All Economics Is Local
Brad DeLong’s highly anticipated economic history of the twentieth century, Slouching Towards Utopia, begins with the reminder that economic growth is overwhelmingly a twentieth-century phenomenon. According to the best estimate, between the birth of Jesus and the beginning of the eighteenth century, the living standard of an average person rose by barely one third—1.5 percent every 100 years. Even after 1750, when the economy began appreciably expanding thanks to the steam engine, improvements in the welfare of a typical person remained paltry, scarcely doubling over 120 years in the global North as the benefits of economic expansion were matched by population growth. It was only in the late nineteenth century that the economy began growing notably faster than the population, allowing living standards to meaningfully increase.
As DeLong notes, in the 150 years since 1870, the world’s total economic output has increased by a factor of 50, and the average output per person has gone up almost ninefold. He argues that this quantum leap in the growth of productivity was brought about by three developments: “the coming of the industrial research lab, the modern corporation, and truly cheap ocean and land transport.” Collectively, DeLong writes, these led to a “technological cornucopia” that made “the world one global market economy.”
Yet Slouching Towards Utopia is not a book about these wellsprings of productivity growth. DeLong, an economic historian and professor at the University of California, Berkeley, has instead written a masterfully sweeping account of the ups and downs of the global economy on its century-and-a-half climb to prosperity. Almost half the book is devoted to all the things that seemed to go wrong during the climb, for the same century that brought unparalleled plenty for so many was also uniquely and violently unstable, characterized by wars, revolutions, economic depressions, financial crises, and stock market crashes—the “most terrible century in Western History,” according to political theorist Isaiah Berlin. It is these upheavals that give DeLong’s book so much of its excitement and drama.
Slouching Towards Utopia is as much about politics as economics, and DeLong obviously relishes telling the story. His distinctive voice, with its exuberant vocabulary and wonderful cadence, familiar to the many thousands who have been reading his widely followed economics blog for the last 20 years, makes the book a joy to read. Few economic historians have as fluent a grasp of political or military history or, more important, write as lucidly and with such great flair about these subjects.
For a book that begins discussing the glorious technological advances that the twentieth century delivered, Slouching Towards Utopia has a particularly downbeat view of the future. DeLong notes that over the last 15 years, productivity growth—usually defined as the growth in GDP per capita—has stalled. That’s especially true for the global North, but it’s also increasingly true for the global South, where the increase in GDP per capita (though still higher than in the global North) is clearly slowing down. The world, DeLong writes, has been convulsed by “waves of political and cultural anger from the masses of citizens, all upset in different ways and for different reasons at the failure of the system of the twentieth century to work for them as they thought that it should.” He therefore concludes that the circumstances that produced more than 100 years of extraordinary growth have come to an end.
The pessimism, however, may be unwarranted. One of the great virtues of Slouching Towards Utopia is the central importance that DeLong attaches to the role of human agency in reshaping political and economic events. He constantly reminds his readers that these events were not preordained. Nor, over the 150 years he chronicles, did growth happen in a straight line. Its pace varied dramatically from one decade to another, sometimes by a factor of four to one. Decades like the current one, when economic growth faltered and the future looked similarly grim, were followed by a rebound and a new boom. It would therefore be premature to conclude that the present slowdown means the era of growth is truly done.
The twentieth-century expansion in the global economy can be broken down into four great waves, alternating periods of 30 to 50 years during which productivity growth accelerated and then decelerated. The first such wave, from 1870 to 1913, was perhaps the most remarkable. In a stark break with the past, total output in the West tripled, and standards of living doubled. DeLong, quoting the economist John Maynard Keynes, describes it as an “economic El Dorado.”
That “golden age,” however, was shattered by the onset of World War I, which DeLong sees as the result of an irrational collective spasm of nationalism. In the period following the war, from 1919 to 1938, growth in the heart of the global North—Canada, France, Germany, Japan, Italy, the United Kingdom, and the United States—slowed to half the pace of the previous wave, thanks in part to the Great Depression, making it seem as if the economic machine powering the whole Western enterprise had started to wobble and was perhaps irretrievably broken. It is not a coincidence that this period also saw intense political turmoil—multiple revolutions, a second world war—that proved to be a near-death experience for capitalism. It was a powerful reminder that the global North’s upward march and economic success were not predetermined.
But the Allied victory ushered in the third wave, lasting from 1945 to 1973. It was another golden era, during which the world economy once again leaped ahead at an unprecedented pace. Economic output nearly quadrupled. Standards of living in Canada, France, Germany, Japan, Italy, and the United States almost tripled.
The West’s twentieth-century economic success was not predetermined.
Finally, in 1973, the last wave arrived. As with the interwar years, it was one of slowdowns. Productivity growth in the global North went from three percent a year to half that, and inequality began rising again as the paychecks of the middle and working classes stagnated. In DeLong’s view, the productivity slowdown was in part caused by the need to retool advanced economies to be more energy efficient after the sharp jump in energy prices. But as he confesses, the ultimate reasons for this sharp slowdown remain “a mystery even today.”
