Today’s Economic History: Keynes on Functional Gilded-Age Inequality
: On Twitter: Keynes on inequality: “@delong @t0nyyates @Noahpinion http://t.co/94J9qC4IrY
From John Maynard Keynes The Economic Consequences of the Peace: the combination of high inequality and Victorian Prudence on the part of the upper class is, Keynes believes, highly functional for economic growth:
III. The Psychology of Society: [Before World War I] Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population, Society was so framed us to throw a great part of the increased income into the control of the class least likely to consume it.
The new rich of the 19th century were not brought up to large expenditures, and preferred the power which investments gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the capitalist system. If the rich had spent their new wealth on their roownad enjoyments, the world would long ago have found such a regime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.
The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half-century before the war, could never have come about in a society where wealth was divided equitably. The railways of the world, which that age built as a monument to posterity, were, not less than the peer maids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.
Thus this remarkable system depended for its growth on a double bluff or deception.
On the one hand, the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of society into accepting, a situation in which they could call their own very little of the cake that they and nature and the capitalists were cooperating to produce.
and on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became 9/10 of virtue, and the growth of the cake the object of true religion. There grew around the nonconsumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world has neglected the arts of production as well as those of enjoyment.
and so the cake increased; but to what end was not clearly contemplated. Individuals be exhorted not so much to abstain as to defer, to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory–the virtue of the cake was that it was never to be consumed, neither by you, nor by your children after you.
In writing thus I do not necessarily disparage the practices of that generation.
In the unconscious recesses of it’s being, society knew what it was about. The cake was really very small in proportion to of consumption, and no one, if it were shared all around, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race–in fact for “progress”. If only the cake were not cut, but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not the less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors. In that day overwork, overcrowding, and underfeeding would come to an end, and men, secure of the comforts and necessities of the body, and proceed to the nobler exercises of their faculties. One geometrical ratio might cancel another, and the nineteenth century was able to forget the fertility of the species in a contemplation of the dizzy virtues of compound interest.
There were two pitfalls in this prospect: list, population still outstripping accumulation, our self-denials promote not happiness but numbers; and less the cake be after all consumed, prematurely, in war, the consumer of all such hopes…