The Bear’s Lair: The 1820s are more relevant than the 1950s

Many supporters of Donald Trump have expressed nostalgia for the 1950s, when large companies, strong unions and international competition that had been bombed flat guaranteed well-paid blue-collar jobs. Yet the current situation looks nothing like the 1950s. With robots, genetic engineering, self-driving vehicles, serious emerging market competition and debt defaults on the horizon, we are entering a new economic age, not yet christened, in which both jobs and policymaking are more uncertain than ever before. To me, the new age looks like Britain’s 1820s.

Economic policymaking in the 1950s was nice and easy. You knew who the major players were, and they told you what they wanted. Since What was Good for General Motors was Good for America that settled the question of what policy should be. Top rates of income tax could be kept high, because there was no point allowing the bureaucrats who rose to the top of large companies to enjoy Sultan-like lifestyles, or to encourage too much corporate jockeying for position, which created uncertainty.

Nobody made huge amounts of money after-tax, which meant there was no entrepreneurial capital to start new businesses, but what did you need new businesses for – we already had plenty of splendid businesses! If an innovation could improve the economy, Bell Labs or some other large company could be relied on to provide it, after conducting extensive tests as to what American consumers might want. As for corporate management, it knew to give way to union demands for better pay and pensions, because that kept the motor of America running, albeit at the cost of a little inflation.

As we now know, this business model was hopelessly unworkable in the long run, because it relied on the largest U.S. companies being hugely ahead of all international competition, and therefore able to pay their workers whatever they pleased. It was already developing weaknesses by 1960, the costs of the Vietnam War further reduced its competitiveness and the crisis of the early 1970s was its death-knell. After 1980, when the U.S. economy once again became competitive, many features of the comfortable 1950s system were abandoned. Certainly today, there is no question of going back to such a halcyon era. The 1950s, as a business, economic and social model, are thus useless. We should avoid that era’s key features rather than seeking to copy them.

Today’s economy is completely different from the highly deterministic 1950s. Robotics are being introduced daily into our manufacturing processes, and even to such staples of blue-collar employment as truck driving. The world is now a hyper-competitive place, with two vast new foreign competitors in China and India, which are getting their economic act together and bid fair to resume the places they held in 1700 as the #1 and #2 world economies.

Debt levels have soared in all sectors of the economy, with government leverage rising to record levels in several countries, some major Fortune 500 companies having bought back all their net worth, becoming infinitely leveraged, and consumers spending and borrowing like there is no tomorrow. Productivity growth rates have fallen catastrophically in the last decade, with no assurance that they will recover, and Professor Gordon claiming the age of productivity growth is over, with productivity flatlining by the end of the century.

These are existential threats to the system. You can also add the immense promise of genetic engineering, that will change the global economy in ways unimaginable today, and the new financial instrument of crypto-currencies, that is probably an immense bubble, but also over the longer term promises to overturn the current realities of monetary management – almost certainly to the global good, but doubtless causing pain along the way.

The world economy, taking a 20-year view, is in a state of exceptional flux. Even in the heyday of new technological advances, say the decade of the 1900s, the overall structure of the global economy was not changing much, and one could look forward with reasonable confidence. That is not the case today. Indeed, there has only been one decade in human history when the economic future was as uncertain as it is today – the British 1820s, or more precisely the decade 1815-25 after the Battle of Waterloo. (Other countries undergoing industrialization underwent its birth-pangs later, and thus had the British example to follow.)

It must be remembered that nothing like the Industrial Revolution, overturning all the assumptions about what output one could expect from a given level of inputs, had ever happened in human history. As for choosing the decade of its maximum disruption, before the Napoleonic Wars, industrialization’s impact was tiny, with only a few mine pumping engines testifying to the importance of non-animal power. During the wars, it remained small, and was overshadowed in policy circles by the need to win the war itself and the difficulties of financing it. International trade patterns and competition were also severely disrupted.

Then after 1815, industrialization began to expand rapidly, creating new forms of human settlement in the factory town and new industrial structures. By 1825, industrialization was in full swing and the first railways were being planned and financed, while economic output had expanded sharply as it had never done before. As with today’s crypto-currencies, new investment opportunities, publicly listed stocks and international bonds, were springing up, creating new economic risks, as the crash of December 1825 was to show.

Even though quantitatively the industrial expansion was much greater in later decades, and the major effects on consumers’ day-to-day lives did not appear until the railway network was constructed in 1830-45, the problems and opportunities of industrialization first became fully apparent in 1815-25. At that point, it was still not clear whether it was beneficial. Friedrich Engels claimed as late as 1844 that industrialization immiserated the working classes, and in its earliest years it was possible for Ned Ludd and Earl Stanhope, from opposite ends of the social spectrum, to claim that factory machinery destroyed jobs rather than creating them.

The policymakers of that 1815-25 decade were dealing with an unprecedented economic development, that had the potential of disrupting the British economy, perhaps sending it into the demographic trap of over-population and mass starvation that Thomas Malthus had forecast in 1798 – British population in the decade 1815-25 increased faster than ever before or since. They also had to deal with others of today’s problems, notably a towering government debt of around 250% of GDP from the Napoleonic Wars and earlier conflicts, paying interest on which ate up more than two thirds of annual budget revenues.

Finally, while Britain was the leading indeed only industrial power in 1815, its government debt left it burdened through heavy taxation by higher costs than most other countries. Indeed, the French economist Jean-Baptiste Say wrote in 1815 that Britain’s taxation burdens left its economy hopelessly uncompetitive against those of less debt-burdened Continental countries, once peace was fully restored. (Say was wrong, and it was Britain’s new industrialization that made him wrong, but if the greatest economist of the time blows that call, politicians can be forgiven for blowing it also!)

Historians of the British nineteenth century are full of effusive praise for William Gladstone, Chancellor of the Exchequer from 1853 and Prime Minister later in the century. But Gladstone took over when everything was running smoothly. The National Debt had halved in terms of GDP since 1815 (largely because GDP had more than doubled) the poverty and unrest of the 1840s was lifting swiftly with continued economic growth and no major wars were on the horizon. Everyone knew what industrialization was by then, and all were agreed of its obvious benefits.

Not only did Gladstone have an easy job, he messed it up. The Corn Laws repeal he had championed in 1846 destroyed British agriculture once transatlantic grain and meat supplies became readily available in the 1870s, while the unilateral free trade he championed, with the Cobden Treaty of 1860, allowed industry after industry developed by British entrepreneurs to be seized by American and German competitors.

Examining the genesis of industrialization in 1815-25 should increase our respect for the economic sophistication and sound management of Lord Liverpool and his government team, who managed the transitioning economy to a triumphant take-off, with declining debt and rapidly increasing national wealth. Our current transition is equally one where the future is exceptionally uncertain. Our economy is over-burdened by debt, new and powerful competitors have arisen, and nobody can be certain whether new technologies will transform people’s livelihoods or destroy the living standards of the American people.

Today’s economy requires economic policies and management of similar quality to that of 1815-25. It is by no means certain that we will find them.

(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.)