Published by EH.NET (February 2010)

Lorenzo Pecchi and Gustavo Piga, editors, Revisiting Keynes: Economic Possibilities for Our Grandchildren. Cambridge, MA: MIT Press, 2008. xi + 215 pp. $30 (cloth), ISBN: 978-0-262-16249-4.

Reviewed for EH.NET by Linda K. Carter, Department of Economics, Baylor University.

John Maynard Keynes? short essay, ?Economic Possibilities for Our Grandchildren,? provides the focal point for this book. In that essay, published in 1931, Keynes looks past the ?economic pessimism? of the day and confirms his optimism regarding the long-term prospects of capitalism (p. 17). Despite the economic conditions surrounding him in the midst of a deep recession, he forecasted substantial increases in living standards by 2030 and provided an insightful, modern account of the determinants of the economic growth that was to occur in the interim. Keynes went on to predict that these increases in living standards would herald the end of the economic problem, that his grandchildren would live in a state of abundance, and that the future generations ? once free from the necessity to work and save ? would spend most of their time in leisure, finding ways to ?pluck the hour and the day virtuously and well? (p. 25). Following a brief introductory chapter and a reprint of Keynes? own essay, sixteen contributors, including several Nobel laureates in economics, each react to the essay.

An opening contribution by Fabrizio Zilibotti presents historical trends in economic growth and work patterns that bring some of the questions arising from Keynes? essay into sharper focus. In particular, he describes world growth patterns, with increases in GDP per capita well beyond Keynes? predictions, the uneven distribution of growth between OECD and non-OECD countries (an event not anticipated or discussed by Keynes), and the fact that solving the economic problem (and the adoption of the 15-hour work week Keynes predicted) is still a very distant prospect for much of the world. In the next chapter, although Joseph E. Stiglitz notes that Keynes grossly underestimated the economic growth that would occur in subsequent decades, he uses Keynes? essay as a springboard to consider why developed nations have not taken advantage of the substantial technological progress that has occurred to better our lives to a greater extent. He points toward apparent preferences for quantitative rather than qualitative consumption, the tendency for Americans to work so hard they scarcely have time to spend with family or enjoy other aspects of life, streams of made up ?needs? to pursue, and the deterioration of communal life. He then offers various hypotheses to explain why increases in wages might not lead to more leisure (as Keynes had assumed would happen) and might not even lead to increases in well-being. Then, in his essay, Robert Solow turns more fully to the question of distribution. He and many other contributors note how Keynes? concerns over the lack of purposeful occupation that will exist upon solving the economic problem seem meaningless today, given the vast majority of the world that is still poor and will remain so even in 2030. After giving some historical context for the rise of corporatism in the 1920s, in Chapter 5, Edmund S. Phelps argues that Keynes? corporatist dissatisfaction with the market and the failure to recognize the satisfaction that accompany economic pursuits (such as entrepreneurship, innovation, etc.) in a capitalist economy are the chief reasons Keynes? predictions about future work and leisure patterns were so wrong.

In his essay, Lee E. Ohanian takes a substantially different approach by sketching a model that generates predictions of declines in the work week strikingly similar to Keynes? predictions, which were stated with little explanation of the underlying theoretical basis. Ohanian points out, however, Keynes? social commentary and especially his predictions about the problems increased leisure would present for a society accustomed to working and saving were based on neither empirical observations nor theoretical foundations, despite related work by his contemporaries that drew strongly on both. In Chapter 7, Axel Leijonhufvud argues that Keynes? class, as well as the time period in which he lived, account for the strange contrasts between his predictions and the trends we ultimately observed. In the next chapter, Benjamin M. Friedman points out that ? aside from medical progress ? the material progress we have made over the past 75 years may or may not have made us ?better off in some fundamental sense? (p. 125). However, he also discusses the positive social and political externalities (such as greater tolerance and a deeper commitment to fairness and democracy), which accompany and reinforce growth. With more relevant timing than he could have realized at the time of writing, Friedman offers his own prediction for Keynes? ?grandchildren? arguing, ?If the current stagnation of incomes and living standards for the broad cross section of citizens were to continue, the likely consequence would rather be the re-emergence of familiar social, political and, yes, moral pathologies that have often afflicted economically stagnant societies in the past but have typically atrophied when a clear majority know that they are getting ahead and have confidence that their living standard will continue to advance? (p. 133).

