Online dialogue "Road to Utopia. An economic history of the 20th century".

Bradford DeLong and Eduardo Dávila

The Rafael del Pino Foundation organised the 23 March 2022the online dialogue "Road to Utopia. An economic history of the 20th century". in which the following participated James Bradford DeLong and Eduardo Dávila which was broadcast via www.frdelpino.es/canalfrp.

J. Bradford Delong is Professor of Economics at the University of California at Berkeley, a research associate at the National Bureau of Economic Research and a member of the Institute for New Economic Thinking. D. in economics from Harvard University, his fields of expertise are economic history, macroeconomics, economic growth and finance. DeLong has served as Assistant Secretary General of the Treasury Department in the Clinton Administration, and has been a visiting fellow at the Federal Reserve Bank of San Francisco. Along with Joseph Stiglitz and Aaron Edlin, DeLong is co-editor of The Economists' Voice and was also co-editor of the prestigious Economic Perspectives Magazine. According to the 2016 Research Papers in Economics ranking of economists, DeLong is the 740th most influential living economist in the world. He has a newsletter in which he analyses the current economic and political situation, and contributes a monthly column to Project Syndicate.

Eduardo Dávila is an Assistant Professor of Economics at Yale University and a Faculty Research Fellow at the NBER and a member of the Rafael del Pino Foundation's Association of Fellows of Excellence. Prior to joining Yale in 2018, he was an Adjunct Professor of Finance at the Stern School of Business at New York University. He was a recipient of the Top Finance Graduate award in 2014. His research interests lie at the intersection of financial economics and macroeconomics, with an emphasis on normative issues. Among other topics, he has recently studied the welfare implications of pecuniary externalities, the optimal determination of financial transaction taxes and corporate taxes, the optimal design of personal bankruptcy exemptions and deposit insurance schemes, the welfare costs of arbitrage violations, the optimal determination of optimal monetary policy in environments with rich individual heterogeneity, and different aspects of how financial markets aggregate information. He holds a degree in Economics from Pompeu Fabra University in Barcelona, and an MA and a PhD in Economics from Harvard University.

Summary:

On 23 March 2023, the Rafael del Pino Foundation organised an online conference by J. Bradford Delong, Professor of Economics at the University of California at Berkeley, entitled "Road to Utopia. An economic history of the 20th century", on the occasion of the publication of his book of the same name.

Before 1870, many people lived the same life of hardship as previous generations with no improvement in living standards, except for the elites, because there was Malthusian pressure. Efforts, where additional resources were available, were devoted to raising a child. Technology did not increase nutritional levels.

In 1870 the average human being lived in near abject poverty, spending half of their resources on getting 2,000 calories a day and almost the rest on having a place to shelter from the weather. The elites, in turn, played a power game to keep as much as they could. This is the situation until 1870.

Then everything changes. Technological inventions skyrocket, nature can be manipulated and this doubles with every generation. We have an increasingly productive economy. Humanity can count on a bigger economic pie so that everyone gets more of it, and we now have far more wealth than anyone could ever have imagined before, so we have a utopian society. But even though we already have such a big cake, our predecessors would look down on us and ask us why we have not shared this cake better, why we have not distributed the cake fairly so that people feel secure and healthy. We have failed to reallocate our wealth. This is the story of the 20th century.

Globalisation implies that there is only one narrative after 1870. We see an evolution not in isolation, but things that happen elsewhere have a minimal impact on other parts of the world. But from 1879 onwards this changes. Take Brazil. Its society was transformed at the end of the 19th century because the British took the rubber plants from Brazil and transplanted them to Asia, where British capital and machinery and Chinese workers harvested the rubber and got plantations that were three times more productive than Brazil's because they left Brazil's pests behind and the Chinese were paid half as much as the Brazilians. So half of Brazil's exports changed. Electricity, the internal combustion engine needed rubber. Everything changed because financiers 10,000 kilometres away decided to produce in Malaysia.

