Winter 1997
by J. Bradford De Long

Daniel Cohen has stuffed two very good books into a very small space: the 134 pages that make up The Misfortunes of Prosperity: An Introduction to Modern Political Economy. The first book is about the coming of the Industrial Revolution. The second discusses the long shadow cast by John Maynard Keynes on modern macroeconomic policy, and whether Keynesian doctrines can still deal with the world in which we find ourselves.

The result is a remarkably short and readable book. But it is not a book that should be read quickly. It wants to make you think, and you should read it slowly enough that it has time to do its task.

THE INDUSTRIAL REVOLUTION

Perhaps the best part of Cohen's first book is his observation that the Industrial Revolution was a great surprise. The classical economists -- even the relatively optimistic Adam Smith -- did not believe in economic growth. Malthus defined their worldview the best: They saw prosperity raising life expectancies and birth rates. But then the pressure of this burgeoning population, against our limited stock of natural resources, would bring the standard of living of the typical family back to bare subsistence. A small minority at the top of society might live very well indeed. The masses might live well during periods of "improvement," and progress in the useful arts might support a larger population on a given resource base. But the idea of rising living standards for all, over a period of centuries, would have struck them as perverse, bizarre, and impossible.

How different things look from today's vantage point. Cohen, focusing on France, reports that agricultural productivity leaped twelvefold in the thirty years after World War II, and the average French citizen today has something like sixteen times the purchasing power of the average French citizen of two centuries ago. And once countries industrialize, the rate of population growth falls. It is unclear whether the population of France in a century will be greater or less than it is today.

The most rapid rate of economic growth of this or any century came in what Jean Fourasti has termed those thirty "glorious" years that followed World War II. It was then, Cohen writes, that "modernity came to...French village[s] like a bolt of lightning....[The] remote [rural] parts of [western] Europe...went from the pre-industrial era to modernity in thirty years." This experience also brought an end to Marxism as an economic theory (as a political movement, it died in 1989): The claim that the wealth of the rich and the power of modern industry, in a market economy, could only flourish alongside the misery of the working class was shown to be absurd, as the working class became clearly unmiserable, bought automobiles, and moved to the suburbs.

It is a misfortune of our prosperity that we in the industrial West were so spoiled by the post-World War II boom that we are disappointed by the current, slower pace of economic growth. Any previous epoch would take the current rate of growth as a miracle.

While the reasons for the current slowdown are a mystery, some effects of the deceleration are clear. In the 1960s, governments were too optimistic about their ability to maintain the extremely rapid 1945 to 73 growth rate. And so they overpromised. Cohen's second book addresses the consequences of this overoptimism and overpromising.

THE SHADOW OF KEYNES

The economic problem of the Great Depression -- when John Maynard Keynes wrote his most influential works -- was mass unemployment. Keynes's solution was for the government to boost aggregate demand by spending money, which would then raise output and employment. Cohen's broader notion of "Keynesianism" is the set of public initiatives -- most prominently the great expansion of public social insurance programs that took place in the 1950s and 1960s -- which implemented Keynes's notion of high government spending as a sea anchor that keeps the economy from drifting into depression.

High unemployment is once again the primary economic problem in Europe. In Cohen's opinion, Europe again has high unemployment because it fears unemployment "less than the remedies that would have been necessary to contain it."

What about the traditional Keynesian demand-management remedy -- more government spending and lower interest rates? European governments -- and Cohen -- view these remedies as largely exhausted. Keynesianism succeeded in the post-World War II period, he argues, because countercyclic fiscal and monetary policies came as a surprise. After the first generation, however, individuals and businesses "learn to foil the effects of a government-induced boost to the economy by indexing their wages to inflation before the fact." So in Cohen's view, Keynesianism now generates stagflation -- unemployment and inflation; only one generation gets to use Keynesian policies.

The unemployment remedy that Cohen calls "ultra-liberal" -- using "liberal" in its nineteenth-century libertarian sense and as pursued in the United States --speeds the process of finding jobs because "those who have jobs are forced to compete with those who do not." One consequence has been great insecurity on the part of the employed; another is the steady downward pressure on wages that has led to widening income inequality.