DeLong isn’t the first person to suggest that the modern global economy is subject to 30- to 50-year cycles—decades of good years followed by decades of lean ones. It was first popularized during the 1930s by the great Harvard economist Joseph Schumpeter. Schumpeter, in turn, got it from the obscure Soviet economist Nikolai Kondratiev, who identified these waves in the 1920s. (Kondratiev eventually fell afoul of the Stalinist regime and was executed for failing to wholeheartedly embrace the Marxist-Leninist doctrine that capitalism was inexorably doomed.) Schumpeter attributed these waves to the ebb and flow of investment associated with innovation and the introduction of new technology. But he was never able to produce a satisfactory account of why technological innovation came in historical bunches or why the up-and-down cycles came so regularly.
DeLong does not fully dismiss the Schumpeterian idea that bursts of technological innovation lie behind these decadelong phases. He argues, for example, that the slowdown in productivity growth after 1973 was in part because the world was “running out of the backlog stock of undeployed useful ideas that had been discovered and partially developed,” especially after Japan and Western Europe’s postwar catch-up. But for the most part, he attributes these cycles to the global economy being randomly buffeted and thrown off course by unpredictable external shocks—such as a cataclysmic war in 1914 or the massive rise in the price of energy in the early 1970s—and to the dysfunctional political response to these jolts.
Slouching Towards Utopia is concerned with more than just economic cycles. Onto these four periods, DeLong superimposes waves of a wholly different nature: ideas. The twentieth century, he posits, was the battleground between two opposing sets of doctrines—one arguing that unfettered free markets were best at generating economic expansion and the other emphasizing that markets needed regulation and state spending to generate fair and just growth. He calls the tug of war between these two ideologies the “grand narrative” of his book.
It is certainly a recurring theme, a sort of leitmotif, one that DeLong traces to the writings of two men both born in late-nineteenth-century Vienna. One was Friedrich Hayek, who attributed the leap in productivity during the nineteenth century to governments giving unregulated markets full play. The other was Karl Polanyi, who thought that free-market capitalism was a massively disruptive force that upended traditional forms of social protection. Polanyi still saw capitalism as a positive, but he argued that to protect groups from the disruptions, governments would have to temper its effects.
In DeLong’s account, one or the other of these ideologies has been ascendant at various points. During the first wave, free market ideas almost completely dominated the intellectual climate. But the dramatic widening of the franchise following World War I and the extensive social and economic changes that came with it meant that unregulated capitalism was no longer sustainable. Questions of economic justice rose to the fore, especially when Western economies collapsed during the Great Depression. Ideologies such as socialism, fascism, and communism all gained new adherents during the interwar years.
All these doctrines proved to be failures. But it was only after World War II that Western economies finally hit upon a model capable of both producing high growth and sharing the fruits of that prosperity more widely. They did so by preserving markets while dramatically expanding the role of government in regulating capitalism to avoid another Great Depression and establishing strong social safety nets—in DeLong’s memorable phrase, “a shotgun marriage” between Hayek and Polanyi. It was a paradigm that would produce a sort of zenith for Western capitalism.
Then, in the mid-1970s, slowdowns pushed Western policymakers to reconsider their economic philosophy. Almost every major capitalist economy responded with what DeLong calls the neoliberal turn: radically shifting to more market-oriented policies and jettisoning the hybrid model that had worked so well for a whole generation. The politicians were not entirely misguided in making this call. Although the new menu of policies—freeing up labor markets, deregulating industries, privatizing public services, and cutting taxes—did not initially succeed in reversing the slowdown in productivity, by the late 1990s, the change had actually begun to reap some benefits. There was a nearly decade-long revival in productivity growth in the early years of the twenty-first century.
But the success was cut short when the global financial crisis hit in 2008. Unlike after the Great Depression, policymakers did not follow it with New Deal–style reforms to curb the influence of markets. Instead, most countries made the puzzling decision to stick with neoliberal, market-friendly policies, largely, in DeLong’s view, because the model’s major beneficiaries—the rich and the superrich—had come to dominate Western political discourse, especially in the United States. Nevertheless, there are signs that the continued embrace of neoliberalism may end. A backlash against free-trade policies both from the nationalist right, which resents the rise of China, and from the left, which wants to temper trade’s effect on the working class, has led many Western states to turn away from embracing unregulated free markets.
Viewing the twentieth century through the prism of ideological and growth cycles is an illuminating way of understanding recent history. It shows that the rate of productivity growth is more than just an economic statistic. It is a measure of the vitality of a society, with a pervasive impact on so many other economic variables— wages, investment rates, the stock market, and public spending that is possible, to name just a few. Changes in GDP per capita therefore have the power to define the ethos of an entire generation or even a whole era.
