer we are than our predecessors of a century ago will strike with equal force. Some things that we now take for granted--large houses within less than half an hour's commuting distance of metropolitan centers, for example--may become extravagant luxuries.

Nevertheless, the odds seem good that by 2050 a quarter of the people in the world (rather than the twentieth of today) will have a material standard of living higher than that of the average citizen of Canada or the United States today. By 2100 it is a good bet that half the world will live better than the average citizen of Canada or the United States today.

What will people do with this material prosperity? We can say with confidence that people have never had a problem finding things to spend their income on. The line between useful convenience and pointless luxury always seems to set in at about twice one's current income.

 

 

Distribution

The world in 2100 is likely to be rich. But it is also likely to be, relatively speaking, at least as unequal a place as the world today: the gap between rich and poor may well be an even greater multiple of the poor's income.

The industrial core of the world economy saw its level of material productivity and standards of living explode in the nineteenth and twentieth centuries. Elsewhere the growth of productivity levels and standards of living and the spread of industrial technologies was slower. As the industrialized economies grew while industrial technologies spread slowly elsewhere, the world became a more and more unequal place. As development economist Lant Pritchett puts it, the dominant feature of world economic history is "divergence, bigtime." In terms of relative incomes and productivity levels, the world today is more unequal and more divergent than ever before.

Those who live in relatively poor regions of the world today by and large have significantly higher material living standards than their predecessors who lived in those regions a century ago. But the relative gap vis-à-vis the industrial core has grown extraordinarily and extravagantly. In the first half of the nineteenth century the average inhabitant of an average country had perhaps one-half the material standard of living of a citizen of the world's leading industrial edge economy. Today the average inhabitant of an average country has only one-sixth the material standard of living and productivity level of the leading edge.

To economists the growth of relative inequality in the world economy over the past century is astonishing, for the relative edge in productivity of the industrial core is due to its superior command of the technologies that have been invented since the start of the industrial revolution, and these technologies are by and large public goods open and accessible to all. Yet the relative technology gap between rich and poor continues to yawn.

Moreover, it is not inevitable that there be such divergence. The United States--with its 14 to 25-fold increase in output per worker over the years since 1870--has not been the fastest-growing economy in the world. A number of other economies at different levels of industrialization, development, and material productivity a century ago have now converged, and their levels of productivity, economic structures, and standards of living are now very close to those of the United States. The six largest of these converging economies are today, with the United States, the so called Group-of-Seven, the G-7 economies whose leaders gather for annual summit meetings.

Up until 1990 at least, the dominant feature of their experience since World War II had been one of convergence--in technology, in industrial structure, in levels of productivity. Most of these economies were significantly poorer than the U.S. back in 1870 and even in 1950. The Japanese economy, for example, went from a level of output per capita equal to sixteen percent of the U.S. level in 1950 to 84 percent of the U.S. level in 1992--before falling steeply backwards during Japan's recent recession. Italian levels of GDP per capita have gone from 30 percent of the U.S. to 65 percent of the U.S. level; German levels have gone from 40 percent to 75 percent; Canadian levels have gone from 70 percent to 85 percent; and British levels of GDP per capita have gone from 60 to 70 percent of U.S. levels in the past half century.

 

By and large the economies that have converged are those that belong to the OECD: the Organization for Economic Cooperation and Development, which was started back in the first post-WWII years in the days of the Marshall Plan as a club of countries that received (or gave) Marshall Plan aid to help rebuild and reconstruct after World War II. Countries that received Marshall Plan aid adopted a common set of economic policies: large private sectors freed of government regulation of prices, investment with its direction determined by profit-seeking businesses, large social insurance systems to redistribute income, and governments committed to avoiding mass unemployment.

The original OECD members all wound up with mixed economies. In these, markets direct the flow of resources, while governments stabilize the economy, provide social-insurance safety nets, and encourage entrepreneurship and enterprise. They arrived at this institutional setup largely due to good luck, partly due to the Cold War, and partly as a result of post-World War II institutional reforms.

This post-World War II institutional configuration was essentially the price countries had to pay for receiving Marshall Plan aid. The U.S. executive was unwilling to send much aid to countries which it thought were likely to engage in destructive economic policies, largely because it did not believe that it could win funding from the Republican-dominated congress for a Marshall Plan that did not impose such strict conditionality upon recipients. By contrast, countries that were relatively rich after World War II but that did not adopt OECD-style institutional arrangements--like Argentina and Venezuela--have lost relative ground.

