The Bear’s Lair: Will the 21st Century resemble the 16th?

According to global purchasing power parity GDP data developed by Angus Maddison and others, the 16th and 17th centuries were the last so far of very slow GDP growth per capita, with the century 1550-1650 probably showing a slight decline in living standards. When Maddison produced his estimates in 2004, it appeared that those days of declining living standards were over forever, and that the Industrial Revolution and succeeding technological revolutions would see us growing ever more prosperous. That assumption is now looking much more doubtful.

Barbara Tuchman in a 1989 book described the Fourteenth Century as “calamitous.” As in many areas (her analysis of the causes of World War I was wrong too) the celebrated liberal historian was in error. In reality, from the point of view of living standards, especially in Western Europe, the fourteenth century was an exceptionally favorable period. The Black Death wiped out a third of the population, relieving the overpopulation pressure on the land, and as a result Western European living standards sharply increased, in many areas reaching levels they would not touch again until the late nineteenth century. There was relatively little technological advance – only the first artillery, revolutionizing siege warfare, made much political or economic difference – but the massive retreat from the Malthusian limit on population was more powerful in raising living standards than any other event before the full Industrial Revolution.

The sixteenth and early seventeenth centuries saw the reverse of this phenomenon, as population again increased in both Europe and China. The 1550-1650 period almost certainly saw a decline in global living standards, albeit a modest one, before the quickening technological change and better governance after 1650 saw a return to growth (most change in living standards in this period occurred in Europe; China, India and Africa were static at around Malthusian subsistence levels.)

The 1550-1650 period saw technological change, but also a post-Reformation revival of war (which unlike pestilence and famine, involves wealth destruction as well as death) and a rapid growth in population that impoverished the working classes across Europe. The new North and South American colonies would develop high living standards after 1650, but in this period were embryonic in North America and exploitative resource extraction labor camps in Central and South America.

Gregory Clark, in “A Farewell to Alms” claims that all increases in living standards before 1800 were temporary or illusory, and that mankind remained at the bare Malthusian level throughout. He has to stretch history to an inordinate extent in an effort to justify this belief, claiming that Jane Austen’s contemporary Britons were no richer than the hunter-gatherers of 100,000 BC. I have discussed this fantasy at length in a previous column, suffice it to say that the best available evidence has working people of Jane Austen’s time enjoying between 4 and 8 times a subsistence income, with only disease (Clark, a Californian, claims the Britons of 1800 were uniquely deficient in hygiene) and marital restraint preventing the British population from increasing even faster than it did.

In any case, even Clark agrees that once the Industrial Revolution got going, mankind in general moved well ahead of Malthusian living standards, although even today isolated primitive tribes are still living at subsistence levels and constrained by Malthusian limits. For the rest of us, until 2000, living standards enjoyed a sustained and increasingly rapid increase.

This may now have changed. As is well known, median real incomes in the United States have declined quite substantially since the peak of 1999, with only the very rich (able to access cheap leverage) and the very highly skilled doing well. Part of that shift is inevitable, a consequence of the Internet and modern telecoms, which have made it much easier to construct global supply chains. In emerging markets, which have five sixths of the world’s population, living standards have risen very substantially since 1999; in some countries they have doubled.

If that were the only factor affecting the world economy, there would be little to worry about. Global sourcing has become cheaper and easier, but it hasn’t become infinitely cheap and easy. At some point, the arbitrage between Western and emerging markets labor costs would reach a new equilibrium, with the gap between U.S. living standards and those of well-run emerging markets being lower but not disappearing altogether because of inbuilt U.S. advantages of capital stock and high-end education. Meanwhile the Venezuelas and North Koreas of this world would stay poor until they mended their ways. Overall, the world would continue getting richer, and gradually low-skill Americans would begin again to share more fully in the increase in wealth.

However, there are several other factors at work, which suggest the malaise may spread beyond the American working class and affect living standards worldwide. One such factor is the gradual slowing in technological advance, highlighted by Robert J. Gordon in “The Rise and Fall of American Growth.” If Gordon is right, and U.S. productivity growth is to slow to zero by 2100, then it must follow that U.S. living standards must also slow commensurately. I am not entirely a believer in Gordon’s thesis, but I could certainly see growth momentum slowing from this cause alone.

As discussed in this column several times, productivity growth in the United States and other “funny money” economies has recently not merely followed Gordon’s trajectory, it has fallen off a cliff. On current, trends, living standards for advanced economies will advance no further and may well begin to regress (there are other reasons for their regression, as discussed below.) This dire productivity performance will last as long as do “funny money” policies, indeed it will probably intensify. Should the central banks of the world persist in forcing negative real interest rates on us for another decade, investment will become so poorly allocated that rich country living standards will start declining at an accelerating rate. Emerging market economies may continue healthy, but they will not continue to get richer ad infinitum if Western living standards decline. Eventually the death spiral will become global.

