A friend recently asked me an interesting question: “Why is it that practitioners of the dismal science are such incurable optimists?”
His sharp remark was primarily directed at staff economists in investment banks and multilateral agencies who seem to have realized a bit late in the day that the global economy is in a mess. They were writing sunny reports till very recently. And many of them still say in their reports that the global economy will bounce back after a few rough quarters—or, at worst, a couple of bad years.
The underlying assumption is that economies are destined to grow rapidly till the end of time. Any other future is too terrible to contemplate.
That was not how it started off. The pioneers of modern economics some two centuries ago did not have much belief in an economic version of the perpetual motion machine. Both Adam Smith and David Ricardo—two of the earliest names in the pantheon—believed that economies would inevitably stop growing and settle into a “stationary state”.
They came to the same conclusion from different directions. Smith said that the rate of business profit would keep falling because of competition, till investment stalled and the economy stopped growing. Ricardo believed that food prices would rise as a result of population growth, push up real wages and squeeze profits.
But John Stuart Mill put a neat twist in the tale. He believed that the stationary state would actually be a good place to live in, as there would be “less trampling, crushing, elbowing, and treading on each other’s heels” and individuals would focus on happiness and well-being.
These classical economists wrote at a time when sustained economic growth was a rarity. Economic historian Angus Maddison has showed us in his monumental work on incomes since the dawn of history that sustained economic growth is a relatively recent phenomenon, especially around the start of the 19th century. Average global incomes grew from $453 in AD 1000 to $615 in AD 1700, an average annual rate of 0.04%. Stationary states were the norm rather than the exception. That was before the rise of capitalism and the explosion of technological innovation made the world get used to high growth.
Fast forward to 1931: The world was stumbling into the Great Depression when John Maynard Keynes wrote his celebrated essay on “The Economic Possibilities for Our Grandchildren”. Keynes believed that the rich countries were tantalizingly close to solving the core economic problems. The magic of compound interest would allow citizens in these countries to stop worrying about where their next meal would come from. They would realize that “avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow... We shall honour those who can teach us to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin”.
This sounds like a defence of a hippie lifestyle. But the broader point is that some of the best practitioners of economics believed that growth was not inevitable and that a society without economic growth could be paradoxically liberating.
It is best to get a qualification in right away: These gentlemen were talking of countries that had achieved a certain standard of living and could reflect on the benefits of a life free of the pressure to perform. This in no way applies to a country such as ours where too many people go hungry to bed, too many women die during childbirth and too many children do not complete school.
And a second qualification: Smith, Ricardo, Mill and Keynes were speculating about societies where otherwise well-paid citizens had not got themselves under a mountain of consumer and mortgage debt.
Yet, their writings also have some contemporary relevance. And some of their logic may apply to those of us lucky enough to be relatively well off in a poor country. Looking at the silver lining that these economists have painted could then help clear some of the slowdown-induced stress clogging our minds right now.
What they are telling us is that a few years of modest salary hikes or a missed promotion is not really that much of a calamity. I am not sure the world is ready for a lotus-eaters’ paradise right now. But the very idea that there are other things you can do with your life in a stagnant economy—or even a slowing one—is a therapeutic thought.
We already see some of this in the reports of young professionals taking a break from the insanities of corporate life to work with non-governmental organizations. More of that could happen, as corporate animals slow and seek clarity in life.
Your comments are welcome at cafeeconomics@livemint.com