Then comes the technological cornucopia, which is the result of having modern science, experiments. But that doesn't achieve enough until 1870, when we get industrial laboratories, which revolutionise the discovery of new technologies. But that is not enough. We also get modern cooperation, which takes the results of modern laboratories and spreads them all over the world through factories all over the world. Globalisation, which also creates the world of communication and transport where it is easy and quick to know what is happening in other parts of the world, also comes from technology. This is what makes each new generation that passes on see a new economy. For the first time in history we are unlikely to be working in the same job as our grandparents because we have a new economy. So we have to rewrite the political, economic and social software to deal with the fact that now the reality is completely different, it is a technology-based, machine-based economy.

Doing this generation after generation is much more than humanity can do collectively without it all falling apart. And that happens on a small scale, on a large scale, and every time it all falls down we try to pick ourselves up and see how we can keep moving forward because we have impressive productivity. But it's very difficult to take advantage of it. If I was in the Kremlin and I had said that you have to convince the Ukrainians that they are not another country but part of Russia, they would spend money on cultural activities to convince them, I would not send tanks or killer robots. But the world is the world of tanks and killer robots.

Technology has helped us to develop rapidly, but it is outpacing us when it comes to dealing with the social consequences. Looking into the future, many economists say that the economy will grow more slowly and resources will have to be devoted to tackling the problems of global warming. It will be easier to reach agreements in this regard when there is surplus wealth that can be distributed.

My great-great-grandmother, whom I knew when I was very young, was born in 1877. She was very well-to-do and had a degree from Cambridge women's college. When my mother was pregnant with me, she asked her if she had lost a tooth during pregnancy because in her world it was taken for granted that there was so much calcium missing that even women of wealthier classes would lose a tooth or two because the baby would be consuming that calcium. If one in seven women die in childbirth, one in two children don't make it to the age of five, if you see that you go hungry and there are no resources for crops and for food, that was the typical life from the time of agriculture until 1870. But that is not the experience we have today, except for the four hundred million people living in poverty.

Imagine a feudal society in the year 1000. In the 1700s technology has advanced and there is an imperial trading society. But governments no longer have to rely on oath-takers for soldiers or sailors. Isabella the Catholic can tax the Mesta herdsmen and hire a sailor from Genoa, get Portuguese expertise to get the necessary ships, get hidalgos and send them to the West to see what happens because maybe Christopher Columbus was right and it turned out that he stumbled upon a continent. This is not something that an earlier European leader would have been able to do because you had to get people with skills from six or seven different places rather than depending on your feudal hierarchy. So these trading societies are very different and they evolve with absolutist government, democracy, the market economy, the idea that people are independent producers. There are seven hundred years for adjustment, which is achieved, but not easily. This gives rise to the ideas of classical liberalism. What remains of the feudal in government are obstacles to progress. We need a smaller state, free trade and commerce and people will do what they have to do, we will move away from absolutist governments to ones that guarantee property. This is the orientation. So we arrive at 1870-1914, after the emergence of the modern corporation.

From 1870 onwards, more progress was made in human welfare, in living standards, than ever before. But even so, this political and economic system inherited from the imperial society became more and more unsuitable from 1914 onwards, and we see different reactions from village to village. German farmers were used to selling wheat to Hamburg but suddenly they find that wheat coming from America or Russia is cheaper, so they start to think that the world and the world market is their enemy and their solution is for Germany to become a country that can dominate the world economy. Suddenly, German policy becomes one of taking over the coal and iron from the French, to show them that they are not the most powerful in Europe, and of colonising and exploiting Russia. So, after fifty years in which there had been fewer wars and we had focused on development, it becomes a situation where politicians say they are now going to fight for the survival of the nation, because that's the right thing to do, and things break down. After 1919, they try to put everything back together, but they fail miserably.

Everything could have been put back together again if there had been what there was before 1914 or after 1945. That is to say, a power that dominated, for which managing the world's economy was its business because it was so big that no other country could even consider it. But after 1918, Britain no longer has that power and the United States had neither the will nor the power to do so until the end of the Second World War. So attempts to rebuild the economy don't take off. Despite everything, there is still changing technology, there is disruption, but there is no growing wealth, which makes people angry and they turn to fascism, communism, nationalism, they turn to ultra-Catholicism. Anyway, there are many different movements, but they all say that society has to be totally reformed according to this plan, because if the market economy continues to rule us this is not going to work. Maybe it never worked, maybe it was always something we invented, a mirage. This is what happens from 1914 onwards.