But the set of extraordinarily successful economies is not limited to the set of original OECD economies. The economies of the East Asian miracle have over the past two generations exhibited stronger growth than has ever before been seen anywhere in world history.

But "convergence" has been the exception. "Divergence" has been the rule.

 

 

World trade, migration, and flows of capital should all work to take resources and consumption goods from where they are cheap to where they are dear. As they travel with increasing speed and increasing volume as transportation and communication costs fall, these commodity and factor-of-production flows should erode differences in productivity and living standards between national economies.

Moreover, most of the edge in standards of living and productivity levels held by the industrial core is no one’s private property, but instead the common intellectual and scientific heritage of humankind. Hence every poor economy has an excellent opportunity to catch up with the rich by adopting and adapting from this open storehouse of modern machine technology.

We can view this particular glass either as half empty or as half full.

Half full is that much of the world has already made the transition to sustained economic growth. Most people today live in economies that, while far poorer than the leading-edge post-industrial nations of the world’s economic core, have successfully climbed onto the escalator of economic growth and thus the escalator to modernity. The economic transformation of most of the world is less than a century behind the economic transformation of the leading-edge economies--only an eyeblink behind from the perspective of the six millennia since the spread of agriculture out of the Middle East's Fertile Crescent.

Moreover, perhaps we can look forward to a future in which convergence of relative income levels will finally begin to take place. The bulk of humanity is now achieving material standards of living at which the demographic transition takes hold. As population growth rates in developing countries fall, their capital-output ratios will begin to rise quickly. And--with tolerable government, reasonable security of property, and better ways of achieving an education--their output per worker levels and material standards of living will converge to the world's leading edge.

The problem, however, is that all these predictions for convergence could have been made with equal confidence a century ago. The economic forces making for "convergence" in the world have been overwhelmed in the twentieth century by political and cultural forces--forces we do not well understand--making for "divergence." It would be pollyannaish indeed to predict that economists' forecasts that were false for the twentieth century will be true for the twenty-first. Look forward to a world in the next century as relatively unequal as the world of the twentieth.

What remains to be determined is whether the largest income gaps are--as they are today--gaps between nations, or whether the "death of distance" will mean that gaps within nations and metropolitan areas will be of the same order of magnitude as gaps between national economies.

 

 

 

Catastrophe

What also remains to be determined is whether this relatively optimistic scenario that I have painted will be overturned by one of the several possible catastrophes--nuclear war, bioterrorism, ecological distress--that may take place in the next century or so. Compared to previous centuries the twentieth century was one of enormous wealth. Yet humans made use of their productive power to turn much of Europe in the first half of the twentieth century and much of Asia in the first three quarters of the twentieth century into an abbatoir.

Large-scale thermonuclear war is a catastrophe that we hope we will avoid. But I would not bet that the twenty-first century will pass without at least one hydrogen bomb being exploded in anger. And the people who worry about such things worry as much about sect- or nation-sponsored bioterrorism as about thermonuclear war.

The last of the potential world-scale catastrophes that might afflict the twenty-first century--severe ecological degradation of one form or another--is not something that I can estimate the probability of, or have any special expertise in. Economic theory tells us that ecological problems will be worst where property rights are not well-defined: the CO2 content of the atmosphere, our fisheries, places on the tropical frontier where law enforcement is loose. Our lack of good models of climate and of ecological impact tells us that disaster scenarios must be taken seriously even where central projections show little effect. But throughout this whole area we know much more than we need to know.

 

 

 

Conclusion

With a little luck the world a century from now will not seem like an overly-crowded world, and will seem--from our perspective--like a very rich world. But will it be a happy world?

Economists like Paul Krugman and Richard Easterlin say "no." Krugman, for example, claims that he will Paul Krugman, for example, claims that he would would rather be middle-class in 1950 than working poor in 1990–even though the material standard of living of America’s working poor in 1990 is higher than that of America's middle class in 1950. Krugman says that he:

In other words, most of the purpose of our wealth is to be a set of counters we use to play our various status games. Richard Easterlin uses survey data to make the same point--that wealth does not, at least does not in international comparisons, appear to buy very much self-reported happiness.

Our successors are--barring catastrophe--likely to be wealthy, and to have command over nature and powers and capabilities that we will envy. But whether they will be happy or not is up to them.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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