There is currently no obvious way in which “funny money” policies will be ditched, because the fanatic Keynesians that run the world’s central banks will never admit they are in error. If as is likely the Western economies plunge into a major recession, with a financial crash and debt defaults, the central bankers will undoubtedly double down on their error, pushing nominal interest rates sharply into negative territory. I had hoped that political change would bring monetary policy change, but even if Donald Trump is elected, he is as convinced as the maddest Keynesian of the joys of easy money, and will therefore change nothing. In other countries, British policy is as good as it’s going to get, EU policy is hopeless and Japan faces bankruptcy.

If no economic development can change policy, and no political development can change it this side of 2020, it will not change. So at least for the next half-decade, the West is condemned to living standards declining and investment misallocated into boondoggles.

We can also imagine technology as the foe rather than the friend of rising living standards. Notoriously, the move from hunter-gathering to agriculture depressed living standards, by allowing more people to congregate on a planet with finite food supplies and little technology (that effect had dissipated by Jane Austen’s time, indeed by the time of Pharaoh Amenhotep III, but it was real for 90,000 years or so.)

Similarly, in a world where investment is going into the wrong places, regulation is rife, and minimum wages and “guaranteed basic incomes” abound, we can imagine the robot revolution depressing living standards rather than raising them, by making the bottom half of the population unemployable and forced to subsist on the guaranteed basic income (which will arithmetically need to be far below the current Western median wage.)

By 2100, we may live in a world of universal robotization, in which a few “Eloi” have real jobs as lawyers, regulators, technologists, actors and sports stars, while the remaining brutish “Morlocks” live out their miserable lives on a bare subsistence provided by the state.

There are other factors tending to depress living standards. Regulation has soared since the financial crisis and shows no signs of going away. Even without the effect of “funny money” this would be depressing living standards, providing layer upon layer of interlocking barnacles that slow down the economic ship. The explosion of debt in the last two decades will eventually lead to mass bankruptcies and impoverishment. Japanese people even of the current generation are likely to find their retirements plunged into penury, but Westerners need not feel smug about this; their similar fate is a mere 15-20 years away.

But will we really be poorer as a whole in 2100 than we were in 2000? The argument above suggests that rich countries may very well be poorer in 2100 than in 2000. For the world as a whole, the argument is less clear; after all, global living standards have already increased by 20% in real terms in the 21st Century so far, according to World Bank data. Surely simple globalization and convergence must push emerging markets living standards up towards rich country living standards, so that even if rich countries are poorer in 2100 than they were in 2000, the world as a whole could be significantly richer?

Not necessarily, for two reasons. First, a world in which the rich countries are growing poorer and more indebted is one in which their electorates will lose their belief in free markets (which have not really governed the world economy since 1914 or so) and will vote for protectionists like Donald Trump or the various dozy socialists of Europe. At that point, the convergence and enrichment effect of globalization will come to a halt, as it did briefly in the 1930s, and poor countries will stop getting richer with any certainty. It doesn’t take much to imagine that the level of conflict would then increase, and, as remarked above, war does not merely remove population, it destroys wealth.

The other impoverishing effect will be from the age-old bugbear of Thomas Malthus: over-population. It appeared for a few brief years around 2000 that we might be conquering this problem, and that global population would peak somewhere this side of 2050 at a level below 9 billion. The latest U.N. projections suggest that this was over-optimistic; global population is projected to continue increasing through 2100, reaching 10.2 billion in that year, and with such nightmare conurbations as a Lagos of 115 million people.

With free trade, globalization and improving living standards, we could perhaps cope with this, safe in the knowledge that the population peak was only temporary, as poorer countries’ birthrates declined with increasing wealth. With a protectionist world, beset by financial crises and a West whose living standards were declining, there would be no such assurance. As poor countries remained poor for longer, their birth rates would stop declining, while modern medicine would ensure that most of those babies would survive to their miserable maturity.

Much of today’s world is too rich to suffer a Mathusian crisis, but it is certainly plausible that poor countries, badly run, blocked from Western markets and with uncontrollable population growth and increasingly pinched resources of water and food, could return to subsistence living standards fairly quickly. Then by exploding the number of truly impoverished, they would extinguish the hope of converging living standards that is sustaining today’s truly “emerging” markets. Needless to say, in such a world, the living standards of both rich and poor would be well below those of 2000 – the limited gains of 2000-2015 would have been wiped out.

This is a dystopia we can avoid. But it can be avoided only by free trade, free markets, sound money and tight limits on government size, regulation and entitlements. Those policies are not currently on offer anywhere; without them, a 2100 of increasingly impoverished dystopia is more than likely.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)