Quarter 3, 1998
by J. Bradford De Long

The historian Felipe Fernandez-Armesto wrote in Millennium, his history of the past thousand years (a book big in scope) that he was haunted by an image: a museum in the far future in which a Crusader chain mail shirt shares a display case with a Coca-Cola can, both labeled "Second Millennium Artifacts." Let us adopt such a millennial perspective, for it may allow us to see more clearly what the history of our twentieth century has been.

From that perspective, the history of the twentieth century has been overwhelmingly economic history. The economy was the dominant arena of events, and economic changes were the driving force behind other changes, in a way rarely, if ever, seen before.

Before this century, the core of history, its most interesting and important parts, has been only tangentially related to economic factors. The historic factors. The history of the fourth, seventh, and sixteenth centuries is primarily religious: the consolidation of Christianity in the Roman Empire, the spread of Islam, the Protestant Reformation. The history of the fifteenth century is primarily cultural: in Europe the Renaissance, in China the cultural flourishing during the Ming Dynasty. The history of the late eighteenth and early nineteenth centuries is primarily political: the American and French Revolutions and their consequences. In these centuries, economic factors changed slowly. The structure and functioning of the economy at the end of any century was pretty close to what they had been at the beginning.

In the twentieth century things have been very different.

In the twentieth century the pace of economic change has been so great as to shake the rest of history to its foundations. For perhaps the first time, changes in the way we produce, distribute, and consume the necessities and conveniences of daily life have been history's driving force.

In the twentieth century, the material wealth of humankind has exploded beyond all previous imagining. We, at least those of us who belong to the upper middle class and live in the industrial core of the world economy, are now so much richer that the amount is nearly impossible to calculate.

In the twentieth century, the gulf between different economies has grown at an astonishingly rapid pace. Region by region and nation by nation, the world has become more unequal in material prosperity than ever before.

At the end of the twentieth century, the economic glass might be viewed as either half empty or half full. Half empty because we live in the most unequal world ever. Half full because much of the world has made the transition to sustained growth and has greater wealth than writers of previous centuries' Utopias could have possibly imagined.

AN EXPLOSION OF MATERIAL WEALTH

Between the invention of agriculture and the commercial revolution that marked the end of the Middle Ages, wealth and technology developed slowly indeed. Medieval historians tell of the centuries it took for key inventions like the watermill or the heavy plow to diffuse across the landscape. And, during this period, increases in technology led to increases in the population, with little if any appearing as improvements in the median standard of living.

Even the early years of the Industrial Revolution produced more "improvements" than "revolutions" in standards of living. With the railroad and the spinning and weaving of textiles as important exceptions, most innovations of that period were innovations in how goods were produced and transported, and in new kinds of capital, but not in consumer goods. Standards of living improved, but styles of life remained much the same. The eighteenth and nineteenth centuries saw a faster and different kind of change. For the first time, technological capability outran population growth and natural resource scarcity. By the last quarter of the nineteenth century, the typical inhabitant of the leading economies — a Briton, a Belgian, an American, or an Australian — had perhaps three times the standard of living of someone in a preindustrial economy.

Still, so slow was the pace of change that people, or at least aristocratic intellectuals, could think of their predecessors of a thousand years before as effectively their contemporaries. Marcus Tullius Cicero, a Roman aristocrat, author, and politician, might have felt more or less at home in the company of Thomas Jefferson. The plows were better in Jefferson's time. Sailing ships were much improved. But these might have been insufficient to create a sense of a qualitative change in the order of life for the elite. And being a slave of Jefferson was probably a lot like being a slave of Cicero.

So slow was the pace of change that intellectuals in the early nineteenth century debated whether the Industrial Revolution was worthwhile. Was it an improvement or a degeneration in the standard of living? And opinions were genuinely divided, with as optimistic a liberal as John Stuart Mill coming down on the side of the "pessimists" as late as the end of the 1840s. But, in the twentieth century, standards of living exploded. The growth in material wealth has been so great as to make it nearly impossible to measure.