The problem is that for all the importance of increased productivity, economists still don’t have a good handle on what drives it. Hayek, for example, may have been right that pro-market policies are necessary for strong growth. But it is clear that by themselves, they are not enough. Otherwise, the last half century—when pro-market ideas have overwhelmingly dominated politics— would not have coincided with a sharp economic slowdown. Similarly, economics has a long tradition of positing a fundamental tradeoff between policies that seek to maximize economic growth with those that seek a more equitable distribution of income. Yet the years from 1945 to 1973 resulted in both the twentieth century’s strongest period of growth and its biggest improvements in the distribution of income; the so-called tradeoff between efficiency and equity thus seems to dissolve when viewed through the wider lens of history. This uncertainty means that any account that puts productivity growth on center stage—including DeLong’s—has a gaping hole.
But Slouching Towards Utopia is, ultimately, not a prescriptive book. It is a work of narrative history, with all the ambiguities and contingencies that make any full account of the past so rich—and with a special emphasis on the choices that key political actors make in shaping the trajectory of the future.
DeLong’s emphasis on human agency is most apparent in his descriptions of how the United States behaved after World War I and World War II. He draws heavily on the writings of his old teacher Charles Kindleberger, a professor of economics at the Massachusetts Institute of Technology, who argued that a well-functioning global economy required one country to act as the hegemon, serving as the supplier of capital of last resort during crises and the economic locomotive for the world. Before World War I, the United Kingdom held this role. Left nearly bankrupt by the conflict, however, it was unable to fulfill that function. The mantle of leadership should have passed to the United States at that point, but Washington, dominated by isolationists, was too parochial and insular to seize its position. The result was 30 years of global economic turmoil. After World War II, by contrast, U.S. policymakers fully embraced their country’s role as hegemon. As DeLong notes, the result was 30 years of high and stable growth across the West.
DeLong also remarks on the astonishing speed with which free-market beliefs came to dominate the economic discourse in the late 1970s and 1980s—and, with it, policymaking. Neoliberalism succeeded undoubtedly because these theories had been incubating for over a quarter century in circles led by the economist Milton Friedman at the University of Chicago. DeLong speculates almost wistfully about what might have happened if there had been an equally well-prepared ideological vanguard on the social democratic side. “Might social democracy have survived, regrouped, and staggered onward?” he asks. “Here again is a place where a great deal of the course of history might, or might not, have evolved differently had a relatively small number of influential groups of people thought different thoughts.”
Given this emphasis on agency, one would not expect Slouching Towards Utopia to end on the gloomy note that it does. Yet in the final chapters, DeLong suggests that statesmen will not again be able to seriously reshape economic history. He gives a litany of factors that all point to a somber future: the continued slide in productivity since the global financial crisis, stalling globalization, eroding confidence in U.S. leadership following the wars in Afghanistan and Iraq, the failure of Western policies to restore full employment, and the inability of the world to take needed collective action to deal with global warming. He goes so far as to proclaim that the long march upward in fact ended in 2010, the year when it became apparent that the world’s recovery from the Great Recession would be disappointingly anemic.
There is no hint, however, that DeLong believes that the fall in productivity growth is somehow permanent because humans have lost their ability to find creative technological solutions to problems. Instead, his pessimism stems from the dysfunctional global political climate. The failure of neoliberalism to revive growth in the wake of the Great Recession and ever-increasing levels of inequality are fueling the sort of toxic combination, albeit in milder form, of the political populism and xenophobia that poisoned the world in the 1930s. He fears that society may be in for a period comparable to the interwar years, when growth slowed because of dangerous political instability.
The interwar period was also the last time that global economic leadership made a tumultuous switch, from the United Kingdom to the United States. Today, the world is in the middle of a comparable shift in the economic landscape. During most of the twentieth century, the global South represented less than a third of the world economy. It is what allowed DeLong, in Slouching Towards Utopia, to focus unapologetically on the West and largely ignore the rest of the world. But with the remarkable growth of China, India, and other Asian economies over the last quarter century, the role of the global South in the world has been transformed—it now accounts for close to 60 percent of humanity’s economic output. The global North, headed by the United States, can no longer act on the assumption that it is in charge.
The global North can no longer assume that it is in charge.
The wider lesson of DeLong’s sweeping history, however, has to be that one should be wary of making categorical pronouncements about the future. The interwar period and subsequent, cataclysmic conflict were not, after all, the end of rapid growth. In 1945, with Europe in rubble, few experts foresaw the extraordinary transformation that made the continent so wealthy over the next 30 years. In 1973, just as Western capitalism seemed to be reaching its peak, almost no one predicted that a decade of financial turmoil and hard times was just around the corner.
Today, despite the political challenges the global economy confronts, there are causes for optimism. Over the last two decades, entrepreneurs and scientists have created a whole new generation of technologies with the potential to dramatically alter the trajectory of growth. Advances in artificial intelligence promise to radically improve the efficiency of economies. Improvements in battery storage and solar cell technology could change the way energy is used and generated and also lower its cost. And recent breakthroughs in vaccine technology could have enormous dividends for treating all sorts of diseases.
The course of the twentieth century can almost be defined by the events of the few hinge years—1919, 1932, 1945, 1973—when the global economy was shifting from one gear to another and the future was unpredictable. Given the inventions of the last 20 years, it is possible that the world is once again at a critical turning point.