School of Economics

Life Impact The University of Adelaide

Wednesday, 16 January, 2013

The Age of Equality

Richard Pomfret

School of Economics, The University of Adelaide

To be presented at the Division for Public Administration and Public Management, UN Department of Economic and Social Affairs,

New York, 11 January, 2013.

School of Economics

Life Impact The University of Adelaide

Wednesday, 16 January, 2013

THEME: the big

question of the 20th

century was:

How to achieve the

increases in prosperity generated by 19th. Century capitalism without the levels of inequality, both across and within nations, of 1900?

School of Economics

STRUCTURE

• 19th century = Age of Liberty

• 20th century = Age of Equality

• 21st. Century = Age of Fraternity

• None of these are self-evident, and change was resisted

School of Economics

New Ideas & Old Regimes

School of Economics

Income per head, 1500-1914

http://digg.com/newsbar/topnews (data from Angus Maddison)

School of Economics

Turning Points

Notes: the units are 1990 international dollars (approximately what could be purchased for a US dollar in 1990). "Western Offshoots" are USA, Canada, Australia and New Zealand. The earlier estimates are based on conjecture (e.g. an assumed value of $400 for hunter-gatherer societies), but the order of magnitude of changes after 1820 is indisputable.

School of Economics

THE STARTING POINT:

Major changes in 1700s

• Division of labour (Adam Smith)

• Economies of scale

• Application of capital

• Innovation (science- or evidence-based)

Specialization by comparative advantage is positive sum, i.e. joint output is increased – (David Ricardo)

School of Economics

Adam Smith’s Pin Factory

School of Economics

The Age of Liberty

a handful of countries, initially in western Europe and lands settled by Europeans, illustrated the potential of market economies to increase output to unprecedented levels.

– the formula was no secret

• other European countries and Japan were experiencing economic growth by the end of the century.

– but it required a combination of conditions that many traditional societies were loathe to adopt

• freedom to choose work and for entrepreneurial activity.

The countries which prospered economically in the Age of Liberty came to dominate a global economy, and their empires spanned the world by 1900.

School of Economics

Domestic Inequality

Despite rising living standards in the Western European countries and their offshoots, inequality also increased – peaking in 1900-15 in most countries.

And also widening inequality between industrialized countries and the rest of the world

But

living standards had risen for most people in western Europe

School of Economics

A blue plaque marking the site of

the UK's first chip shop

The Rover Safety Bicycle, circa 1885.

Discretionary spending:eating out,trains to the beachsummer holidayspersonal mobility (bicycle craze of the 1890s)clothingspectator sports

School of Economics

Blackpool

School of Economics

Grand Magasin La

Samaritaine

Saison d’Eté 1886

School of Economics

Football League champions 1888-9

School of Economics

Demands for Greater Equality

Political reaction:

- challenging the market-based system

- Socialists, anarchists, promising a better future

- Traditionalists longing for a better past

- seeking to modify the system

- Progressives in the USA

- Public education in Australia

- Welfare state in Germany, UK etc

School of Economics

War and Totalitarianism

By the early 1900s success was breeding tensions, centered on the distribution of the fruits of prosperity.

– tensions between established and rising economic powers

• fuelled a world war of unmatched battlefield killing collapse of dynastic empires centered in Saint Petersburg, Constantinople, Vienna and Berlin (following Beijing 1911).

– domestic tensions

• in Russia and later in Italy, Germany and Spain new regimes emerged, rejecting unfettered capitalism in favor of state-controlled economies aimed at benefitting workers (Communism) or the nation (Fascism).

1920s and 1930s = dismal decades for the European market economies with democratic political systems and individual liberties. They were slow to respond to the challenges in a constructive way.(although average living standards were 1/3 higher in 1950 than in 1913!)

School of Economics

Domestic Issues in High-income Countries

Concerns in liberal democracies about the critics of capitalism, but little positive response.

Nevertheless

– the capitalist economies grew substantially 1919-39

– in the USA these were the decades of major innovations that improved living standards for many families.

School of Economics

Private Cars in Use, 1910-70 (thousands)

France Germany Italy UK Canada USA

1910 108 55 22 132 6 10

1929 930 422 170 981 1,031 23,121

1950 1,700 516 + 75* 342 2,258 1,913 40,339

1970 12,900 13,941 +

1,160*

10,181 11,515 6,602 89,243

Over 15 million model-T produced 1908-27:

• assembly line production (cf. Smith’s pin factory)

• interchangeable parts

• standardized paint - "Any customer can have a

car painted any colour that he wants so long as it

is black“ (Henry Ford, 1922).

• national networks of dealers in USA & Canada

• price - $290 in 1920s (= c $3,200 today)

But dynamic competition – GM offered choice(Buick, Cadillac, Chevrolet, Pontiac, Oldsmobile)

School of Economics

Appliances

In the 1920s many of the major electrical appliances were

being mass-produced

Washing machines relatively expensive (but almost a million sold in

1928) → laundromats (first in Fort Worth TX in 1934)

Vacuum cleaners cheaper, but harder to visualize

• Hoover pioneered “on approval” (try it for ten days) and commissions to

department stores

Refrigerators – improved over 1920s

– frozen food developed in 1930

All of these reduced the burden on housewives, freeing

women to earn money

Slower development in Europe - servants still prevalent in middle

class households – and in Australia.