Consider a sample of consumer goods available through Montgomery Ward in 1895, when a one-speed bicycle cost $65. Since then, the price of a bicycle measured in "nominal" dollars has more than doubled (as a result of inflation). But the bicycle today is much less expensive in terms of the measure that truly counts, its "real" price: the work and sweat needed to earn its cost. In 1895, it took perhaps 260 hours' worth of the average American worker's production to amass enough money to buy a one-speed bicycle. Today, an average American worker can buy one of higher quality for less than 8 hours' worth of production.

On the bicycle standard, measuring wealth by counting up how many bicycles it can buy, the average American worker today is 36 times richer than his or her counterpart was in 1895. Other commodities would tell a different story. An office chair has become 12.5 times cheaper in terms of the time it takes the average worker to produce enough to pay for it. A Steinway piano or an accordion is only twice as cheap. A silver teaspoon is 25 percent more expensive.

Thus, the answer to the question "How much wealthier are we today than our counterparts of a century ago?" depends on which commodities you view as important. For many personal services — having a butler to answer the door and polish your silver spoons — you would find little difference in average wealth between 1895 and 1990. An hour of a butler's time costs about the same then as now. But for mass-produced manufactured goods — like bicycles — we are wealthier by as much as 36 times.

THE RANGE OF GOODS AND SERVICES

Such calculations substantially understate the improvement in our material well-being, for they fail to consider the enormous expansion in the range of goods and services we can consume.

So when we are told that the standard of living in the United States in 1900 was roughly equal to $12,000 per worker per year (at today's prices), we tend to think about what we could buy today with $12,000. But that is not at all what material standards of living were like then. Imagine, instead, what our life would be if we had $12,000 to spend, but we were required to spend it all on commodities that were around in 1900: no fluoridated toothpaste, electric toaster ovens, clothes-washing machines, dishwashers, synthetic fiber-blend clothes, radios, plastic bottles, intercontinental telephones, xerox machines, notebook computers, automobiles, airplanes, or steel-framed skyscrapers. How would we calculate the impact on our living standards?

And here I believe we can gain insight by looking not at economic statistics, but at one of the best-selling novels of the 1890s, Looking Backward, by Edward Bellamy — a wooden, poorly-written book that sold in extraordinary numbers because it offered the late nineteenth century a vision of Utopia.

In Looking Backward, the narrator, who is living in the year 2000, is asked by his host: "Would you like to hear some music?"

He expects his host to play the piano — a social accomplishment of upper-class women of the time. Instead, the narrator is stupefied to find that, in the year 2000, his host need merely touch "one or two screws," and immediately the room was "filled with music; filled, not flooded, for, by some means, the volume of melody had been perfectly graduated to the size of the apartment. 'Grand!' he cries. 'Bach must be at the keys of that organ; but where is the organ?'"

His host has called the orchestra on the telephone; in fact he has a choice of orchestras, four playing at any moment. At the end of the nineteenth century, this was considered Utopia — the choice of four orchestras played through a speakerphone. To Bellamy's narrator, this was "the limit of human felicity already attained . . ." What if someone were to take him to Tower Records? Or Blockbuster Video? His heart would stop.

We do not think of our ability to listen to high-fidelity, go-anywhere, listen-to-anything music as remarkable. We do not daily give thanks for our cassette players and genuflect in front of our CD collections. We do not reflect that they have brought us to the limit of human felicity. We do not think about it at all.

This is the most important piece of the history of the twentieth century. In the twentieth century, the human race passed from the realm of necessity, where providing basic food, clothing, and shelter took up the lion's share of economic productive potential, to the realm of economic freedom: in which our collective production is largely made up of conveniences and luxuries.

A VAST AND GROWING ECONOMIC GULF

This upward jump in productivity and wealth has not been confined to the industrial core of the world economy. In 1987, about 97 percent of households in Greece owned a television set. In Mexico, there was one automobile for every sixteen people, one television for every eight, one telephone for every ten.

Nonetheless, while economies that were relatively rich at the start of the twentieth century have, by and large, seen their material wealth and prosperity explode, those nations and economies that were relatively poor have grown richer, but more slowly. A country that was 10 percent richer than another in 1870, was (on average) likely to be about 15 percent richer in 1995. A country that was 30 percent richer in 1870, was (on average) likely to be about 45 percent richer in 1995. Thus, the relative gulf between rich and poor economies has grown steadily over the past century.