In 1933 we are very lucky because Franklin D. Roosevelt is elected president of the United States. He is a very pragmatic person who says you have to do something and he tries everything. If you went into the Oval Office with a plausible idea, you came out of there with an agenda and the money to do something. You have to spend money to get the economy moving, Keynesian style. You have to give unemployment benefits. Roosevelt tries everything and reinforces what succeeds. When he dies, in the middle of the Second World War, there is a plan in place, which is a market economy with a state that guarantees social protection, with an advanced tax system and with a lot of desire to develop progress. This seems to work perfectly for thirty years after the Second World War. This is very important because you had to fit in with the system if you wanted to receive aid from the Marshall Plan. The United States wanted to achieve full employment and rapid growth worldwide because it was necessary to win the Cold War and because if the Cold War turned hot, it would be in Germany, not in the United States. In perspective it is a wonderful time when we almost got there.

The system collapsed because it failed the test of sustainability and because right now we don't have those industries with the large economies of scale and the workers that we had after the Second World War. Now it is different. Now we are based on info-biotechnology and the New Deal order needed that factory and blue-collar industry. It is useless to try to recover now what disappeared two generations ago. Just as it happened in the 1920s, when they wanted to put back together the framework they had inherited from a commercial imperialist society.

We can't go back to the old order, we don't have the big industries, we don't have the unions, we don't have the social bonds. Last week, Silicon Valley Bank was under-capitalised, with losses in its bond portfolio far greater than they should have been. If we are willing to be patient, SVB has not failed because the maturity value of Treasury bonds is nominal. If we had counted on the instrument launched by the Federal Reserve, we would not have cared because the SVB could have given everyone their money. The financial barons who have been working with the SVB for forty years could have said that the US government could help and they could have bought some shares, supported it because it is part of the community, which is very productive. But they didn't say that. They said we are all leaving and they left. On Monday morning they looked panicky. They also showed that all potential partners are not committed for the long term. It is a very interesting lesson about an economic system that does not have a community that believes in common interests, there is no solidarity to be able to cooperate and move forward. This erosion of trust is one reason why we can look with fear to the future.

Hayek says that bureaucracies are inefficient, planning systems are worse and what we need is for all of humanity to think to solve problems. And what we need is to look at market prices to match what is necessary, so that the market has the necessary supports. For people to feel responsible and for decisions to be made by people who have information and who have that sense of ownership to make decisions without having to rely on a bureaucrat who doesn't know what's going on. The market economy is perhaps the way to get what we need and we need it, no doubt. But Hayek says it is not fair because it gives to the people who are there at the time and in the place, but gives little to others. Hayek also says that, although it is not fair, if we try to tinker with it, it will fall apart.

Karl Polanyi says that the market economy is a dismal utopia. The only people he sees are the rich, because they are the only ones who can pay. Therefore, the only rights he recognises are property rights. But people will not put up with a society in which the only rights vindicated are property rights. So if we push too hard, society will explode. And it's not that Polanyi is very sure what the security of the allocation of rights is. He wishes that the market economy was embedded in a society where people look after each other. What Polanyi basically does is to warn us that if we push too hard, society breaks the market economy and then we have to pick up the pieces. In fact, most of political economy tries to recompose the institutional framework to cope with changing technology.

What Keynes does is to whine that we should let his students manage aggregate demand because we could achieve full employment, a good distribution of income, because these policies will boost the economy and the rich will only be able to earn their income by spending their capital. Keynes was basically right, but he was also wrong because these fifteen years of low interest rates have been a time of increasing economic inequality. Keynes did not foresee this. Moreover, Keynesianism requires expectations of stability that are undermined, which is the Federal Reserve's problem today.

The personal computer increased the productivity of white-collar workers by a factor of five, but also the amount of things you had to sort out. Individuals are much more productive: they can produce videos, they can write. But you have to be much more selective. Then the internet, the mobile phone that leads to being connected all the time to see what your friends are doing. This is what teenage girls used to do when they were on the phone in the 70s and 80s chatting with their friends. This transformation is fantastic stuff. Artificial intelligence is autocomplete. ChatGPT is not a lie, but it is not thinking. It completes something very complicated, it can complete a selection of books as long as the information on the internet is pretty good and that's not true by a long shot. We can see where it gets the information from, but it doesn't quite fit.

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The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.