School of Economics

Appliances (1920s)

Hoover vacuum

cleaner

1926-30

GE fridge 1927

School of Economics

The Depression of the 1930s

Despite the positive developments, even in North America the 1919-39 period was seen as negative, because of the long and deep recession

High unemployment pointed to a weakness of the market-based economic system

explained in Keynes’ General Theory (1935)

and it highlighted the inequalities of the system.

School of Economics

The Great Experiment

In the 1920s the Soviet Union adopted central planning

Could a planned economy improve on a market-based economy in the production and distribution of goods and services?

Note: theoretical debates were inconclusive – was one system better, or was the best solution a mixture of the two (“market socialism”)?

Empirical testing would take sixty years

School of Economics

Central Planning

What was Soviet central planning good at?

– producing standardized outputs (tanks, satisfying basic needs, ..)

– directing resources to achieve a specific goal (Yuri Gagarin, Olympic medals)

What was Soviet central planning bad at?

– technical change (and motivation) in the workplace

– responding to consumer demands for variety

– investing efficiently over time

School of Economics

The Planned Economy in the Long-run

Debate over Soviet data, but

• ↓ economic growth in 1970s and 1980s

• clear negative comparisons by 1980s (e.g. E&W Germany, N&S Korea)

• ↑ Incremental-Capital Output Ratio (ICOR):

– 3.7 1950-60,

– 5.0 1960-75,

– 14.8 1975-85

Similar problems may apply to Fascist economies (e.g. Spain).

Poor allocation of capital, esp. inability to identify new opportunities

– equipment is used until worn-out; in market economies it is used until obsolescent

School of Economics

Hot War and Cold War

Conflict between systems erupted in

• a war which saw the defeat and discrediting of Fascism by 1945

• a cold war which ended with the disintegration of central planning and widespread rejection of Communism by the end of the 1980s.

The winner was the market economy, but not the unbridled capitalism of the 1800s.

School of Economics

The Welfare State

Successful high-income countries all introduced measures

• to protect those disadvantaged in a market economy (the old, the disabled, the involuntarily unemployed, etc)

and

• to promote equality of opportunity (through public education and healthcare).

The extent and nature of welfare state measures varied from cradle-to-grave support (the Scandinavian model) to more limited provision in the USA,

but all provided basic schooling ( equality of opportunity) and accepted responsibility for the destitute ( equality of outcome)

– current debates are about the extent of the welfare state (e.g. Obamacare in the USA or level of university fees in Europe or Australia), not the fundamental principle of state intervention.

School of Economics

The Third World also seeks equality

Global inequality in the mid-20th. Century was highlighted by the concept of a Third World

• Modernizing regimes adopted interventionist policies, from import-substituting industrialization (ISI) to full-blown central planning

ISI was jettisoned in the final decades of the century, following the lead of the Asian tigers (South Korea, Taiwan and Singapore)

– those economies embraced "Asian values" but clearly involved resource allocation driven by world prices and a welfare state.

School of Economics

The End of History?

The idea that the desirable economic system is market-based with government intervention to promote some degree of equality of opportunity and of outcomes is dominant worldwide.

• By the early 2000s the actuality was of greater prosperity than ever before, and greater equality than a century earlier within and across countries.

– globally this was driven by the rapid growth of China, India, Indonesia, Brazil and other large economies.

Yet , this is not the end of history.

School of Economics

Politics is not dead– but a regulated market economy is the only serious economic option

• Many states remain autocratic and unequal, although such regimes have been under increasing pressures for change, especially in Africa and in the Arab world.

• Some high-income countries have experienced growing inequality in recent decades, notably the USA, but relevant political debates are about incremental reform, rather than abandoning either the market economy or government provision of social services.

– in all countries, the extent of government involvement is debated and aging populations raise concerns about support for the elderly.

School of Economics

An Age of Fraternity?

Notwithstanding the immediate concerns that hog media headlines, the long-run challenges in the 21st. century will be how to live in an interdependent world.

– disputes between powerful nations cannot be settled by force in a world with weapons of mass destruction.

– uncoordinated national policies will be inadequate to address global warming, epidemics or unpredictable threats such as stray asteroids.

– the consequences of failed states may be felt by others (e.g. Somalia-based piracy) and raise issues of responsibility to protect people from genocide or other crimes when their own state fails to do so.

To enjoy the benefits of the globalized economy will require an Age of Fraternity.

School of Economics

The Role for Public Administration

For Adam Smith, this role was the provision of public goods (law & order, national defense, roads).

In modern economics it also includes correcting market failure (externalities, abuse of monopoly power, etc).

My argument is that the modern state is expected to promote equality of opportunity and outcome

– the extent to which equality should be promoted is a political decision,

– but no modern society accepts that equality can be ignored

– and the state is an essential agent in promoting equality