The extraordinary trajectory of the United States is the most manifest example of a rich nation forging ahead. Between 1890 and 1930, a host of innovative technologies and business practices was adopted in the United States and nowhere else. Henry Ford's assembly lines in Detroit, and his mass production of the Model-T, are only the most prominent examples of these new methods of mass production and distribution. The fact that other industrial economies were unable to quickly follow gave the United States a level of industrial dominance that persists to this day.

At the other end of the wealth spectrum, it is hard to argue that the typical African is much better off in material terms than his or her counterpart of a generation ago.

Some have argued for the importance of culture. But the presence or absence of a "culture of entrepreneurship" is not usually a deciding factor. Throughout South Asia, for example, emigrants from China play key roles in trading and manufacturing, while China proper remains relatively poor. Consider also that some British observers in the early 1900s believed that the Japanese did not have and could not learn the patterns of behavior necessary for successful industrialization. And consider that one of the most far-sighted social scientists of the early twentieth century, the German sociologist Max Weber, argued that the Hindu, Buddhist, and Confucian traditions militated powerfully against the development of modern market economies and industrial societies in Asia. Yet, from today's vantage point, such confident predictions appear naïve.

Moreover, in the twentieth century, cultures have become more malleable and permeable than ever. Potential contacts among nations include an enormous number of tourist visits, acts of economic exchange, and cultural broadcasts. If there are strands in any culture that can encourage and support entrepreneurship (and there are such strands in every culture), then they have every prospect of being able to support a growing, industrializing economy. Entrepreneurship can flourish almost anywhere, if incentives and institutions are right.

However, this does suggest one decisive factor: Who controls the coercive powers of the state, and for what ends? Consider how countries fared under Communism. The location of the Iron Curtain is an historical accident: where Stalin's armies stopped after World War II, where Mao's armies stopped in the early 1950s, and where Giap's armies stopped in the mid 1970s. But the countries fortunate enough to lie outside the old Communist boundaries are vastly more prosperous today. Mexico is some eight times as wealthy as Cuba, an outcome few would have predicted before Castro seized power. Greece is some six and a half times as well off as Bulgaria. And Taiwan is nineteen times as well off as the Chinese mainland.

Governments that fostered market incentives have encouraged their economies to put resources to their most productive uses, whereas bureaucratic command economies exerted pressure to allocate resources following other logics. Moreover, market economies have prospered and grown when they were managed in the interests of the business class. Whenever a government has intervened to set prices and quantities in order to distribute income away from the productive and entrepreneurial classes (both current and prospective future members of the bourgeoisie), and toward urban consumers, bureaucrats, or small farmers, that nation's growth and prosperity have suffered.

VIRTUOUS AND VICIOUS SPIRALS

In the twentieth century, the persistence and increasing size of large gaps in productivity levels and living standards across nations seems bizarre. We can understand why preindustrial civilizations had different levels of prosperity. They had different exploitable natural resources, and the diffusion of new ideas and technology from one civilization to another could be slow.

But in the twentieth century, the principal producers of wealth are an economy's workers. And the major source of growth is the storehouse of technological capabilities invented since the beginning of the Industrial Revolution. This storehouse is no one's private property. Most of it is accessible to anyone who can read. With modern telecommunications, ideas can spread at the speed of light. And the benefits of taking advantage of this storehouse are immense.

So why do we see "divergence" instead of "convergence" in the relative wealth of nations? Even outside the Communist world, the wealthier countries have been able to maintain and even increase their lead, while countries that stumbled were likely to lag ever farther behind.

A large part of the answer is the existence of powerful virtuous and vicious spirals: If a country was doing well one period, it tended to do even better the next; but a country doing poorly saw its options — demographic, economic, and political — narrowing.

A richer country went through the demographic transition more rapidly. As wealth increased, parents became more likely to limit family size and concentrate their parental energies on raising a few children for whom they could provide ample nourishment and education, rather than on raising many children in the hope that a few would survive. Thus, a rich country found its birth rate shrinking and its rate of population growth slowing. The slower rate of population growth meant more investment could go to multiplying the stock of capital available to the average worker, and less had to go to merely equipping new workers with the country's average level of capital per worker.

