Optimism in a Terrible Economy from John Maynard Keynes

In 1930, John Maynard Keynes wrote a remarkable little essay called "Economic Possibilities for our Grandchildren." Stock markets have collapsed all over the world, but amidst the opening blasts of the Great Depression, Keynes dared to offered an optimistic view of where the standard of living was headed over time. The full essay, which is short and readable, is available here and there on the web. As the U.S. economy staggers through a time when recession technically ended in June 2009, but robust growth is nowhere in sight, it's intriguing to look at some snippets of his essay, and consider the modern echoes.
Here's Keynes:

"We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down --at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.

I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick...

At the same time technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history. In the United States factory output per head was 40 per cent greater in 1925 than in 1919. In Europe we are held back by temporary obstacles, but even so it is safe to say that technical efficiency is increasing by more than 1 per cent per annum compound. ...

For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come--namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict 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. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of afar greater progress still."

Of course, no economic moment is precisely the same as any other economic moment, but Keynes' perspective is worth reflecting on today. Of course, his essay was not about short-term economic optimism. Things can and often do get worse before they get better. He is writing about the long run.

To some, a prediction that the standard of life will be four to eight times as high in 100 years may seem foolhardy. But remember the arithmetic of compound growth. The old rule-of-thumb is that if you want to know how many years it will take something to double, take 72 and divide by the annual growth rate. Thus, if you have $100 and can get an 8% rate of return, your money will double in (roughly) 72/8=9 years.

If the standard of living grows at 2% per year on average over time, then it will double in 36 years, quadruple in 72 years, and octuple in 108 years--about eight-fold growth in a century. If the standard of living grows at 1.5% per year, then it will double in 72/1.5=48 years, and will roughly quadruple in a century. Thus, Keynes prediction in 1930, in the teeth of the Great Depression, was nonetheless for a long-run growth rate of 1.5-2% per year. It's a reasonable prediction for 2011, in the teeth of the Long Slump that has followed the Great Recession, as well.