Some Questions on the Intriguing Twentieth Century

In a 1930 essay titled “Economic Possibilities for our Grandchildren,” John Maynard Keynes predicted that in 100 years, “assuming no wars and no important increase in population,” the standard of living in “progressive countries” would be “between four and eight times as high” as it was then. His most optimistic scenario is being realized. In 2022, real GDP per capita (equivalent to income per capita) in the US has already been multiplied by 7.3, with eight years to go (see Bureau of Economic Analysis, National Income and Product Accounts, Table 7.1, revised March 30, 2023). Even if the rate of growth is only 1% per year between now and 2030, real GDP per capita will then be 7.9 times that of 1930.

Keynes also believed that with such high incomes, the economic scarcity problem of mankind would be solved and the question would be what to do with one’s free time. This part of his forecast has not lived well. Somewhat similarly, the 1960s and 1970s hippies thought they were reentering the Garden of Eden, if only capitalism could be destroyed. San Francisco’s Blue House, sung by Maxime Le Forestier, is a reminder of the dream. Keynes is more difficult to forgive.

The whole 20th century has seen an incredible increase in the standard of living. In America, real GDP per capita has grown at an annual (compounded) rate of 1.8% over that century, a higher growth than in the preceding century (see the semi-log graph below, where the slope of the curve indicates the rate of growth). And that was despite two world wars, the Great Depression (and a number of smaller ones), the New Deal, and a large growth in taxes, government expenditures, welfare programs, and regulations. In the United Kingdom, Keynes’s country, population has grown by 45%. Similar economic developments happened in Western Europe and in a few capitalist countries elsewhere.

The 20th century was an intriguing century. It is sometimes difficult to avoid the impression that Mussolini was correct to expect and hope that the 20th century would be “the century of the State.” How can we explain this coexistence of economic growth and advancing state intervention? Here are a few hypotheses.

One hypothesis (the data hypothesis) is that GDP data are not reliable or decisive. It is well known that GDP per capita does not measure welfare and that it may not even provide a satisfactory measure of the general standard of living. Imagine that you are living in a Middle East oil emirate where production responds to what the princes and their courts want, as opposed to generalized consumer sovereignty. This objection raises some useful caveats but, at least in Western countries, there is clearly a strong correlation between GDP per capita and the standard of living for ordinary individuals. Any passing knowledge of history should confirm that they are incredibly wealthier than even just a century ago.

Other explanatory hypotheses are needed. Many mainstream analysts support the benign-intervention hypothesis (sometimes called “state capacity“) according to which  government expenditures and taxes, the welfare state, or regulation are not as detrimental to prosperity as we thought, at least when these interventions are moderated by the rule of law and limited by constitutional constraints.  My own guess is that regulation and the multiplication of criminal laws and felonies put a strong brake to prosperity and individual opportunities, much more so than the welfare state (or some implementations of it).

A related hypothesis—the counterfactual hypothesis—is that economic growth would have been more rapid without state intervention. Economists John Dawson and John Seater argued that the American GDP per capita would be more than three times its current level if federal regulation had remained at its 1949 level. Even per capita, a growth rate of 1.8% is not that fantastic. The counterfactual hypothesis has some historical support: it is certainly not the most regulated countries that spearheaded the Industrial Revolution—the United Kingdom and the Low Countries, rapidly joined by the United States. A mere counterfactual would not be sufficient to explain the strange mixture that the 20th century was, but we do have theories strongly suggesting that state dirigisme hinders prosperity, which is a natural consequence of the efforts of free individuals to improve their situations.

Anther hypothesis along the same lines is that the social, economic, and political institutions that respect or promote individual liberty and free markets are very resilient once established (the resilient-freedom hypothesis). In this perspective, individual liberty is self-sustaining, at least up to a point. Economic growth continued and accelerated despite, not because, growing government intervention. This would be reassuring. Yet, we do not know if and where a breaking point exists at which prosperity would stop or reverse like in, say, Argentina or Venezuela. It is not clear either if or how liberty and prosperity, once lost, can be regained.