Where has all the money gone?

Having read Tim Harford’s book “Adapt:Why success always starts with failure” referenced in the Neal Stephenson article in the last post, I got to thinking about where the West’s success came from, and why it has halted over the last century or so.

Looking at the example I used in the last post, in 1922 the farm labourer would have had about the same square footage of rented living space as today’s minimum wage earner, and would have brought up a family (In poverty but not destitution) on his wage. He wouldn’t have even dreamed of owning a car. Today’s minimum wage earner probably shares accommodation with another minimum wage earner, requires and receives considerable support from the state to bring up his family and probably has a car for getting to work.

I don’t mean to posit an argument for revolution, or to ignore the freedom from want and uncertainty or the improvements in healthcare we all now enjoy in the west. I do wonder though whether the farm labourer who might just have fought in the Great War, would endure the Great Depression and then maybe have to fight in the Second World War in 17 years, perhaps alongside his children, would think he had struck a poor bargain if he could put himself in the shoes of his equivalent in the modern age. Why have western societies that have achieved so much not progressed more? (As Kate Atkinson has it “Everything is improved but nothing gets better”).

I suspect though, that even his disappointment would pale beside that of a middle-class person of 1922, the sort of person who bought the Austin 7. He would see his modern equivalent living in a smaller house with his wife having to work. They would have labour saving devices but no hired help. They would have a warmer more comfortable house, with lots of leisure equipment and toys, but at the cost of a degree of indebtedness which would have been horrifying in 1922.

Further up the social scale, the merchant classes have seen their shops and businesses made obsolete by supermarkets, out of town superstores, and globalisation. At the top of the merchant classes instead of people who created and owned businesses, we have a whole group of Senior executives who didn’t create their businesses, risked none of their own money and yet pay themselves ever increasing sums because it is too difficult and not worth any individual’s time and energy to stop them (See Tim Harford’s book “The Logic of Life” to see why).

Western Governments have changed their perceived role from keeping the borders secure, the currency sound and enforcing the rule of law to one of providing an equitable allocation of wealth. This often involves opening the borders when cheap labour is helpful and debauching the currency with inflation every time government debt has got out of hand. It also means that they have to take the wealth from those people and businesses that produce it, count it, weigh it, add some they’ve borrowed, and then give it out again to wherever and whomever they imagine it should go. The purpose of all this is fairness.

This is a lot of work to take on and means that in a modern western economy with a welfare state the Government controls some 50% of national output. It also seems true that the welfare provision we have in the west may be incompatible with globalisation and the free movement of labour. Most welfare systems from health to unemployment benefits to pensions rely on all of us contributing all of our lives, and taking out in a fairly predictable and controlled manner. If sufficient of us take the free healthcare and education on offer when we are young then go abroad, we don’t contribute during our productive years. If we need more young people in the workforce and they come from abroad they come with housing and healthcare needs, as well as possibly educational needs for their children. They will possibly leave to go elsewhere before collecting a state pension here, but it may still be due to them. If we’re not careful this could all go to pigs and whistles and collapse, or worse become “unfair”.

So big government hasn’t much improved the lot of the farm labourer in our example, and any improvements he has got in his material well-being have come from the support he now gets from the Government. After 90 years of progress shouldn’t he be able to do things worth more than minimum wage and to get by without the Government providing part of his income? Being a much wealthier society should surely mean that we are all able to create and keep more wealth ourselves.

Most if not all of the improvements we have seen in national wealth seem to be being consumed by the mechanism which processes and reallocates wealth. A fine example of this can be seen in Magnus Mills excellent “Scheme for full employment” where a benevolent government scheme entails otherwise unemployed people being employed to drive delivery vans between depots. The vans are made to a special government design and are (natch)outdated, slow and cumbersome. The public don’t object to the increase in traffic and delays, since the aims of the scheme are so worthy. Those on the scheme, knowing that the only cargo they carry is spare parts for their vehicles become disenchanted and spend all their time thinking up wheezes to avoid their essentially pointless work, becoming increasingly bolshie. Eventually the scheme collapses under the weight of its own futility.

The Goon Show had a more pithy example in the machine that does the work of three men, but requires four men to operate.

We have seen the idea that Governments should take an even bigger hand in the running of the economy tested to destruction over the last century and how it impoverished and dehumanised the very people it was supposed to be all for. (Still viewable in North Korea for the time being).

However those who lived through the introduction of the welfare state did not rise up in protest for a return to unrestrained laissez-faire capitalism with no safety nets, so that probably wasn’t all that great either.

Can we get similar welfare benefits to what we have now but at significantly lower processing costs then? i.e. keep the wealth that actually leaves the government system at the same level but with a smaller public sector.

Can we organise our affairs so that all people at work are capable of generating sufficient wealth that their employer pays them sufficient to live on without state subsidy? Supply and demand being what it is, this probably means labour needs always to be in short supply. Can western economies free themselves from the sclerosis induced by supra national bodies enforcing ever greater convergence in the way they go about things, stifling innovation for consensus?

Perhaps western economies are at a fork in the road. On the one side continued globalisation, on the other a return to post war trading blocks and controls.

Globalisation is the end result of some 200 years of free market laissez-faire capitalism which has been the single most effective engine in history for bringing the world’s people out of poverty, as it continues to do. It does however set global manufacturing wages at the level of the lowest common denominator, the developing countries paying poor wages and not having yet developed expensive modern welfare infrastructures. Western economies which do not change will continue in relative, if not absolute, decline until some kind of new equilibrium is established. This decline will likely be accompanied by constant striving for further efficiency and transfers of resources from the state to the productive sector, with a lower level of overall welfare provision.

Attempts to establish trading blocks with strong boundaries as a rebuttal to progressive globalisation would allow western economies some breathing space but at the cost of millions in the less developed economies not being brought above subsistence levels of existence or worse.

If we want the benefits of globalisation for the world’s poor to be combined with a maintenance or improvement in western levels of welfare, history has some lessons. The west needs to comprise vigorously competing independent polities with strong laws, prosperous merchant classes and free international / global trade. It’s how we got where we are and it’s how others are prospering now.

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3 thoughts on “Where has all the money gone?”

  1. This is very attention-grabbing, You are an overly skilled blogger. I have joined your feed and stay up for searching for extra of your great post. Additionally, I’ve shared your site in my social networks!

  2. I do wonder whether the “instant gratification” factor is now playing a role. There is no hiding place any more for anyone seeking to control information beyond the limited number of places on earth where entry in the first place is difficult (such as North Korea). Two seconds after any event of significance, images of it – still and video – have been transmitted from phones owned by average individuals to places all around the world. Politicians need to respond to things in seconds and know that the public attention span has shortened in line with the shortened timeframe for access to information. Today’s news is obsolete far more quickly than it was, and of course, since this is a media dominated phenomenon, the overall quality of information provided has tended to the trivial (although we remember that the first image on television was a man sticking out his tongue – they knew even then…)

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