In Chapter 9, Richard B. Freeman offers perspectives that contrast sharply with other contributors who view the observed increases in hours of work and decreases in leisure (despite growing income per capita) as negative or even pathological behavior. He argues that high returns to extra hours of work (e.g., due to incentives in the retirement system, low safety nets, and performance-related compensation), increased ease of working away from a traditional office setting, and the social benefits of work explain much of the observed positive relationship between hourly pay and hours worked. He argues this is not only reconcilable with standard models of economics, but also desirable since ?there is so much to learn and produce and improve? (p. 142). Although Keynes dismissed the importance of context in consumption, in Chapter 10, Robert H. Frank provides an interesting discussion of the importance of context that reaches beyond standard discussions of ?conspicuous consumption? or ?relative needs.? He also hypothesizes that ? if context matters more for demand of some goods than others ? free markets may not generate efficient outcomes.

In a chapter that economic historians will find disturbingly titled ?End of (Economic) History,? Jean-Paul Fitoussi implies that Keynes? essay presents further evidence of his anti-Semitic views. On a similar note, Michele Boldrin and David K. Levine provide a critical assessment of the ?classist, sexist, Eurocentric? viewpoint reflected in Keynes? essay, the disregard for the majority of the world living in poverty, and the ?sloppy description of human preferences? underlying his predictions (p. 173). Gary S. Becker and Luis Rayo detail many of the blindspots in Keynes? analysis that have become clear only with the benefit of hindsight. For example, they argue that Keynes failed to consider the differences in income effects of wage increases for individuals with all wealth in land, assets, etc. (as was the case with the idle rich of Keynes? era) and individuals with wealth in the form of human capital (as is true in recent decades). In Chapter 14, Leonardo Becchetti draws on the recent economics literature regarding happiness to highlight the part of Keynes? social commentary that was right, namely the increased value individuals would begin to place on (relatively scarce) immaterial goods as income continues to grow. Finally, a closing chapter by William J. Baumol highlights the ?value of erroneous forecasts? by emphasizing the tremendous progress we have made as a society in the past 75 years that is brought into bold relief against the underestimates of economic growth made by an incredibly optimistic individual and brilliant economist (p. 202).

In this review, I?ve focused on some of the unique (or especially thorough) discussions in each contribution, but ? as one might expect in a volume of responses to Keynes? brief essay ? there is a substantial amount of overlap between the chapters. And, it is far from surprising that some of the contributions are more intriguing and easier to follow than others. Each chapter, however, adds distinct perspectives on Keynes? work and the whole volume is certainly greater than the sum of the individual contributions. In reacting to Keynes? essay, several contributors echo the sentiment succinctly expressed by Fitoussi, ?What matters is not so much the way Keynes answers the questions he poses but the nature of the questions themselves? (p. 151). I would say the same about this book. Whether one agrees with some (or none) of the contributors? perspectives, economists ? or indeed any reader with an interest in thinking about catalysts for and impediments to human progress in the long run ? will enjoy pondering the questions each contributor poses while reflecting on Keynes? essay, as well as the arguments and answers outlined in each chapter. Economic historians, in particular, will appreciate many of the contributors? efforts to take seriously the historical, institutional, and personal context in which Keynes? penned his essay and to analyze his predictions within that context. The differences in the contributors? research backgrounds and disposition toward Keynesian ideas add richness to the analysis as they bring their own perspectives to bear on Keynes? work and most readers will likely agree that the book could not be more timely. As Keynes wrote while formulating the final draft of his essay, ?The fact is ? a fact not yet recognized by the great public ? that we are now in the depth of very severe international slump, a slump which will take its place in history amongst the most acute ever experienced? (Harrod 1972, p. 469, quoted on p. 2). Since this book went to press on the eve of the current recession, the contributors were not in a position to incorporate the events of the past two years in assessing the validity of Keynes? predictions or soundness of his arguments. As such, the evaluation of Keynes? work is undertaken through a longer-run perspective than would likely emerge in the current climate of uncertainty. This is perhaps a loss for us, however, since it would have been incredible to hear more from these contributors about the economic possibilities for our grandchildren in the midst of today?s widespread ?economic pessimism.?

Reference: Harrod, F. R. 1972. The Life of John Maynard Keynes. London: Macmillan.

Linda K. Carter is an Assistant Professor of Economics at Baylor University. Her current research examines the rise, diffusion, and impacts of evening schools for working children and immigrants in the late nineteenth-century United States.