Lessons from the 20th Century

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Bill Gates’ insightful review of Yuval Noah Harari’s 21 Lessons for the 21st Century (2018) stimulated this post. From the book’s introduction: “What are today’s greatest challenges and most important changes? What should we pay attention to? What should we teach our kids?” Divided into 21 chapters, the issues covered do not surprise: work, war, nationalism, religion, immigration, education, and more along those familiar lines.  

Thinking about Harari’s questions, I would have added a somewhat different inquiry: What have we already learned in the 20th century that is critical to guide public and private decisionmaking today? Given the additional question, Harari’s subject list is incomplete. I have five additional topics. All are – surprise – economic in nature. History places them well within the central lessons to which – borrowing from Willy Loman’s wife — attention must be paid. Space requires that the rationale for each be brief. Elaboration is available in the website’s e-book.

Five More Lessons from the 20th Century

The first lesson is the extraordinary capacity of decentralized markets to organize information sufficiently to, by and large, efficiently allocate and price scarce resources. Market-oriented economies seem to have become a tougher sell, especially to younger generation of voters, in the 21stcentury.  Yet the evidence of their superiority over economies which rely on government control over allocation and pricing is clear-cut. During the 20th-century, market-oriented economies dominated in the U.S., Canada, and Western Europe, while government-command organization was most notably used in the Soviet Union, Eastern Europe, China, and Cuba. There is no question that living standards of the former group greatly out-performed the communist states, forcing each of the latter to impose draconian restrictions on out-migration.  

The second lesson is the importance of understanding and acting on market externalities, which address the “by and large” caveat about the efficacy of free markets. Externalities largely occur when costs of production for the firm differ from costs for the community. The classic example is a business dumping polluting waste in a nearby river. A fundamental responsibility of government is to identify and correct negative market externalities wherever they exist. A.C. Pigou (1920) forcefully argued that economists have a moral responsibility to identify such externalities and design interventions that ameliorate their effects.

The third crucial lesson is what has been learned about the importance of, and how to effectively manage, aggregate nominal demand. The 20th century taught us that demand intervention is necessary to deal with macro instability producing recessions, great recessions, or depressions. Such episodes are characteristic of highly specialized market economies and are hugely costly. The GEM Project has demonstrated that macro contractions, in all sizes, are consistent with continuous decision-rule-equilibrium and largely result from the rational interaction of meaningful wage rigidity with nominal demand disturbances. In 2008-09, Fed policymakers’ aggressive management of total spending prevented the Great Recession from morphing into depression. Moreover, once economists give up on today’s dominant research program futilely focused on preventing future financial crisis, we will be able to put the existing demand-analysis pieces together and, as a result, prevent great recessions as well. (See Chapter 6 of the website’s e-book.)

The fourth lesson is what we have learned about the criticality of, and how to manage, technological change. Such change is by far the greatest source of rising living standards but joins warfare and pandemics as a primary source of social disruption. A central lesson of the 20th century is not to prevent technological change but instead use government authority and resources to aggressively support labor-force adjustment to the changing circumstances, including effective human-capital acquisition and construction of an adequate social safety net. The resources for ambitious government intervention should be readily available in the higher-productivity economies produced by technological change. (Think of the labor productivity bonanza that will result from widespread application of artificial intelligence.) The task here is difficult but must be undertaken. The U.S. cannot thrive in an economy sheltered, via tariffs and regulations, from productivity-enhancing technological innovations occurring in the rest of the world.

The fifth lesson has been around a long time. We must get money out of politics. We must figure out how to defang Citizens United and construct effective campaign-finance laws. We must sharply limit the political advertising of internet media giants and/or make them responsible for the veracity of their political ads. Most Americans want money out of politics, implying that effective action here is possible.

My closing thought is a bonus question. What should be done about the outsized role large corporations play in in highly-specialized modern economies? Large corporations are demonized in today’s political discourse, especially by young, sketchily informed voters. They flocked to Sanders and Warren presidential rallies, to cheer speakers railing against big firms. Here are a couple things they might want to learn. First, a crucial fact of the 20th century is that, in the millennia of human existence prior to last 150 years, abysmally slow economic progress was unable to lift humanity out of backbreaking near-subsistence agriculture. Alfred Chandler’s important work (frequently cited in this Blog) showed that technological change, embodied in large, highly specialized firms and mostly occurring in the past century, put the world on a significantly higher  productivity-growth path, breaking market economies out of Malthus’s demographic trap. Once known as the Great Fact, the fundamental dynamic discontinuity and the role of scale economies in creating it are little understood today.

Second, the demonized big corporations are by far the greatest source of specific human capital, rent-paying labor compensation (including prized health insurance), and the most equitable treatment of employees that the world has ever seen. The preference for equity (and the desire for redress of unfair treatment) is today understood to be axiomatic, an outcome of evolutionary biology that was embedded in neural networks as our distant ancestors adapted to survival advantages available from group cooperation. During the last century, Personnel (later Human-Resource) Departments learned that fair treatment of employees is a necessary condition for worker adoption of the firm’s objective as their own. Large corporations learned that quasi-judicial workplace rules, the importance of seniority and established reference standards, and the payment of wages greater than market opportunity costs contribute to the pursuit of profit.

Existing anti-trust and pro-competition laws should be vigorously enforced. The means to those ends, however, is not to penalize organization size unless that exploitation of that size is increasing costs or decreasing convenience/quality to consumers. Dismantling big corporations must be done with great care.

Blog Type: Big Think

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