It is possible to chart a plausible time path of global living standards (output per capita) over tens of thousands of years. The evidence indicates that it took some 12,000 years (ending around 1000 BC, the time of the Ancient Greeks) for living standards experienced by hunter-gatherers to roughly double. Moreover, near-zero annual progress must have persisted for most of the next three millennia. In early nineteenth-century Britain, the time of Jane Austen’s enduring stories of English manners, the typical Englishman was a farm laborer who consumed some 1500 calories a day – less than modern hunter-gatherer tribes in New Guinea. His material standard of living was little better than earlier experienced by a Roman slave, and the threat of starvation was a fact of life. (See Nasar (2011), p. xii.) This is, of course, the core of Malthus’ dismal macro dynamics.
Around the middle 19th century, however, living standards began rising rapidly and, in the 20th century, exploded upward. A remarkable thirty-fold increase was recorded in five generations. Economic activity during the past century and a half, the tiny tip of human experience, became profoundly different from what it had been for thousands of years.
That nearly all global progress in living standards has occurred in a single burst that began in the middle-nineteenth century has been named the “Great Fact”. It must be correct. From Jones (2002, p.12): “Suppose we guess that the world, or even a particular country, has grown at the rate of 2 percent per year forever. This means that per capita income must have been doubling every 35 years. Over the last 250 years, income would have grown by a factor of 27, or 128. In this case, an economy with a per capita GDP of $20,000 today would have had a per capita GDP of just over $150 in 1750, measured at today’s prices – less than half the per capita GDP of the poorest countries in the world today. It is virtually impossible to live on 50 cents per day, and so we know that a growth rate of 2 percent a year could not have been sustained even for 250 years.” Maddison (1995), Easterlin (2000), and Bradford DeLong (cited in Beinhocker (2006)) derive equivalent conclusions about the time-concentration of economic progress.
The evidence becomes especially compelling when coupled with Alfred Chandler’s (1977, 1992, 1996) insightful economic narrative. He persuasively argued that trend productivity growth was transformed by specialization-based increasing returns associated with the spread of large, hierarchical firms, beginning in North America and Europe, that also dates from the middle of the 19th century. The organization of that now-ubiquitous class of enterprises was triggered by the development of railroad, steamship, telegraph and cable systems which decreased delivery times and uncertainties for large flows of goods through national and international economies. The wave of relatively uncomplex technological innovations exploiting the increased potential for high-volume, high-speed production has been named the Second Industrial Revolution. From Chandler et al. (1997, pp.12-13, italics added): “Entrepreneurs and firms in these nations [United States, Britain, Germany] pioneered in the commercialization of new capital-intensive technologies by making the investments and creating the new corporate forms requiredto fully exploit their profit-making potential.” Chandler (1996) asserts that, as late as 1840, there were no middle managers in the United States. The Chandler narrative is consistent with a wide variety of growth environments, including accumulating knowledge, structural shifts in saving, and the ascent of market-friendly political and regulatory ideologies.
That, over the past two centuries, an increasing and now dominating share of global GDP has been produced in large, bureaucratic firms – the “new corporate forms” nonexistent prior to the 19th century – is an essential piece of the “Great Fact”. Macro theorists, to their detriment, never got the message that large establishments are home to optimizing activities that are fundamentally different from what occurs in small firms, making size distribution a necessary part of any model tasked to explain modern economies. The reorganization associated with the Second Industrial Revolution produced a new landscape of technological heterogeneity that had to be accommodated by market economies. Production processes that intensively exploit input specificities, creating complex combinations of scale, high productivity, market rents, workplace information asymmetries, routinization, and the greatly enhanced value of voluntary labor cooperation, have had to coexist in the population of firms with enterprises that are much more simply organized.
Technological differences are especially consequential when interacting with the only conscious production factor. Employees are the input class capable of recognizing the latitude imperfect information provides for advancing their interests inside the firm. The formal economic method, by extending its focus to rational exchange in the workplace, helps explicate the consequent market complications that reduce SVGE modeling, on its own, to a badly incomplete description of worker pricing and use. In short, much of the transformational economic behavior of the Second Industrial Revolution occurred inside large establishments, requiring close attention to
Chandler’s “new corporate forms” created a companion activity set (workplace exchange) that must be modeled and integrated into the mainstream corpus of macro thinking. Generalized-exchange modeling accommodates critical disparities between large and small production establishments, providing macroeconomics an additional class of equilibrium: a rest period in the space of optimizing workplace decision rules. New Keynesian ignorance of this powerful intrafirm class of equilibrium is the root cause of the stabilization irrelevance of mainstream rational-behavior macro modeling.
Blog type: New Keynesians
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