A richer country could more easily afford to invest. Rich countries have adopted the technologies of the Industrial Revolution, whose principal focus is on how to make capital goods more cheaply. A small relative diversion of resources from today's consumption in a rich country can produce a large increment to the economy's productive capital stock.

Moreover, a richer country could maintain domestic peace and political stability more easily. A rapidly growing pie meant that politics could take the form of how to distribute the benefits from growth. And everyone — or almost everyone — could see that they were living significantly better than their parents, and that their children would live better still.

By contrast, in countries where growth was slow, politics tended to be more vicious. Enriching one group meant impoverishing another. The benefits from working for higher productivity seemed lower than the benefits from grabbing someone else's share of the pie. When economic growth is slow, productive entrepreneurship can seem less attractive than predatory entrepreneurship.

Moreover, a country in which growth was slow found its demographic transition delayed, its population growing rapidly, and thus its investment diverted away from deepening the capital stock at the disposal of the average worker. And in a slowly growing economy, it is hard to afford the capital goods that embody so much of modern machine technology. Capital goods cost more in less developed countries. A larger relative diversion of resources from current consumption is needed to produce even a small increment to the economy's productive capital stock.

Taken as a group, poor countries have not closed any of the gap relative to the world's industrial leaders since World War II. And this divergence in living standards and productivity levels will continue to grow. After all, the factors that have kept economic growth slow in today's poor countries are still operating today. What signs do we have that they will cease in the near future?

This is a source of great danger not just for developing countries, but for industrial nations as well. The world in the twenty-first century will be sufficiently interdependent — politically, militarily, ecologically — that passage to a truly humane world requires that we get there at roughly the same time.

CONCLUSION

The best way to tell the history of the twentieth century is as a story of liberty and prosperity, as a tale of partial escapes from (and at times and places the falls back down into) servitude and poverty. But its ending is not clear. History as it unfolds has no immanent logic: Nothing except our own and our descendants' efforts and struggles can give this particular grand narrative a happy rather than a tragic conclusion.

One of the glories of the history of the twentieth century is that, although it has an extremely depressing middle, it seems to be moving more toward a (relatively) happy ending than a tragic one. We live in a (relatively) free and prosperous country and, compared to the past, a relatively free and prosperous world. We are slouching toward Utopia.

The Success of Social Democracy

Despite failures in other spheres, twentieth-century governments have made a success of social democracy. The industrial market economies have created legal and institutional infrastructures that have allowed the private economy to flourish, while also building systems of "social insurance" to greatly diminish the vulnerability of individuals and families to individual and collective economic catastrophes. Social democracy has enabled stable democracy to coexist with incentives for entrepreneurship, investment, and enterprise.

In the United States today, social democracy comprises the interstate highway system, airport construction, air traffic control, the Coast Guard, the National Parks, government support for direct research and development through agencies like the National Institute of Standards and Technology, the National Oceanic and Atmospheric Administration, and the National Institutes of Health. It includes the antitrust lawyers of the Department of Justice and the Federal Trade Commission, the financial regulators in the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve System, and the Pension Benefit Guaranty Corporation.

It includes the National Labor Relations Board to regulate and guide the bargaining between workers and employers. It includes the promise by the federal government to insure small bank depositors against bank failures. It includes Social Security and all of its means-tested and non-means-tested cousins — Supplemental Security Income, Food Stamps, Temporary Assistance for Needy Families, and Head Start. It includes (with much less success) farm subsidy programs.

None of these programs would be seen as a proper use of the government by even a moderate classical liberal. None of them fit under the definition of the "night watchman" state. But over the twentieth century, these programs and analogs in other advanced industrial countries have been remarkably successful.

They have been remarkably successful politically. Voters distrust politicians who seek to cut back on the major programs of the social insurance state. Voters find taxes earmarked to support social insurance programs less distasteful than taxes that flow into general revenues.