The "ultra-corporatist" remedy, as pursued in Scandinavian social democracies, finds jobs for the unemployed by boosting public employment and spending large sums on reentry programs for the jobless.

The European Union is stuck in the middle, and Cohen sees no easy way out. A vigorous liberalizing campaign, waged on behalf of the unemployed, appears unlikely: "The war on unemployment is in the hands of governments which represent first and foremost the point of view of the people who have jobs and fear losing them." But Scandinavia's costly reentry programs must be paid for, either through higher taxes that threaten to slow economic growth or by crowding out other social benefits.

So Europe's reaction to the perceived failure of Keynesianism has been a return to monetarist orthodoxy and to a policy of economic austerity. Cohen thinks this shift is temporary. He doubts that orthodoxy can deal with a changing world, full of surprises, as well as Keynesian, ultra- liberal, or ultra-corporatist approaches.

Cohen sees on the horizon a more serious "second crisis of Keynesianism." Our social insurance institutions are commonly seen as a Keynesian prosperity-producing response to the hard economic times of the Great Depression. But causation runs the other way, Cohen argues; focusing on the great expansions of the 1950s and '60s, he claims "prosperity created Keynesianism." And for the social-insurance state to remain solvent, Cohen writes, the postwar growth spurt needed to continue indefinitely.

As the pace of economic progress has slowed, all industrialized nations have had to reconsider the size of these social insurance programs, and how they can be financed. The crisis in the United States is primarily one of funding federal health programs, with Social Security being a secondary problem. It is the reverse situation in Europe.

Cohen is quite pessimistic about the ability of governments to manage this crisis with their programs intact. The United States, after the overpromises of the 1980s -- lower taxes, faster growth, and no reduction in government spending -- has moved to the right. It has capped federal spending at one-fifth of national product and has begun the piece-by-piece dismantling of the social insurance state. The European Union has not yet decided how to deal with this "second crisis of Keynesianism." It is still overpromising.

The problems Cohen points to are serious and painful. But they must be placed in perspective. Europeans at the end of World War II feared a return to the Great Depression. They also feared another failure of democracy in Germany, the extension of Stalinism, and the United States turning Europe into a radioactive abattoir in its struggle with the Soviet Union.

Instead, things have gone surprisingly well. Governments have used Keynesian policies to manage their economies successfully long after the end of World War II. Our prospects for the future are dark only in the sense that the next generation appears unlikely to advance as fast as the previous two.

Perhaps our chief misfortune is that we had grown used to favorable surprises, so that their absence over the past generation has come as a somewhat unpleasant surprise. We can hope for more favorable surprises in the future -- that thirty years hence Cohen's worries will look as antiquated as those of people writing in the Great Depression. But for the present, we should take comfort that our misfortunes are truly the misfortunes of prosperity.

J. Bradford De Long teaches economics at the University of California at Berkeley.

Daniel Cohen
The Misfortunes of Prosperity: An Introduction to Modern Political Economy
Trans. Jacqueline Lindenfeld (from the French). An expanded and revised edition of Les Infortunes de la Prosperite (Julliard, 1994).
Cambridge, MA: MIT Press, 1995. $25.00

Too pessimistic

Cohen argues that keynesian stimulation -- via government spending or lower interest rates -- produces only inflation today. But this is so only if no extra workers are trained (as in Sweden) and eager (as in the United States) to compete for new jobs. It is also the case that worker retraining and extra labor-market competition will not cut unemployment if the Keynesian aggregate demand is not there to buy the goods the newly employed workers produce.

A two-handed grand bargain is needed to combat stagnation: The central bank reduces interest rates to stimulate demand while reforms to the social insurance state make work viable and attractive for the unemployed. This approach worked well enough in the United States to produce a relatively healthy economy by the mid 1990s. Compared to Europe, however, the bargain in the United States has not been grand but little: U.S. unemployment problems, for quite some time, have been significantly less than those seen in Europe.