EconoMatters, Globalist Paper

Global Economics between Jerusalem and Athens

What is the ultimate destination of economic history?

Rodin's Le Penseur (Credit: Daniel Stockman - Wikimedia)

Takeaways


  • The Greek philosophers had no concept of history fulfilling itself, no history with a big “H.”
  • Neoclassical economists’ theoretical concept is as far from any real life experience as Marx’s Communism.
  • In good times, theories of ever increasing plenty replace economic Doomsday theories of stagnation.
  • Just like human history, economic history may not have an ultimate goal – or it may not be given to us to know it.

In a series of lectures given in Moscow in the early 1920s (later published under the title “The Meaning of History”), the Russian religious and political philosopher Nikolai Berdyaev outlined the two central approaches to the philosophy of history.

One was derived from Jewish scriptures and saw history as unfolding according to some grander plan. It led mankind (or originally the Jewish people) to an ultimate goal.

What initially was “God leading his people to the Promised Land” changed when it was exposed to the ideas of the Enlightenment. In the context of a benevolent “reason,” the goal became devising an ever more perfect social arrangement for all of mankind.

Cyclical Greeks

The other approach, according to Berdyaev, was associated with Greek philosophers. They had no concept of history fulfilling itself, no history with a big “H.” For them, history was just a repetition of patterns.

This cyclical view of history was exemplified by Plato’s discussion of the four political systems that follow each other in a never-ending cycle: timarchy (rule by the most ambitious), oligarchy, democracy and tyranny . There was evidently no ultimate goal to such circular history.

Enter economics

Economics, as an academic discipline, is a child of the Enlightenment. Adam Smith, one of its founders, was a directional, not a cyclical thinker.

Smith’s “philosophy,” his “The Wealth of Nations,” was the attainment of ever increasing wealth. He viewed that as possible, provided some basic principles were observed, the most famous being to provide for “peace, easy taxes and tolerable administration of justice.”

But it was David Ricardo, the late 18th- early 19th century British classical economist who, in defining his simple economic model, first conceived an explicit “end-of–the-world” scenario.

Ricardo foresaw (in the harmless sounding case of tariff rates on corn entering Britain not being abolished) a rather bleak future – diminishing profits, investments drying up and an economy coming to a standstill. His analysis foreshadowed a view of an economic system that leads us to an ultimate, and not very pleasant, destination.

Enter Marx

Of course, it was Karl Marx, more than anybody else who, in his stunning combination of chiliasm – a happy end state approaching paradise – and historical materialism, saw economic systems evolving according to his newly-discovered laws of motions towards an ultimate goal.

The goal was Communism, where everyone would contribute according to his or her abilities and receive according to their needs, the Nirvana of no exploitation and a high standard of living for everyone.

Moving closer to today, many neoclassical economists, among whom Robert Solow and Trevor Swann are perhaps the best known because of the eponymous growth model, did not have as grandiose theories of economic history.

In their models of economic progress, the key was the concept of “dynamic equilibrium” or “steady-state growth.” In this model, capital, labor and output grow in unison, at the same rate, forever.

It is through “steady state” that, for economists, history was unfolding itself. This was the neoclassicists’ Nirvana, perhaps a somewhat useful theoretical concept, but as far from any real life experience as Marx’s Communism. Economies were always in a “traverse” mode “tending” toward the steady state – but without ever reaching it.

In some cases, these “steady-states” are downright cheerful. Consider the assumption that, once we discover the elixir of economic growth, our standard of living will increase forever. Dry though economists may be, this happy state, repeated many times over, even has its poetic equivalent. It is the world of abundance and leisure, Baudelaire’s “luxe et volupté.”

Apostles of stagnation

In other cases, the ultimate destination of economic history is much bleaker. Generally, such bleakness appears particularly attractive at the times of crises. The idea of secular stagnation was expressed in the aftermath of the Great Depression by the 20th century American economist Alvin Hansen.

In our own days, Larry Summers has borrowed the terminology from Alvin Hansen and spoken of a new “secular stagnation.”

During the oil crises of the 1970s, another ultimate state of the world emerged – the one associated with the exhaustion of natural resources. “The Limits to Growth” was its most famous product.

Often, that is, once the immediate crisis is gone, it turns out that theories that were designed to show that the crisis times would last forever or get worse are quickly forgotten.

There is perhaps no better testimony of economists’ short memory than the fact that Larry Summers took exactly the same term (and largely even the idea) used by Hansen some 50 years ago without people really noticing.

But then, when the good times come, economic Doomsday theories of stagnation always have a way of being replaced by optimistic theories of ever-increasing plenty.

Living in cycles

To exit from this mood-driven morass, we could ask this question, going back to Berdyaev’s dichotomy: Would it not make more sense to think of economic processes as unfolding in cycles, without tending to an ultimate goal?

Take income inequality, which is a huge topic these days. Its main empirical and, to some extent, theoretical construct has been for years the Kuznets curve.

The Kuznets curve, defined in 1955 by the Russian-born American economist Simon Kuznets, charts the evolution of inequality. At first, inequality rises as economies move from rather egalitarian agricultural and traditional production to industrialization. Then, inequality goes down, as economies become rich and social transfer payments increase.

It is thought that the current period of rising inequality in the rich countries has proven the predictions of the Kuznets curve to be wrong. After all, were rich countries not supposed to become ever more equal?

However, an alternative explanation is possible. Kuznets might have been right in his argument on the movement of inequality for the period he observed. From around the end of the 19th century to the 1950s, inequality first went up – and then down.

Inequality: Up now, down again later on

Think of the Kuznets curve not as a one-shot development, but as one of the many such wave-like episodes of rising and ebbing inequality.

Economic history data for Spain from 1500-1850 and Northern Italy from 14th to 18th century, made available only recently in papers by Carlos Alvarez Nogas and Leandro Prados de la Escosura and Guido Alfani, imply that this might have been the case.

A very similar idea motivated Jan Luiten van Zanden, when studying episodes of economic growth prior to the Industrial Revolution to speak of a “super Kuznets curve.”

If inequality can ebb up (now) and down (until the 1980s), couldn’t the same cyclical reversal happen in the future? Thus, today’s upsurge in economic inequality could be regarded not too differently from the one driven by the first Industrial Revolution.

Technological change and globalization today might have produced a new Kuznets curve. Accordingly, it is its rising portion that we are riding on today.

Yet new elements (e.g., technological progress that works in favor of the poor and low-skilled or political demands for redistribution) may at some point overturn it. When that happens, we may once again begin to slide on the downward part of this new Kuznets curve and equality may be on the rise again.

Instead of one Kuznets’ mechanism that, according to its inventor, would lead us to a state of permanent low inequality, mankind may go through a series of repeated Kuznets curves.

This insight of cyclical economic development is not limited to the issue of inequality, crucial as it is. It may apply just as much to the study of depressions and expansions, crises and booms. They may succeed each other – without leading either to an ultimate doom or, on the bright end of the human aspiration, to Arcadia itself.

Just like human history, economic history may not have an ultimate goal — or it may not be given to us to know it.

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About Branko Milanovic

Branko Milanovic is the lead economist in the World Bank's Development Research Group and a visiting professor at the University of Maryland.

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