These programs have also played a large role in drawing the fangs of potential revolutionary movements. The Marxist argument that a market economy cannot function without a grossly unequal and ever-worsening distribution of wealth has not survived the success of the social democratic safety net for the middle class. The ability of social democracies to deliver more-or-less constant economic growth together with a more-or-less stable relative distribution of wealth, has created a powerful consensus in favor of their current institutional setup.

Because most of the redistributions have occurred within the middle class, economists tend to assess these programs as having no positive effect — a mere churning of the income distribution. And they worry about any adverse incentives.

Yet, there is a sense in which economists' views are too narrow. For the underlying logic of social insurance is the political and cultural logic of universalism: Social insurance provides rights and services that are yours by virtue of your standing as a citizen, and voters are more likely to approve of such universal rights and services as just than they are to approve of welfare programs with a more limited scope.

Killing in the Name of Economics

It is not possible to write economic history without taking the sometimes bloody hands of twentieth-century governments into account. First, the possibility that the secret police will knock at your door and drag you off is a serious threat to your material well-being. Second, shooting and starvation were part of certain governments' "management" of the economy. They were tactics used to compel the people to perform service and labor as the government wished.

But, perhaps most important, the twentieth century is unique in that its wars, purges, massacres, and executions have been largely the result of economic ideologies. Before the twentieth century, people slaughtered each other over theology: eternal paradise or damnation. People slaughtered each other over power: who gets to be top dog and command the material resources of society. Only in the twentieth century have people killed each other on a large scale in disputes over the economic organization of society. The two most prominent examples: the Communist governments in Russia and China, which, according to the political scientist Rudolph Rummel, were responsible for the deaths of almost 100 million people.

Communism in Russia was born when the "Bolshevik" or majority faction of the Russian Social Democratic Party, led by Vladimir Lenin, seized power in a late-1917 coup from the government led by Kerensky. A brutal civil war followed that lasted three years.

When the war ended, Lenin began the task of eliminating capitalism. According to the Marxist theory that Lenin deeply believed, capitalism — private ownership of businesses and land, and private receipt of profits — was the source of inequality or exploitation. Marx believed in the labor theory of value: that human productive labor (but only "socially necessary" labor, only labor using techniques at the leading edge of technology) imbued a commodity with "value" by virtue of the social relationship between producer and consumer in the market economy.

All sources of income other than the direct payment to the production-line worker of the value of his production were immoral and constituted exploitation, including not only the return to investment and the rewards to entrepreneurship, but also the wages paid to those who distributed and marketed the product. Thus, it was not enough to simply nationalize all property and prevent the bourgeoisie from receiving interest and profits extracted from production-line workers. You also had to eliminate the market — because all intermediary profits from market exchange had their ultimate origin in value exploited from the toiling masses.

But, how then do you run industry and economic life? Lenin's answer was that you organize the economy like an army. Lenin had been impressed by what he saw of Germany's centrally directed war economy of World War I and tried to copy it.

How do you industrialize rapidly? Lenin's answer was to follow Marx's interpretation of how Britain industrialized — steal land from the peasantry, force them to migrate to the cities as a penniless urban working class, and use the resulting resources to build factories.

Thus, Lenin and his successors believed that in order to industrialize, the ruling Communists must wage economic war against Russia's peasants. Squeeze their standard of living to feed the growing industrial cities. Keep urban wages just high enough to provide migrants to the cities' jobs, but no higher. Every kopek that was not spent on consumption goods was a kopek that could go to building a new dam, a new railroad, or a new steel mill. And the more this generation sacrificed, the quicker utopia would be attained.

Great ruthlessness was exercised. And the dictator who won the struggle for power after Lenin's death — Josef Stalin — was even more brutal in pursuit of economic ideology. The story of Mao in China is similar to that of Stalin in Russia: The same ruthless commitment to remake society and preserve Communist Party rule, the same desire to override other social forces and centralize economic and social life into a near-military hierarchy.

J. Bradford De Long is Professor of Economics at the University of California at Berkeley, and is a Research Associate at the National Bureau of Economic Research. His book, Slouching Toward Utopia, on the history of the twentieth century, will be published before the end of the century.