The Financial Times recently interviewed Daron Acemoglu:
The research shows that major technological disruption — such as the Industrial Revolution — can flatten wages for an entire class of working people. It also points to the distributional conflict and power dynamics inherent in it. “Yes, you got progress,” Acemoglu says, “but you also had costs that were huge and very long-lasting. A hundred years of much harsher conditions for working people, lower real wages, much worse health and living conditions, less autonomy, greater hierarchy. And the reason that we came out of it wasn’t some law of economics, but rather a grassroots social struggle in which unions, more progressive politics and, ultimately, better institutions played a key role — and a redirection of technological change away from pure automation also contributed importantly.”
This is not an accurate description of the Industrial Revolution. Technological progress greatly raised living standards, especially during the pivotal 19th century.
My research focused on the interwar period. During the late 1920s, the living standard of American blue-collar workers was far higher than 100 years earlier. And yet almost none of the “progressive” ideas advocated by leftists had been put in place. There was no minimum wage, no federal unemployment compensation, no OSHA, and labor unions were fairly weak. In 1929, the federal government spent only a bit over 3% of GDP.
When trying to understand living standards, it is more helpful to focus on output, not money. Billionaires have no wish to own a million pairs of pants, or a million cars, or a million refrigerators. As American industry began churning out vast quantities of consumer goods, it was almost inevitable that the living standard of the average American would rise sharply. If Apple and Samsung produce a billion phones, then lots of people will end up owning smartphones.
That’s not to say that income distribution plays no role in living standards. For any given average income, a more equal distribution of income will generally provide higher living standards. But the effects of distribution are completely dwarfed by the effects of technological progress on long run economic growth.
P.S. Reason magazine has an excellent article explaining how the Netherlands created modern capitalism, without a strong central government. This led to the emergence of the world’s first middle class. Most readers of this blog probably have a middle class lifestyle. If so, thank the Dutch.
READER COMMENTS
spencer
Jun 11 2023 at 4:26pm
It’s Marxist. In the circular flow of income, unless the upper income quintiles’ savings (the bourgeoisie), are expeditiously activated, i.e., put back to work, then a dampening economic impact is generated (secular stagnation of the proletariat).
Contrary to Dr. George Selgin, banks don’t lend deposits. Deposits are the result of lending/investing. Hence, all bank-held savings are lost to both consumption and investment, indeed to any payment or expenditure. It’s stock vs. flow.
Dr. Philip George’s equations corroborate this, in his: “The Riddle of Money Finally Solved” ( the ratio of M1 to the sum of 12 months savings ).
The activation of monetary savings, savings flowing through the nonbanks, e.g., MMMFs, increases the supply of loan funds, but not the supply of money, a velocity relationship.
That’s the impetus for the recent rally in stocks, which will likely reverse at the 4th seasonal inflection point.
spencer
Jun 11 2023 at 4:47pm
Nonfarm productivity has been sliding:
Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Workers (PRS85006092) | FRED | St. Louis Fed (stlouisfed.org)
2021-07-01 -3.0
2021-10-01 3.0
2022-01-01 -6.0
2022-04-01 -3.7
2022-07-01 1.2
2022-10-01 1.6
2023-01-01 -2.1
If DFI financing is for projects that increase productivity, then the initial inflationary effects of DFI financing are quickly overcome by improved technology: larger output, lower unit costs, or increased utility (higher quality).
All debt incurred which reduces unit costs of production and promotes productivity is obviously quite often “good” debt, regardless of how it is financed, with new money or existing savings.
“Capital expenditures, their level and mix, and applied innovation statistically prove to be the most important determinants of labor productivity growth.” Alan Greenspan’s: The Map and the Territory
Mark Z
Jun 11 2023 at 9:04pm
There may be a kernel of truth to the idea that, initially, rising output from the industrial revolution failed to lead to rising real wages – the so-called Engels Pause (though even this was largely due to the famine across northern Europe at the time) – but Acemoglu stretches it way too far. The Engels pause was undeniably over by the 1860s; you can look at real wages or life expectancy and clearly see them rising at an unprecedented rate in the UK by the 1860s.
Casual Observer
Jun 11 2023 at 10:52pm
@ Spencer I know this is a public site so all are free to comment. However, your comments tend to take away from the discussion. Frankly, the comments tend to come off a bit like the old comments from “Andrew FL”. I may be missing something since I am just a casual observer, but it seems you really like to comment on Dr. Sumner’s post, so can you respond to the post at hand or add commentary to expand/refute Dr. Sumner’s analysis. I am sure Dr. Sumner would follow up (as he tends to do). Thank you.
Andrew_FL
Jun 12 2023 at 6:41pm
Not a bit.
spencer
Jun 12 2023 at 9:35am
@ Casual Observer
Guilty as charged.
anon/portly
Jun 13 2023 at 11:58am
“Billionaires have no wish to own a million pairs of pants, or a million cars, or a million refrigerators.”
My favorite version of this is when people complain about inequality and the high levels of spending on health care in the US almost in the same breath, as if the top 1% are making all of those visits to the doctor.
Or similarly with high housing prices…. I don’t have an example at hand (so maybe I am making this up) but I think I’ve seen a few things that have had a bit of Yogi Berra logic to them, along the lines of “no one goes to that restaurant any more because it’s too crowded.”
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